Reprieve from Paris

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.