Earnings of Rp 10 trillion, raised from the increase in the price of oil, will not help as long as Indonesia’s debt burden is not significantly reduced.

The economic crisis has shackled Indonesia in debt.  Prior to the onset of the crisis, in March 1996, the debt burden amounted to 30% of GDP; now, following the crisis, this figure has rocketed to 128% of GDP.  For the first time since the 1970’s, Indonesia has domestic debt1.  The government has issued bonds worth US$ 80 million, the majority of which is to be used to finance recapitalisation of the banking sector.

Most of the additional government foreign debt is to be used to cover the routine budget deficit, finance development projects, and provide loans for Bank Indonesia (US$ 10 billion from the IMF) and state-owned enterprises (around US$ 9 billion).

Debt repayments will take up more than 40 percent of government revenues for years to come2.

Who is Indonesia indebted to?  Japan is the largest creditor with loans of around US$ 26.6 billion, followed by the World Bank with loans amounting to US$ 12.3 billion.  The majority of government foreign debt is long term, falling due in 22 years with a grace period of 7 years.  The average rate of interest is around 5 percent.3

Jeffery Winters, an expert on Indonesia from the United States, has confirmed that since WWII no other country has run up such a serious debt burden over a period of just two and a half years.  Indonesia’s debt burden far outstrips that of other Asian nations, such as Thailand, Korea, the Philippines, and China.4

Total repayments on government loans (domestic and foreign) for 2000, 2001 and 2002 amount to US$ 8.8 billion, US$ 12.9 billion, and US$ 15.6 billion, respectively.  Of this amount, repayments on foreign debt alone account for US$ 3.7 billion, US$ 5.4 billion, and US$ 7.6 billion.

Total debt repayment will absorb around 36 percent of government revenues (compared to just 24 percent in the past). However in 2000, loan repayments will take up 40% of government revenues.

There are at least four problems related to this massive debt burden: first, loan repayments will increase as the rupiah continues to depreciate (compared to the pre-crisis situation).  This pressure on the rupiah will mean people have to work much harder since foreign debts are in foreign currency, while debt repayments by the people (tax, etc) are in rupiah.  Second, the ability to pay will decline as the debt service ratio (DSR) has risen from 33 percent in 1996 to 50 percent in 1998.  In the medium term, this ability to repay debt will depend on exports; and exports are greatly dependent on a still depressed demand and supply.  On the demand side, the still depressed Asian region accounts of 64 percent of the Indonesian market.  On the supply side, the real sector is as yet unable to operate due to the debt repayment problem and lack of recapitalisation.  Third, because the required loan repayment is so large, the potential and funds to stimulate the economy are lacking.  Fourth, such a immense debt stock could exacerbate adverse public perception and expectations, making Indonesia susceptible to external shock.5

The economic crisis in Indonesia has brought about very serious social ramifications.  In 1993, the number of poor in Indonesia stood at around 22.5 million.  By 1998, this figure had increased to 40 million.  Health and welfare indicators have also suffered.  In the Province of West Sumatra, it has been reported that more than 32,000 of 300,000 under-fives in this province suffer from malnutrition.6  At the end of 1999, the UNICEF Jakarta office stated that due to its grave debt burden Indonesia will sustain a lost generation7; a weak and feeble-minded generation resulting from malnutrition, lack of education, and unhealthiness.

The INFID Conference in Bali in 1999 noted that since the onset of the crisis in 1997, Indonesia has had the largest external debt stock of any developing country.  INFID stated that this grave burden of debt repayment will have an adverse impact on the people of Indonesia, particularly the poor and other susceptible groups.8

THE WORLD BANK’S FAILURE TO RECOMMEND DEBT CANCELLATION / REDUCTION

The World Bank recognises that Indonesia’s debt burden is huge and that Indonesia has no chance of receiving any more new loans.  Yet, strangely, the World Bank believes that this debt problem is still resolvable and manageable.  This World Bank projection is an optimistic one based on optimistic assumptions.

