Respite from Paris

The government can now enjoy a respite from severe cash-flow problems after its sovereign creditors grouped in the Paris Club, as widely expected, approved its request for the rescheduling of US$5.5 billion in debt principals and interest due between this month and the end of 2003.

Barring any major shortfalls in receipts from asset sales by the Indonesian Bank Restructuring Agency and from the privatization program, the deferment of the debt payments would help control the budget deficit in the current fiscal year at least at the targeted level of 2.5 percent of gross domestic product and prevent the country's sovereign risks from worsening.

The agreement will also help reduce the demand for foreign exchange for debt service payments, thereby decreasing the pressure on the balance of payments and strengthening the rupiah with a chain of positive reverberations on the economy.

But the accord obviously will not decrease Indonesia's stocks of official foreign debts, estimated at about $74 billion, but simply carry the burden over to the next 20 years because the government, despite strong demands from many analysts and non- governmental organizations, did not ask for any debt relief.

True, as NGOs have often argued, a debt rescheduling alone would not help unshackle the government from its debt trap. What the government really needs is a comprehensive debt restructuring that provides partial debt relief, lower interest rates, longer repayment and grace periods.

In whatever way its debt burdens are measured, the government is on the verge of default with total foreign and domestic debts already exceeding $140 billion or slightly larger than the country's GDP. That does not yet include around $64 billion in corporate foreign debts. Total official debt service payments alone, not including amortization (principal payments), are already as large as 50 percent of total domestic tax receipts and 45 percent of the government's operating budget.

True, a significant reduction of the debt overhang is the only effective solution to the huge debt burden that will enable the government to allocate more budget resources for poverty reduction, education and health service development.

But the government had asked for debt rescheduling, rather than debt relief, cognizant of its limitations; its weak position to negotiate an overall debt restructuring scheme.

First of all, despite its oppressive debt burdens, Indonesia cannot qualify as a heavily-indebted poor country (HIPC) in order to be entitled to debt relief, in part because its per capita income of about $850 is still higher than the threshold level set by the World Bank.

Most damaging to its bargaining position is the government's failure to take economic reform measures vital to achieve a lasting resolution to the debt problem, notably the fight against corruption and gross inefficiency within the public sector. The government is notorious for frequently backtracking on sorely needed measures to fuel a sustainable, robust economic recovery.

The second weakness in Indonesia's bargaining position is the government's inability to make and implement a credible poverty alleviation program, another basic requirement to qualify for partial debt relief.

Indonesia's credibility was seriously damaged early last year when the World Bank canceled almost $400 million in loan commitments for poverty alleviation in the country because the multilateral agency doubted the effectiveness of the supervision mechanism the government set for its poverty reduction programs.

Giving Indonesia a partial debt relief in the absence of the political determination to push through reform programs to cope with the economic woes and to develop good governance would only cause a moral hazard, tempting the government to backtrack again on painful reforms and resorting instead to populist measures at the cost of sustainable economic development.

Even now, despite its huge debt burdens and the prolonged economic crisis, the pervasive attitude within the government is still "business as usual", there being an acute lack of a sense of crisis and urgency.

The only way to gain creditors' goodwill to help reduce debt stocks is for the government to resolutely push through with its economic reform programs and work harder to fight corruption and strengthen law enforcement.