When assumptions behind debt do not work

Bahtiar Arif, Center for Indonesian Reform, Jakarta, bahtiararif@yahoo.com

Blessed are the young, wrote former U.S. president Herbert Hoover, for they shall inherit the national debt.

The level of government debt has reached a staggering Rp 1,300 trillion (US$ 151 billion) of which Rp 670 trillion is domestic. This means every infant or adult out of some 200 million Indonesians would be indebted by at least Rp 6.5 million.

The repaying of the loan accounts for at least 95 percent of the gross domestic product; and the government, through the extension of its relations with the Internationl Monetary Fund (IMF), has decided that loans are still necessary.

Loans, especially when they are foreign, are supposed to fill investment and trade gaps to achieve sustainable growth until the economy "takes off". The underlying assumption is that the loan is used effectively and is well managed.

The effectiveness of loans must be evaluated. In general loans made to Indonesia have been corrupted by around 30 percent. Loans are often not entirely based on real needs, but have in some cases been pushed by creditors. Foreign loans were drawn as a complementary source of financing, in particular for development expenditures. Some of them were conducted without sound project appraisal techniques, measuring costs and benefits and the net present value of the projects.

Domestic loans used to finance bank restructuring seem to be an instant solution, without much consideration on how to repay the loan. And for all its debts the government has never provided a cash flow projection, which is crucial to know how to repay loans.

Moreover, the level of debt has never been reported and submitted to the legislature as part of the government's accountability. The government has only submitted a statement of realization of budget revenues and expenditures.

Without a balance sheet made available to the public, people do not know the level of the country's wealth and how much debt has to be paid.

The drawing of more loans should be delayed until the following conditions exist. First, fundamental regulations dealing with loans and other public finance matters should be established. Second, loans should only be drawn following a proper feasibility study showing a cost-benefit analysis, the rate of return of project loans, and a cash flow projection to repay the debt.

Third, the government has to produce a financial accountability report for a loan, and submit it to the legislature after it has been audited by an independent auditor.

An investigative audit would be needed if there were suspicions of corruption, followed by prosecution and efforts to regain the money.

Finally, the assessment of debt sustainability may be the most important consideration. The government should measure how much of the debt can be repaid based on financial reality. Then, with the approval of the legislature the government should propose restructuring schemes according to the level of debt sustainability.

The budget shows that it will obviously be hard to repay domestic loans. Therefore, alternatives must be explored such as debt-to-asset swap, debt-to-nature swap -- or debt relief.