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.