RI becoming economically more dependent on foreigners

RI becoming economically more dependent on foreigners

By Rikza Abdullah

Indonesia will have been politically independent for 56 years
tomorrow, but economically it has been getting more dependent on
foreigners.

The dependence is so deep that it will be difficult for the
country to solve its own domestic problems without the
involvement of foreigners, particularly foreign creditors and
investors.

JAKARTA (JP): The solution to the country's current economic
problems, therefore, will largely depend on the resumption of
financial support from creditors like the International Monetary
Fund (IMF), the World Bank-led Consultative Group on Indonesia
(CGI) and the Paris Club of creditors. If Indonesia can win their
support, it will be able to woo foreign investors. Such
dependence is a result of the early steps taken by its own
decisionmakers.

Since the fall of Indonesia's first president Sukarno, who
promoted self-reliance in his economic development plan, in 1967,
the country has been increasingly dependent on foreign borrowing.

In order to accelerate the economic development, the
government, under the leadership of his successor Soeharto,
decided to raise funds from foreign creditors and use them
complimentarily for its development spending. In the 1980s, the
private sector followed suit and raised offshore borrowing for
their business development.

According to Bank Indonesia, the country's total outstanding
foreign debt was recorded at only US$2.43 billion as of 1969 and
steadily increased to $8.44 billion in 1975, $14.87 billion in
1980, $35.15 billion ($28.31 billion owed by the government and
its companies and $6.83 billion owed by the private sector) in
1985, $63.95 billion ($49.35 billion and $14.59 billion
respectively) in 1990 and $107.83 billion ($64.41 billion and
$43.42 billion respectively) in 1995.

When the country was hit by the economic crisis in 1997, the
foreign debt surged to $136.08 billion ($57.86 billion and $78.22
billion respectively) and rose to $150.88 billion ($71.46 billion
and $79.41 billion respectively) in 1998, before falling back to
$146.93 billion ($73.75 billion and $73.18 billion respectively)
the following year.

It is very difficult to imagine how and for how long Indonesia
will be able to repay its foreign debt, which is more than triple
its annual gross domestic product (GDP). If the 1999 outstanding
debt of $146.93 billion is converted into the local currency with
an exchange rate of Rp 9,000 per dollar, for example, it will
amount to Rp 1,322.37 trillion, compared to the country's GDP,
which, according to the Central Bureau of Statistics (BPS), was
only Rp 379.56 trillion that year.

The increasing outstanding debts has increased the country's
annual debt repayments, which, in turn, has intensified the
nation's dependence on foreign sources -- it has to continue
accruing new loans and inviting foreign investments to keep its
balance of payments at a convenient level every year.

But when foreign investors, for whatever reasons, started to
repatriate their investments in Indonesia in 1997, the country
suffered a monetary crisis, which, in turn, caused it to become
more dependent on foreign creditors. The government then invited
the International Monetary fund (IMF) to help solve its monetary
problems.

The crisis is marked by, among others things, a sharp
depreciation of the rupiah (from its 1997 value of Rp 2,400 per
dollar), an imbalance of payments, a sharp rise in consumer
prices, closure of or reduced production in companies, bankruptcy
of many commercial banks, loss of jobs and a higher number of
people living under the poverty line.

According to the Asian Development Bank (ADB), as quoted by
Kompas daily, the net private investment outflow from Indonesia
reached $3.48 billion in 1997 and surged to $19.6 billion in 1998
before sliding to $11.29 billion in 1999. During the first six
months of 2000, the net private investment outflow reached $2.3
billion.

Foreign investors did make new commitments to invest in
Indonesia but the level of their implementation was very low.

Chairman of the Investment Coordinating Board (BKPM) Theo F.
Toemion said last month that foreign direct investment
commitments approved by his office increased from $10.9 billion
in 1999 to $15.4 billion in 2000. During the first five months of
this year, new commitments reached $4.6 billion. But he said the
level of their implementation was very low.

