Seizing the momentum

It was really good move on the part of the government to send a special team led by Foreign Minister Hassan Wirayuda to Europe last week to follow up the initiatives by the governments of Germany, France, Italy and Britain, on debt moratorium to help Indonesia cope with the Dec. 26 earthquake and tsunami in northern Sumatra. The effort, as Hassan said yesterday, was like hammering the iron while it is still hot, riding on the momentum of international sympathy for Indonesia and seizing upon the massive humanitarian gestures.

There is nothing to regret, even though the team only got a firm pledge of US$350 million in debt relief from the Paris Club of 19 sovereign creditors. As the mission was only an initial exploration of what creditors would be willing to give Indonesia, the outcome is already quite encouraging, especially as the Paris Club's rules of operation require consensus decisions. Moreover, the debt relief was obtained without any conditions.

Indonesia should indeed turn down any offer of assistance that is tied to the normal terms and conditions that the Paris Club imposes on debtors in financial crisis. We are not in a financial crisis, nor in an economic crisis. The government has never made any official request for debt moratorium. It only responded to the initiatives of several major sovereign creditors with regard to the natural disaster in northern Sumatra. We also know that there have been several precedents whereby the Paris Club waived its standing operating procedures to help natural disaster-hit countries such as Haiti and Kosovo.

It is also understandable, however, that the Paris Club meeting last Wednesday decided on a moratorium only for Indonesian debt payments due over the next three months, which amounts to some $350 million. Since the debt scheme is tied to the disaster in northern Sumatra, it is sensible and logical that creditors wait until a final, comprehensive assessment of the devastation is made, along with its economic impact and estimated financial requirements for the reconstruction of Aceh.

The team took other important initiatives, not only exploring debt moratorium and grants, but also other possible aid schemes such as debt swaps (for projects in Aceh), soft loans and even assistance through trading opportunities. The team's exploration of preferential tariffs for Indonesian products is quite strategic because of the multiplier effects and sustainable impact of trade on the economy.

Even new debts such as the $390 million offered by the French government as a soft loan -- repayable within 30 years with a 10- year grace period and annual interest of only 1 percent -- could be a good option. Such a loan, for example, could be used to restructure old debts that carry higher interest and shorter maturity. Whatever avenue that is effective in cutting our debt, or does not add to future debt payments should be utilized.

All the aid or debt schemes mentioned above are very relevant and should be explored further because what the government is now seeking is no longer funds for emergency relief. Rather, it is for financing the rehabilitation of Aceh, that could take at least five years, and for reconstruction, that could take more than seven years.

The annual meeting of Indonesia's creditor consortium (the Consultative Group on Indonesia, CGI) that begins here today is another good forum to follow up on what Hassan's team started in its exploratory talks in several European cities last week. After all, most major Paris Club creditors are also members of CGI. Another mission to Europe by the finance and trade ministers with more concrete aid proposals will keep the momentum of creditor and mass media attention on Aceh before the agenda of international interests moves elsewhere.

More important, though, is that the government and the World Bank accelerate the assessment of damage in the northern part of Sumatra so that projects for rehabilitation and reconstruction can immediately be designed and offered to creditors for financing.

The government, however, is well advised to realize that the management of and accountability for the huge amount of emergency aid that has been flowing to Aceh over the past three weeks will very much determine any further assistance from major creditors for Aceh's rehabilitation and reconstruction.

The outpouring of international sympathy should not lull the government into complacency. Experience in other countries has shown that debt relief is always tied to a comprehensive development strategy that hinges on good governance, building strong institutions and promoting growth.

Further down the line, this means continued implementation of the series of key economic reforms, including sound macro- economic policies that underpin the creation of a sound legal system, the establishment of a reliable and accountable financial system, and the fostering of self-sustaining private sector development.