Passing on debt to the next generation

Bahtiar Arif, Center for Indonesian Reform, Jakarta

The economic team led by the Coordinating Minister for the Economy has successfully convinced creditors grouped in the Paris Club to reschedule Indonesian debts of US$5.5 billion. These debts will be rescheduled to more than 20 years. This means that the government will not begin repaying the debt until at least 2004, and the 2003 and 2004 budgets can be used to fund some development programs.

However, has the government prepared a comprehensive, feasible financial projection for repaying its debts over the next 20 years? There seems to be little concern about how the next generation can afford to repay the previous generation's debt.

The amount of foreign debt tends to increase. Debt rescheduling only concerns the period of repayment, not reduction of the amount to be paid. It transfers the obligation to pay the debt to the next generation. The government, meantime, will draw down new debts in order to finance its budget deficit. Without good management, the next generation will be burdened by a huge amount of debt.

Debt relief is the only way to reduce the debt. But, the government has never proposed debt relief to its creditors, although there have been some demonstrations calling for a cut in the nation's debt. The government said that Indonesia has no bargaining power and was not categorized as a poor country, so it was impossible to obtain a debt haircut or debt swaps.

Why didn't the government propose debt cancellation as its opening bid at the Paris Club. There are some grounds for calling for debt cancellation. First, there is the ineffectiveness of the debt. The state's borrowings have not been totally invested, but rather partially consumed. This phenomenon is known as "fungibility". Not only did the government consume the debt by corrupting it, but creditors also absorbed it by imposing provisions linking aid to trade. This means that the creditors required the government to buy equipment and/or use consultants from their countries.

Second, the debt will be hard to repay if we look at the country's recent financial and economic performance. A researcher, John Hanton, in 2000 measured the debt sustainability of surveyed countries by using financial and economic data from the countrys' budgets, capital accounts and debts. By looking at Indonesia's budget, capital account and debt for the year 1999, only 23 percent of its $150 billion debt will be repaid. Therefore, 67 percent of the total debt should be written off.

Third, one of the motives for giving financial assistance is moral. It is time to prove the creditor's commitment to nature, poverty eradication, health, education, and other social, human and environmental developments. If creditors are really committed to helping, the debt should be swapped for development programs.

But the deal is now a fait accompli. The economic team left Paris happy because it had successfully achieved its objectives. Yet the government still needs to explain how to repay the debt by producing a debt repayment plan approved by the legislature. The plan should be in line with National Development Programs and annual budgets.

New foreign borrowings should be selective, and be scrutinized and approved by the legislature. The debt service ratio, which is now around 35 percent, has to be reduced to between 10 percent and 20 percent. Export performance must be improved by reviving the real sector, especially export oriented businesses. The capital account should be maintained in positive territory so as to accumulate reserves and strengthen the rupiah.

If these scenarios are successful accomplished, the present government will not burden the next generation. But if there is no proper economic management, the next generation will become the indebted generation.