Solution

The country, since the start of the crisis, has been trying to
solve its economic difficulties but inconsistent policies --
generally influenced by conflicts of interests -- have caused the
failure of its efforts. During the Soeharto era, for example, the
government decided to close or take over a number of insolvent
banks and companies but banks and companies owned by cronies of
the then president allegedly tried to evade the government's
measures. Soeharto himself allegedly also tried to evade
agreements made with the IMF by planning to introduce foreign
exchange control through a currency board system.

Under the government of president Abdurrahman Wahid, a number
of points that were agreed with the IMF were not well
implemented, thereby prompting the international lender to delay
the disbursement of its next loan tranche since last December.

The current government, under Megawati Soekarnoputri, has the
opportunity to solve the economic problems but it has yet to
formulate its strategy and policies.

In formulating its strategy and policies on economic recovery,
the government needs to cooperate closely with Bank Indonesia,
and their respective representatives need to synchronize
policies.

Officials of the central bank have repeatedly said that they
would maintain a tight money policy, while newly appointed
Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti
said last week the government would make job creation its
priority.

With its tight money policy, aimed at curbing the country's
inflation, Bank Indonesia has been trying to control the growth
of its money supply by keeping interest rates on its SBI
promissory notes at high levels -- at slightly over 17 percent
per annum -- these past weeks. The tight money policy, according
to the central bank, is important as the recent sharp
depreciation of the rupiah, the government subsidies as well as
social and political uncertainties have caused inflationary
pressures.

Although it was originally assumed that the GDP would grow by
between 4.5 percent and 5.5 percent and that the rupiah's value
would fluctuate between Rp 7,750 and Rp 8,250 to the dollar, the
central bank has now projected the inflation rate at between 4
percent and 6 percent this year. However, since the rupiah
continued depreciating, the inflation rate reached 7.7 percent
during the January-July period alone.

The government, under its revised 2001 budget, has estimated
the currency to average at Rp 9,800 to the dollar this year. But
in reality, the rupiah's value, which averaged at Rp 8,400 to the
dollar in 2000, fell to Rp 9,485 in January 2001, Rp 9,611 in
February, Rp 10,213 in March, Rp 11,116 in April and Rp 11,285 in
May.

The rupiah's value continued hovering at above Rp 11,000 per
dollar in June and during the first three weeks of July. It
strengthened to Rp 10,225 to the dollar on July 23 when the
People's Consultative Assembly (MPR), in its Special Session,
elected and swore in Megawati as the new president to replace
Abdurrahman Wahid, who, according to the Assembly, had violated
the Constitution. The rupiah, since then, has continued
appreciating and its value surged to about Rp 8,500 against the
dollar earlier this week. The GDP, which increased by 0.85
percent in 1999 and by 4.77 percent in 2000, rose by 4.3 percent
in the fist quarter of 2001.

Dorodjatun's plan to make job creation his top priority has
been welcome by many parties. Job creation is regarded as
important because about 5.87 million people (2.6 percent of the
country's population) are now unemployed and another 30.14
million (13.9 percent) are on disguised unemployment.

But they warn that such a policy will demand strict discipline
in its implementation. Job creation, for example, demands for
conducive investment environments that include legal certainty,
simple procedures for licensing, security for operation,
stability in foreign exchange rates and lower interest rates.

The government, in promoting employment, also needs to
accelerate the restructuring of the banking industry so that
commercial banks can expand their function of capital
intermediation.

The government and the central bank will be able to accomplish
their policies if the IMF resumes its loan to Indonesia after the
signing of the long-delayed letter of intent( LoI) with the
government later this month or in early September. The signing of
the LoI will be a ticket for the government to negotiate with the
Paris Club of creditor nations in September for the restructuring
of part of its debt. As soon as the country recovers from the
economic crisis, it should try to gradually reduce its dependence
on foreigners for a steady development of its own economy.