New debt rescheduling

New debt rescheduling

Regardless as to how Indonesia's public sector debt burden is
measured, the government is unquestionably mired in a severe
liquidity crisis. Its total debt stocks outstanding as of this
year were estimated by Bank Indonesia at more than US$141
billion, including $70 billion in domestic debt.

The ratio of total debts to the country's gross domestic
product (GDP) is already 110 percent, far exceeding the
sustainable level of 70 percent. Their ratio to total export is a
horrendous 258 percent, way above the 200 percent level
considered manageable.

The government's total debt servicing requirement this year
alone is calculated at Rp 132 trillion ($13.7 billion based on an
exchange rate of Rp 9,600, the average rate assumed for the
budget). That is already 62 percent of its total annual operating
budget, or more than 46 percent of its total tax receipts.

Official foreign debt payments alone (interest and principal)
are projected at $10.9 billion next year and $9.4 billion in
2003. It is little wonder then, that the latest World Bank Debt
Reporting System classifies Indonesia as a severely indebted
country.

Set against these oppressive debt burdens, the government's
plan to negotiate another debt rescheduling package with the
Paris Club of sovereign creditors, as disclosed by new chief
economic minister Dorodjatun Kuntjoro-Jakti last week, is a wise
move.

Without a significant reduction of debt servicing and
principal payments, the 2002 state budget deficit will certainly
explode to an unsustainable level, much higher than this year's
target of 3.7 percent of GDP.

The problem is that foreign debt rescheduling is the only
avenue available for the government to cope with its severe cash-
flow difficulties.

Domestic debt rescheduling is completely out of the question
because the rupiah debts consist entirely of bonds issued to
recapitalized banks. A mere intention to reschedule these bonds
will kill the whole banking industry because more than 80 percent
of their capital is made up of the government bonds, while the
bulk of their revenue is still derived from the bond coupons.

Asking for some foreign debt forgiveness, as often demanded by
non-governmental organizations, is similarly devastating as it
results in a default that will entirely deprive the government of
any access to the international financial market. As this
condition would normally trigger a cross-default in the private
sector, the international financial market would consequently
close its doors to the Indonesian economy.

Lobbying the World Bank and the International Monetary Fund
(IMF) to classify Indonesia within the Heavily-Indebted Poor
Countries (HIPC) group, thereby entitling it to partial debt
relief, is a remote possibility that requires more arduous
negotiations as to whether Indonesia is eligible for the HIPC
scheme. Under the present critical condition, time is certainly
not on the government's side.

Judging from the ratios of total debt burdens to government
revenues, exports and GDP, Indonesia should qualify for the HIPC
initiative launched in 1996. But the eligibility criteria are
quite broad, including very low per capita income (below $500),
inaccessibility to commercial credits, implementation of a World
Bank-endorsed poverty alleviation program and a good track record
of successful macroeconomic and structural adjustments.

Hence, a third debt rescheduling package from the Paris Club,
following the first deal signed in September 1998 ($4.2 billion)
and the second in April 2000 ($5.4 billion), is the most feasible
alternative.

But since the Paris Club debt rescheduling commitments are
linked to a reform agreement with the IMF, the government
urgently needs to complete its homework and conclude a new pact
with the IMF. Even $2.8 billion of the second rescheduling
package is now in limbo because of the suspension of a new
agreement with the IMF since last December.

A new accord with the IMF should therefore be on top of the
new economic team's working agenda, especially considering the
Paris Club creditors will meet on Sept. 10.

Without a new agreement with the IMF, it will be extremely
difficult to draft the 2002 budget plan because the April 2000
rescheduling package signed with the Paris Club only covers debts
maturing between April 2000 and March 2002.