Young Indonesians inherit huge foreign debt

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.