RI to seek 'Islamabad Terms' at Paris Club

Dadan Wijaksana, The Jakarta Post, Jakarta

Bank Indonesia is hoping the upcoming meeting with the Paris Club of creditor nations might come up with the most beneficial deal to Indonesia in terms of debt rescheduling, similar to the terms given to Pakistan.

"The important thing is how we can seek the best possible deal from it. If we can get a deal like Pakistan's, that's a reasonable achievement," BI Governor Sjahril Sabirin told reporters on Friday.

Indonesia and its creditor nations are scheduled to meet in April in Paris to discuss the rescheduling of the country's Rp 27 trillion (about US$2.6 billion) debt, both principal and interest, due this year.

The rescheduling facility is crucial to help the government achieve a budget deficit of not more than 2.5 percent of gross domestic product (GDP).

The Paris Club groups together Indonesia's major sovereign creditors for talks on debt rescheduling.

Bank Indonesia senior deputy governor Anwar Nasution said earlier on Thursday that it was still possible for Indonesia to get a very favorable debt rescheduling deal from the Paris Club, if it were willing to get tough against terrorism, as demanded by the U.S. government.

He was quoted in media reports as saying that Pakistan had managed to obtain soft terms and conditions because the country had been cooperative with the U.S. government in the fight against terrorism.

He said that the generous terms agreed with Pakistan were popularly referred to as the "Islamabad Terms."

Last year, Pakistan was granted generous terms and conditions in rescheduling its $12.5 billion debt by the Paris Club, in what the latter regarded as a bid to help kick-start the country's economy.

Under the deal, two-thirds of the debt was rescheduled over 38 years and the rest over 23 years, with 15-year and five-year grace periods respectively.

There have been accusations that certain militant groups, linked to the Sept. 11 terrorist attacks in the U.S., have been operating in Indonesia.

But, unlike neighboring countries such as Malaysia and the Philippines, Indonesia has been lagging behind in efforts to get tough and rid itself of terrorists.

Anwar advised the government to start making intensive political approaches toward donor countries, including main creditors like the U.S. and Japan.

According to him, a success at the meeting would be beneficial, as it would give the government more breathing space to make a larger budget allocation for development spending.

The success of the Paris Club meeting would also depend on the implementation of various reform measures agreed with the International Monetary Fund. These include the sale of Bank Central Asia, which is now in progress and completion of the anti money-laundering law, currently being debated at the House of Representatives.

The government's debt currently stands at some $130 billion, or some 90 percent of GDP, with external debt at close to $70 trillion.

For 2002, the allocation for debt repayment reaches Rp 136.2 trillion, or some 40 percent of total state expenditure.

Due to its heavy weighting in the budget, the government has been forced to ask for a rescheduling of the debt interest payments, something the country has never done before.

However, seeking rescheduling in interest payments could also create other risks.

Some economists have warned against deferring interest payments, saying the move could downgrade the country's sovereign rating, thus creating additional new pressure on the rupiah and raising the cost of borrowing for the corporate sector.

International rating agency Standard & Poor's has already threatened to downgrade the country's long-term sovereign debt rating, should the Paris Club creditors suggest holders of the country's commercial bonds bear a similar burden.

If that were to happen, Indonesia's rating would be downgraded to "selective default", putting off potential investors even more.