Terms of support

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.

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