Wishful thinking vs debt crisis

Wishful thinking vs debt crisis

This is the first of two articles on Indonesian debt by
Juergen Kaiser, campaign coordinator of Erlassjahr 2000, the
German Jubilee 2000 campaign, an international civil society
initiative for debt cancellation and the reform of international
debt negotiation procedures.

ESSEN, Germany (JP): As the Consultative Group on Indonesia
meeting ended on Oct. 18 in Tokyo with new pledges amounting to
US$4.8 billion to Indonesia in public external loans, one cannot
help thinking about Indonesia's indebtedness.

The total external debt of Indonesia has reached around $144
billion, consisting of both private and public debt, which is
more than 90 percent of Indonesia's gross domestic product.

As such, Indonesia's indebtedness is very severe, in which
debt servicing would mean putting the burden even more on
Indonesia's poorest.

On May 22, the World Bank (WB)'s Jakarta office published a
document entitled Managing government debt and its risk. The
document acknowledges that Indonesia is confronted with a severe
internal and external debt problem.

Its problem assessment, suggested solutions and visions of a
possible workout strategy merit a closer look.

Both reveal a high degree of either naivete or well-aimed
wishful thinking on the part of the international institutions
which happened to host the meeting crucial to Indonesia's
economic future.

According to international practice, debt renegotiations of an
indebted sovereign borrower must be based on an evaluation of how
much stress the foreign debt will impose on the country's budget
and hard currency (i.e.export) earnings in the future.

The World Bank's projections to this regard are highly
unrealistic, as shown from its table of government outstanding
debt.

Table 1. Indonesia: Government Debt Outstanding
(US$ billion, end of period)

FY 96/97 FY 97/98 FY 98/99 FY 99/00 2000

Actual Projection
Total 52,6 51,2 78,1 134,2 157,2
Domestic a/ 0 0 18,9 71,5 91,5
External
Memo items (%)
Total/GDP 22,9 61,9 67,3 83,3 90,7
External/GDP 22,9 61,9 51,0 38,9 37,9

Source: Bank Indonesia, Ministry of Finance and World Bank
estimates. Assuming an exchange rate of Rp 7,000 per US dollar
for 2000.

This table assumes a nominal GDP growth rate of some 25
percent from fiscal year 1998/1999 to 1999/2000 to accomplish a
reduction of the total external debt to GDP ratio from 51 percent
to 38.9 percent, while the government's external debt is rising
from $59.2 billion to $62.7 billion.

As the relative stress imposed by the debt is the common key
indicator, when it comes to discussing the necessity of debt
relief, the presumed good news of a reduced relative burden of
the foreign debt, is all too telling from the Bank's point of
view.

In the present document, the optimistic outlook is
additionally underlined by an impressive diagram; it is the same
type of graphs the World Bank displays in its "sustainability
analysis" all over the world.

They reveal the build-up of a (debt) problem through rising
parameters and right at the transition from actual data to World
Bank projections, the graph starts to fall.

This notoriously optimistic scenario normally is produced by
simply assuming a sharp rise in the denominator's value in the
future; the denominator in this case is the Indonesian GDP.

Of course, this kind of wishful thinking has hardly anywhere
materialized over the last 10 years. However, it has provided
creditor governments (for example during Paris Club negotiations)
with the outlooks on a country's economic future which they
wanted to see, to justify their inaction or inadequate relief.

It is interesting to note that the document contains two
vulnerability scenarios in order to estimate effects of economic
factors which could impede Indonesia's foreseen growing out of
her debt. One is displayed vastly and contains the message that
even with a smaller than foreseen fiscal surplus, Indonesia will
still stay largely on track.

The other one is displayed in a very small graph. It shows
that in a scenario which the WB calls "weaker economic
management", the debt ratio to government revenues will not fall
at all. Indonesia's history in the last two years teaches that
problems related to the IBRA restructurings make the weaker
scenario far more likely than the World Bank's base scenario.

Fig.5 on page 11 on avoiding adverse shocks, it rightly
assesses the extreme risks connected to external shocks. What it
does not reveal is that a sudden and dramatic worsening of the
Indonesian situation, which is here called "a sudden drop in
investors confidence" could result from a broad spectrum of
external shocks, most of which are totally or partially beyond
the government's control.

The most important ones are certainly the conflicts in Aceh,
Maluku, West Timor and West Papua.

So what does the World Bank recommend the Indonesian
government to do? The World Bank's recipe, "How to reduce the
debt burden", starts with a highly ideological and unfounded
assumption by stating:

"As noted above, macroeconomic stability, good governance, and
market friendly policies are essential..."

Nothing of all this is mentioned, not to speak of the
evidenced above. One rather gets the impression that this kind of
Washington-consensus-liturgy is being automatically posted from a
central World Bank server, before the first sentence of an actual
document is written.

Most of the subsequent recommendations regarding good debt
management practices are certainly beyond doubt. On the material
side, however, one finds as a centerpiece of the WB strategy the
suggestion "to sell government assets to reduce government debt".

It is not only poor market behavior to "sell aggressively"
when everybody knows, the seller is in urgent need of cash. (The
Bank quite audaciously and without displaying its alleged
evidence tries to sell even this as sound strategy).

It is moreover problematic to sell exactly those elements of
old or new state property which, if anything, will be able to
contribute to the current income, while in reality what Indonesia
needs is medium-term reliable current income.

The Bank acknowledges that government finances are exposed to
significant risk. However, all the World Bank does in order to
deal with this risk, is recommending "a prudent and transparent
fiscal management"; while in other countries like HIPCs (Heavily
Indebted Poor Countries") contingencies are at least marginally
implemented by allowing for enhanced ("more robust") debt relief.

Of course, there is nothing wrong with a "prudent and
transparent fiscal management".

However, distinct from the treatment other low-income
countries receive in the HIPC framework, nothing is being done in
order to bolster the fragile economy of this country from the
acknowledged risks.

Instead the Bank expects Indonesia to simply grow out of its
severe indebtedness by assuming an absurdly optimistic scenario
between 2002 and 2010, arguing that the government debt will
decline by the Year 2010.

Looking at the assumption underlying the assumed reduction in
the government debt service ratio, one finds assumptions of a
constant six percent growth rate and an equally constant two
percent primary fiscal surplus, both of which are admittedly far
from being accomplished in the current fiscal years for which the
World Bank displays data.