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.