Passing on debt to the next generation

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.