Young Indonesians inherit huge foreign debt

By Eddy Soeparno

JAKARTA (JP): Not so long ago, a leading Indonesian economist explained in plain Bahasa Indonesia what the actual size of the state's foreign debt was. Much to the surprise of many Indonesians, the total debt was significantly larger than previously anticipated, namely US$110 billion. Why so large?

Well, if you take into account $53 billion worth of state debt obtained prior to the crisis, add $8 billion and $6 billion from the Consultative Group on Indonesia (CGI) and foreign donors respectively, then include $43billion provided by the International Monetary Fund (IMF), then in fact state foreign debt actually reaches the above figure. As if this wasn't bad enough in its own right, add an additional $67 billion owed by the private sector, and Indonesia, the world's fourth most population nation, has largest outstanding foreign debt outstanding on the face of the earth.

Here is a simple illustration to demonstrate how we arrived in this sorry state. The "development budget" in the annual state budget increased gradually every year to support economic growth, while revenues from the fiscal sector were constantly insufficient to finance this need.

The government insisted on a balanced budget, so this deficit had to be covered by other means of funding, particularly through foreign borrowing from donor countries grouped in the Consultative Group on Indonesia.

With the government unwilling to "hit the brakes" and cool off the economy at any point over the last decade, foreign loans required to balance the budget grew steadily. The balanced budget mechanism forced up Indonesia's state debt to record high levels in the years preceding the crisis. At the same time, the country's economy did not have the capacity to generate sufficient output and revenue to service these debts.

Returning to the debt problem of today, interestingly enough, officials recently proclaimed that the government had succeeded in rescheduling maturing government loans of up to $4 billion and dressed it up as a foreign creditors' vote of confidence in Indonesia.

What they failed to see was that the problem does not lie in the success or failure of any rescheduling agreements. The problem is the gigantic size of the debt itself, especially if one stops to think about how long it will take to repay.

The huge amount of debt Indonesia currently carries on its shoulders will have to be repaid in full. The longer these debts are "successfully" stretched out, the greater the burden they will place on Indonesia's younger generation, who will be responsible for ensuring they are repaid.

Indonesia's economic architects transformed the nation from the brink of destitution and illiteracy into a modern state that, despite its current ills, still offers endless potential for growth. But it goes without saying that the same "architects" have left our younger generation to pick up the huge "bill" they ran up with creditors over these years.

Years and years of study and hard work will be dedicated solely to repaying foreign creditors, while strategic state enterprises and natural resources will be exploited to serve the same purpose. Hopefully there will never be a generation in this country that lives only to make good the debts run up by the preceding generation.

While we're still in the midst of the crisis, we should hammer home the message that the current debt problem has brought problems of other dimensions with it, most notably social and political in nature. It should be acknowledged that "hitting the brakes" once in a while during an economic boom is not such a bad idea, especially if sustainable long term economic growth and stability are the objectives of government policy.

This will result in economic contractions and cool down the economy, perhaps at times when competitors are experiencing rapid growth. However, it must not be forgotten that building up an economy based on excessive debt will almost certainly lead to a severe recession that will make a minor contraction of the economy look like "the good old days".

Naturally, the temptation to seek new debt, be it in the name of balancing budgets or to fuel future economic growth will reappear in the years ahead. Hopefully when it does we will be wise enough then to remember that it was excessive debt that brought Indonesia to its knees in 1998/1999. Logically speaking, we can hardly afford another economic crisis.

In the interest of sustaining long term economic growth and not merely short term upswings, it is not only important to balance the budget, but to guarantee the ability to repay loans. It would be extremely unfair to continue to pursue a policy of excessive borrowing when it is known that the responsibility to repay this debt will fall to a different generation of Indonesians. The situation is reminiscent of what U.S. President Herbert Hoover once said jokingly but nonetheless less cynically: "Blessed are the young, for they shall inherit the national debt!".

The writer is a director at a foreign bank in Jakarta. This article has been written in a private capacity.