Terms of support
Those who have frequently attacked the International Monetary Fund (IMF) for the tough lending conditions it has imposed on the Indonesian government should feel further outraged by the outcome and messages of the 13th annual meeting of the creditor consortium, the Consultative Group on Indonesia (CGI), last week.
Even though CGI creditors committed US$3.4 billion in new loans and grants to Indonesia for next year -- higher than their pledge of $3.1 billion to the 2003 state budget -- about half of these loans depends on progress in the government's policy agenda. This means more than $1 billion will not be disbursed if the government fails to meet the creditors' conditions.
Isn't this intervening in Indonesia's internal affairs and dictating policy measures on the Indonesian government? Yes, in a way it is, but there is nothing wrong with this. There is no such thing as free lunch, even in bilateral relations as that between the government and CGI creditors. After all, it is the government that asked for new loans and not the other way around. Jakarta can simply reject the loans if it finds the terms unacceptable.
However, given the severe liquidity crisis the government has been suffering since the 1997 economic crisis, the CGI's lending conditions -- compared to commercial borrowings -- are too good to turn down. Our fiscal situation would have been much more damaging to macroeconomic stability without additional funds from the sovereign and multilateral creditors grouped in the CGI. And without a minimum degree of macroeconomic stability, the economy will not be able to operate normally, let alone expand robustly.
Moreover, further analysis will show that the conditions the CGI creditors have tied to their loan and grant pledge are not designed to serve their own interests, but follow the policy agenda as stipulated in the White Paper, which the government adopted in September through a national political consensus.
When it comes to lending conditions, there are many similarities in the basic treatment of sovereign and commercial borrowers. In both cases, for example, the creditors must always ensure that the debts are sustainable -- that is, that the loans would create new revenue-generating assets to help borrowers service and repay their debts.
CGI creditors must also be held accountable for their loan and grant decisions. CGI sovereign creditors must account for foreign lending to their respective governments, because it is their taxpayers that shoulder such loans; and multilateral creditors such as the IMF, World Bank and Asian Development Bank, must provide an account to shareholders, which are also governments.
It is in this context that we must view the creditors' advice to maintain the momentum of reform and thus retain market confidence in the government's political willingness and ability to execute structural reforms -- even after the IMF program closes this year.
The issue of governance took center stage at the CGI meeting because the Indonesian government is perceived internationally to be one of the most corrupt in the world.
The creditors also paid such keen attention to legal and judicial reform that the Supreme Court chief justice was, for the first time in CGI history, required to attend and brief the meeting on the road map to judicial reform.
Legal and judicial reform is highly crucial in enhancing good governance which, in turn, is vital in ensuring legal certainty, contract enforceability, policy consistency and sound tax and customs administration, that have long been at the top of the list of business and investment concerns.
As the creditors rightly argued, the investment climate must be improved to fuel a higher rate of economic growth. But policies to improve the investment climate can be effective only if they are supported by an effective, predictable, transparent and equitable judiciary.
True, not only does Indonesia badly need new loans, but it also needs debt forgiveness, as Indonesia's outstanding foreign and domestic debts have increased steeply since the 1997 economic crisis to as large as $77 billion and Rp 600 trillion ($70 billion), respectively.
Still, it is a wonder as to how the government has come to deserve such goodwill and understanding from overseas creditors if it is considered one of the most corrupt in the world.
___________