Mon, 22 Aug 1994

Rescue from debt trap

The ministerial meeting of the Non-Aligned Movement (NAM) on the debts of the least developed countries (LDC) in Jakarta last week might go down in the NAM history as a one-time affair or, at the most, could lead into long, complex negotiations between debtors and creditors. Yet, the Indonesian government should be commended for organizing the unilateral dialogs among the 31 NAM member countries.

The recommendations from the meeting are sensible and down to earth because they stipulate what both the creditors and debtors should do to settle the debt problems once and for all. We noticed the recommendations were very much influenced by the thoughts of the Indonesian government who, though being one of the world's biggest sovereign debtors with total debts of over US$53 billion, has painstakingly built up a reputation as a good borrower. It has never defaulted or fallen behind in servicing its debts since 1967 when its debts were rescheduled under the Paris Club of Developed Country Donors.

The call for an immediate, across-the-board reduction of 70 percent of the estimated $248 billion debts of the LDCs is seen as crucial for rescuing the debtors from their debt trap. Without immediate, significant debt write off, those debtors would not be able to implement sharp adjustments which are obviously prerequisite for any debt relief. The problem is that those heavy debtors depend mainly on primary commodities whose international market tends to be depressed.

In fact, the possibility of debt forgiveness has often been discussed by government donors, especially with regard to official development assistance. The Group of Seven economic powers invited the Paris Club to their summit meeting in Tokyo in July, 1993, to discuss debt reliefs for the poorest, heavily indebted countries. A debt relief of up to 80 percent was explored but the technical details of the process of the write off have yet to be negotiated bilaterally.

The NAM suggestion of a more coordinated debt solution effort is quite appropriate because the debt problem is being handled by different fora of creditors. Coordination is especially essential because the debts of the LDCs comprise borrowings from a variety of sources. Therefore, any action on debt relief should be taken simultaneously on several fronts to bring about comprehensive and lasting solutions.

Although the NAM suggested an across-the-board debt relief of up to 70 percent, it is also realistic enough to realize that solutions to the debt problems should be negotiated on a case-by- case basis. Indeed, though the LDC debtors have similar problems with regard to servicing and repaying their debts, the magnitude of their problems and their capacity to take in adjustment measures widely differ from each other.

The capability to implement economic reform measures without causing economic and political instability is crucial because such measures are always integrated into every debt-reduction program. And such adjustments usually require big sacrifices on the part of both the people and government of debtor countries. In fact, Indonesia's success in servicing its foreign debts and in maintaining a high international credit standing should be attributed to its capability to implement sharp adjustments, notably deregulation measures, without causing economic and political instability.

One may question the advantages of too strong a government in terms of democratic principles and the reliability of political stability in the long-term. The fact is, however, that the Indonesian government is so strong that it is capable of taking unpopular reform measures even a few weeks before a general election-- something which is unthinkable in developed countries with a mature democratic system.

The requirement of sharp economic adjustments may in fact be one of the formidable challenges for the debtor governments to implement. But the LDC debtors should realize that domestic economic reforms are a must in every effort to solve debt problems.