Under creditors' scrutiny

Under creditors' scrutiny

There is no reason for the government to rejoice over the
US$3.1 billion in new loans pledged on Thursday by its creditor
consortium, the Consultative Group on Indonesia, because their
disbursements are not yet guaranteed, being contingent upon
policy performance. In fact, according to some sources who
attended the closed-door meeting, there was already an air of aid
fatigue among the creditors because of the government's
disappointing track record in reform implementation.

That the creditors still made new pledges seemed to have been
prompted more by their great concern over the devastating impact
a halt in new loan commitments might have on Indonesia's fragile
stability. Certainly, the country's vital geopolitical role in
this part of the world was also prominent in their
considerations.

But then what else can the CGI creditors do but continue
supporting the government, as it still owes them more than $58
billion in debts outstanding as of last December.

However, since the new loan pledges would not mean anything in
terms of remedying the nation's crisis if they were not realized
as liquidity flows to the state budget, the government has to
work harder to secure their disbursement.

For the current fiscal year alone, creditors are unlikely to
disburse $1.7 billion or 65 percent of their $2.6 billion program
loan pledges due to the government's failure to meet policy
reform targets. In fact, according to the World Bank's latest
report on Indonesia, only 40 percent or $9.3 billion of the $23.2
billion pledged in program and project loans by CGI creditors
between 1998 and 2001 had so far been disbursed.

This obviously adds to concerns about fiscal sustainability
because CGI creditors are now the only source of external
financing available to the government. Not a single foreign
commercial bank is now willing to lend to the government due to
Indonesia's extremely high country risk rating.

The tone of the meeting was set mainly by the report entitled
Indonesia: The imperative for reform, which was used as the main
briefing shet on Indonesia at the CGI meeting.

The report bluntly points out that most reform measures lagged
behind schedules and that in the 100 days after assuming office
President Megawati Soekarnoputri had made little progress on
structural and governance reforms.

Understandably, the creditors have insisted strongly that
their loans be used efficiently and effectively and that the
borrower, in this case the government, take the necessary
measures, including painful ones, to ensure that the new debts
actually help remedy the country's economic woes.

That is because the bulk of the money the creditors lend to
Indonesia is derived from their own taxpayers, who themselves
have been required to take on greater burdens amid the gloomier
global economic outlook. For example, Japan, which usually
contributes about 40 percent of the CGI's total credit
commitment, is now plunging deeper into recession. Even the
capital of the World Bank and Asian Development Bank, which
together contribute one half of the consortium's total loans, is
derived mainly from taxpayers in developed countries.

It is only sensible, even imperative, for the creditors to
thoroughly examine whether the government has fully shouldered
its share of the burden and implemented all the measures required
to cure the country's economic ills, because they have to account
for their loans to their shareholders (taxpayers).

The creditors should be especially careful about extending new
loans because the government's total domestic and foreign debts
have exceeded the country's gross domestic product. Its foreign
debt service payments alone are now as large as 40 percent of
annual export earnings and its foreign and domestic debt service
obligations already take more than 42 percent of its total
operating budget.

The creditors' demand that the government take more painful
measures does not mean undue intervention in the country's
internal affairs or infringement of its sovereignty. The point
here is that any new loans from the creditors would simply be
rendered ineffective if the government itself did not fully
shoulder its share of the reform burden. In the same spirit, we
should not feel offended by the creditors' criticisms that
corruption in Indonesia had not been curbed but had instead
flourished. Rampant malfeasance would waste their hard-earned
loans.

What is at stake if the government is not capable of or
serious about implementing the reform measures is not only the
loans from creditors but also the survival of Indonesia's
economy. Ineffective loans will instead add to the already huge
debt burdens of the government and consequently the Indonesian
people.