New Cabinet needs to take hard look at odius debt

New Cabinet needs to take hard look at odius debt

Can the new Cabinet relieve the country of its debt trap?
Political economist Revrisond Baswir of the Yogyakarta-based
Gadjah Mada University (UGM) shares his concerns.

What are President Megawati Soekarnoputri's priorities?

Her priority should be the management of the budget which is
related to many things that are right before us, such as the
Paris Club meeting (in September), the meeting of the
Consultative Group on Indonesia and also the government's budget
proposal for 2002. The Paris Club talks are related to the 2001
budget; if we fail (to negotiate for debt rescheduling) at the
Club we could experience a default.

The new ministers like Dorodjatun Kuntjoro-jakti and Budiono
are expected to be able to resume the government's relations with
the International Monetary Fund (IMF). But can they negotiate the
issue of debt reduction at the Paris Club and CGI? Dorodjatun is
respected and accepted by the market but he should be critical
towards foreign debt. His Ph.D thesis was in the political
economic scope. Budiono, together with (economist) Mubyarto of
UGM initiated the concept of "People's Economy."

But they've both been in the government for quite a while,
especially Budiono, so he'd be more conservative and would likely
go only as far as requesting debt rescheduling. But they should
go further given a green light (for debt relief) from Australia
and the World Bank.

We need here a grand design on how to manage such matters.
What is the fundamental solution of the government regarding our
maturing debts? Are we going to ask for amnesty or is there
another way? This needs to be clear.

The threat of a deficit is there because of our these debts,
both (to lenders) inside and outside the country. Domestic debts
reaching Rp 53 trillion must be paid this year to Bank Indonesia
(central bank). With BI's interest rate of some 17 percent the
amount could reach Rp 60 trillion.

Interest for overseas debts which must be paid this year alone
will reach at least Rp 23 trillion ... The government also has
the burden of the earlier rupiah value of Rp 9,600 to the dollar
this year. So until the end of this year the rupiah must stay
below Rp 9,000. All such problems must be resolved before
September.
What's your comment on signs from Australia and the World Bank
that they are considering aamnesty of part of Indonesia's debts?

Our debt should indeed be wiped out. The World Bank has all
the information showing that we've fallen into a very heavy debt
trap. So if the World Bank says it will conduct a study it
wouldn't be about how deep we're in debt; it would be more likely
on the prospects of Megawati's Cabinet. If the government is
friends with the IMF it will receive positive signals from them.
They also want to see whether the government can hold out to 2004
and what the political map of the Cabinet is like. If they're
satisfied with everything they should help us wipe out our debt.

So the government must follow up on this green light?

Of course. The amount of foreign debt compared to our gross
domestic product has reached over 100 percent; this is the
strongest indication of our debt trap. The government also has a
domestic debt of Rp 600 trillion. The burden of installments for
our due foreign debts this year is around US$14 billion.
Meanwhile next year the burden of debt installments to our export
revenues will reach 54 percent; this means a continuous, annual
threat to our foreign exchange reserves.

So I see no choice for Indonesia other than to try to obtain
debt amnesty. We should not be ashamed of being declared as
having defaulted on our debt payments, given the circumstances.
The World Bank and Australia seem to be taking into account the
corruption under the New Order regime.

This is indeed the strongest reason (for appealing for
amnesty). So our request for debt forgiveness would not only be
because of the above condition but because of our historic
reality that such huge debts have not reached the people because
of the corruption of the New Order elite. This is categorized as
odious debt.

We should be grouped under the "heavily indebted poor
countries" which get a reduction of 60 percent on debt
repayments. Thirty-five countries are now in this category.

With a targeted deficit of 3.7 percent from the gross domestic
product for this year, the government must seek income by getting
as much as possible from state firms, mainly through
privatization. If Megawati's Cabinet is really market friendly,
the pace of privatization may increase. This means contributions
from state firms (to state revenue) will no longer be from
distribution of dividends but from the sale of private firms.
What about the relation to other policies?

The success of privatizing state firms is related to other
policies. A market friendly Cabinet will get a response of a
stronger rupiah which will eventually attract investors.

Our sacrifice would be having to let go of the state firms
because foreign investors will clearly buy the firms whatever
their price in rupiah. Investors in strategic sectors will first
conduct due diligence studies before bargaining for the firms.
I'm sure the state firms will still be bought at the lowest price
levels.

What about the role of the Indonesian Bank Restructuring
Agency (IBRA)?

Their contribution is expected but the main priority is
restructuring the organization and revamping their work program;
IBRA is too messed up ... The government is also slated to
increase fuel prices again this year given subsidy reduction.

This is quite sensitive. The fuel prices will depend on the
development of the rupiah and interest rates. Subsidies and the
fuel price are still debatable; is an increase really needed to
cover the deficit or is another review needed, given that some
things are not yet clear on the actual production costs of
Pertamina.

So has the government delivered on its promise of a market
friendly Cabinet?

Yes; the issue is if this "market friendly" approach will have
to be paid dearly with IMF-suggested steps like increasing prices
of fuel and electricity? Hopefully not, in view of Megawati's
party image of "the little people." She should remember that.

What about the fiscal balance between Jakarta and the regions?

Very early in her term Megawati has had to face this problem
in the form of the CPP Block contract (with PT Caltex Pacific
Indonesia) ... This is a good start. So (the government) should
not harbor any wish to reduce regions' revenue ... The government
should also resolve the implementation of regional autonomy and
pay attention to issues around Aceh, Papua (Irian Jaya) ... and
other potentially restive areas.

Wiping out corruption is also important in securing investors'
trust. What can this government do?

Megawati's government is compromising here and there, we can't
expect much .. While the government has to be market friendly,
corruption and money politics is still widespread.

Combating corruption is related to decentralization of the
fiscal balance. By reducing concentration of funds at the center,
possibility for abuse of state funds in Jakarta becomes smaller.

Giving regions the authority to manage big funds can also lead
to corruption but at least the management of local
administrations is closer to their people, enabling better
control. Strong monitoring by the public must be established.

I'm worried about the influence of (Megawati's) Indonesian
Democratic Party of Struggle (PDI Perjuangan) which gives too
much emphasis on the notion of unity, which may imply reducing
the spirit of giving a chance to regional administrations. The
party could very well sponsor efforts to amend the regional
autonomy law. (Asip A. Hasani)