Respite from Paris

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.