Reprieve from Paris
The approval by the Paris Club of 19 sovereign creditors on Thursday for rescheduling a portion of Indonesia's almost $70 billion foreign debts was strongly predicted. But it came as a great surprise that the amount of US$5.8 billion to be rescheduled was more than twice the $2.2 billion Indonesia said earlier it had proposed. The International Monetary Fund (IMF) reaffirmation of its confidence in Indonesia's commitment to reform measures which came on the eve of the Paris meeting surely was the key to clinching the Paris agreement. Only as recently as 10 days ago, the prospect of debt rescheduling was still bleak due to an IMF decision to hold up the second disbursement of loans to Indonesia as the government had fallen behind schedule on implementing most of its reform programs. But all-out efforts over the past week, personally directed by President Abdurrahman Wahid, succeeded in supporting the Indonesian delegation to Paris with an IMF endorsement.
The support of the Paris Club will certainly contribute greatly to improving market sentiment on Indonesia's economic outlook and remedy the damage inflicted earlier by the IMF loan delay. The Paris agreement will also pave the way for future debt-rescheduling negotiations with the London Club of commercial bank creditors and provide some lift to the rupiah which fell more than 3 percent after the IMF loan postponement.
As the current state budget has been forced to spend an additional Rp 250 billion ($33 million) a month on fuel subsidy as a result of the delay in fuel price increases, one can imagine how critical the budget deficit would be and how tremendous the pressures on the rupiah would be if the Paris meeting had failed to meet Indonesia's proposal. This is because budget appropriations for foreign debt servicing in the current fiscal year assume that $2.2 billion of the debts that will mature within the April-December 2000 period will be rescheduled.
The secured deferred installment of $5.8 billion in debt principals, due between this month and March 2002, will provide the government with reasonable breathing space to manage its severe liquidity crisis during the next two fiscal years. Debt servicing has indeed become a huge burden on the state budget with the government's debts already exploding to almost $150 billion, of which $85 billion was domestic debts incurred for the costs of bank recapitalization and restructuring.
In the current fiscal year alone, budget allocations for debt servicing amount to Rp 63.22 trillion ($9.03 billion). That is almost 41 percent of total domestic revenues or twice as much as total personnel expenditures. The World Bank has projected that without a rescheduling of a portion of the foreign debts, the total debt service burden would skyrocket to $15.4 billion in the fiscal year of 2001 and $15.6 billion in the fiscal year of 2002.
Hopefully, the nascent economic recovery will become increasingly stronger to achieve a robust growth beginning in 2002 so that state revenues will be large enough to service foreign and domestic debts and the government will no longer have to go to Paris to beg for more debt rescheduling.
But this condition depends on how consistent the government will be in pushing ahead with the remaining painful reform measures. The Paris debt rescheduling deal, which the government is flaunting as an international vote of confidence in Indonesia, is only the first step of a long process to fully regain market confidence in the economy.
First of all, it should be remembered that the Paris debt rescheduling does not reduce debt payments but only spreads them to future years. The government is also well advised to realize that the agreement is not a market vote of confidence as government deals are often based more on political interests rather than economic rationale. It will only help regain investor confidence as the market becomes more assured now that a reduced debt service burden will minimize the risk of the Indonesian economy plunging into total collapse.
Moreover, the Paris agreement has yet to be negotiated bilaterally in the coming months and, as with any debt rescheduling deal, the process will impose tough requirements on the government. Foremost among the conditions will be consistent implementation of all the painful reform programs needed to restore the economy to sound footing.