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.