Removing the confusion

Chief economics minister Boediono was right to jump in and correct a statement last week by State Minister for Development Planning Paskah Suzetta, about the government's "plan" to seek foreign debt rescheduling in 2006.

It was necessary for Boediono to act immediately to remove any confusion in the market caused by the statement, which if allowed to stand, could have caused market jitters, raised the country's sovereign risks, increased the costs of domestic and foreign borrowing from the financial market and even set off another speculative attack on the rupiah.

Suzetta, a politician from the Golkar Party, who recently replaced Sri Mulyani Indrawati in the post, obviously did not know what he was talking about early last week. Suzetta's statement should be seen more as an attempt to boost his political popularity, without fully realizing the consequences of his words.

Certainly, the interest payments and amortization of foreign debts in the next fiscal year will increase significantly to about US$8.8 billion, or almost 21 percent of total spending, because the government will no longer receive a debt payment deferment from the Paris Club of sovereign creditors.

However, the Paris Club has standard procedures for rescheduling debt payments.

The almost $3 billion in debt payment deferments the government earlier obtained from the Paris Club was a special case. It was granted not at the government's request, but at the initiative of several creditors after the devastating earthquake and tsunami in Aceh and parts of North Sumatra. If the government requests a new debt rescheduling facility, it would have to follow the Paris Club's standard procedures.

Boediono and finance minister Sri Mulyani were quite right in asserting last Thursday that the government had no plan to seek foreign debt rescheduling. First, the House of Representatives approved the 2006 budget last October and it has now become law, and any major changes to the budget would require prior approval from the House.

Most importantly, the government is no longer entitled to any debt rescheduling from the Paris Club after it ended its special arrangement with the International Monetary Fund in January, 2004. The decision to stop the special aid arrangement with the IMF was based on a political consensus in mid-2003 at the House, and both the government and the House fully realized the consequences of the decision.

Nor is the government entitled to debt reduction or rescheduling programs under the Heavily Indebted Poor Countries scheme. This is because Indonesia is no longer tied to any IMF special aid arrangement, and also because the government has yet to complete a poverty reduction strategy paper, which would also have to be approved by the IMF and World Bank

We fully agree with Suzetta's view that the burdens of domestic and foreign debts should be reduced, to allow more resources to be used for public sector investment in infrastructure and poverty alleviation.

Official foreign and domestic debts as of this year are still as much as 52 percent of gross domestic product. Even though this is much smaller than the almost 100 percent of GDP in 2000, most analysts consider the debt level still too high, seen from the risks of a currency crisis and the impact of a high debt ratio on future tax burdens and lower investor expectations for net profits. Based on these aspects, a safe level for Indonesia's public sector debts is about 30 percent to 35 percent, compared to 60 percent in European Union countries.

It is worth remembering that the World Bank, the Asian Development and the IMF, to which more than half of Indonesia's official debts are owed, never grant debt rescheduling. Hence, debt payment deferments can be obtained only from the Paris Club of creditors.

The dilemma, though, is that debt rescheduling from the Paris Club, besides depending mainly on recommendations from the IMF and World Bank, must follow strict procedures.

Suzetta's misleading statement last week, which seemed to come out of the blue, should serve as a valuable lesson for the new economics team on how to handle information to the public and who should make policy statements.

The day-to-day perception in the market, notably in the financial market, is formed mainly by what businesspeople/investors hear and read, not by economic fundamentals whose indicators are published quarterly.