The World Bank offers six policy recipes to resolving the government debt burden: a fiscal surplus of 2% of GDP (by raising taxes for instance); plugging fiscal losses and leakages (state-owned enterprise leakages, for instance); sale of government assets; debt rescheduling (via the Paris Club and London Club); building debt management capacity, in particular the capacity to analyse and monitor to be dealt with by a Debt Management Office under the auspices of the Department of Finance; and finally, to create an effective domestic bond market.

Since World Bank analyses and recommendations are the main source of reference for creditors, a number of criticisms need to be communicated.

First, these six recipes aim solely at raising Indonesia’s repayment capacity, so that Indonesia will be able to pay off its debts.  Raising repayment capacity to this level means placing the full burden and responsibility on the debtor nation/Indonesia.  This involves Indonesia having to sell its assets that are under the management of IBRA and also income earned from the proposed privatisation of state enterprises. And yet, speeding economic recovery requires budget flexibility and adequate funds to stimulate the economy.  Therefore, besides stemming unnecessary expenses and corruption, reducing the debt burden should be the priority.  In this regard, creditors are not taking any responsibility nor sharing the burden.  The fault and burden lies wholly with the debtor nation.  The only facility available to lighten Indonesia’s burden is the rescheduling facility offered by the Paris Club/London Club.

The second criticism of the World Bank analysis and recommendations is that they ignore the fact that during the 32 years of the Soeharto regime there was substantial corruption, mis-channelling and misuse of loan funds.  The role of the World Bank during its 32 years of operations in Indonesia, working in cooperation with Soeharto and turning a blind eye to this persistent corruption, need to be accounted for. Disregarding the existence of odious debt and criminal in its analysis of and solution to Indonesia’s debt problem seriously undermines the credibility of World Bank analysis and policy.

The third criticism of the World Bank analysis and recommendations concerns its failure to include poverty alleviation as an objective/goal.  Has the World Bank considered the impact Indonesia’s debt repayment has on the poor?  The World Bank has stated that if the Indonesian economy recovers, it will no longer be necessary to provide assistance for the poor.  But the reality is quite the converse. Even if Indonesia manages to repay its debts, by sacrificing its social budget, it is the poor who will be hardest hit.  Either that, or Indonesia will need to take on new loans to provide social security for its citizens.

IMPACTS OF INADEQUATE RESCHEDULING

The debt solution executed involved rescheduling via the Paris Club and London Club.  In 1998, the Paris Club approved a rescheduling of US$ 4.6 billion for debt falling due between August 1998 and March 2000.  In this way, repayments on this debt can be maintained at 34 percent (1998/1999) and 25 percent (1999/2000) of government income.  In April 2000, the Paris Club (also known as Paris Club II) rescheduled bilateral debt (ODA and non-ODA) of US$ 5.8 billion, falling due between 2000 and 2001.  In June, the London Club also rescheduled the Indonesian government’s commercial debt for the period 2000 and 2001.  According to Jurgen Kaiser9, a German Jubilee 2000 activist, Indonesia’s fate is indeed deplorable, because, although the size of Indonesia’s debt burden places it in the category of Severely Indebted Low Income Country (SILLC), Indonesia’s creditors failed to act equitably.  Of the 32 countries classified as SILLC, Indonesia alone is excepted from facilities that would alleviate its burden.  Jurgen notes four alleviating and mitigating facilities not extended to Indonesia: 1) no access/facility for rescheduling multilateral debt (because Indonesia is still receiving IBRD loans at market rate of interest and IDA loans at concenessional rates of interest below the market rate); 2) no access/facility for rescheduling private/bondholder debt due to a lack of an adequate mechanism; 3) Paris Club extends only standard terms access/facility, not the most recent scheme (which would be far more beneficial to Indonesia), namely the Cologne Terms (alleviation/cancellation of up to 90% of debt stock), or even the previous scheme, the Houston Terms, provided for seriously indebted countries.  The only facility available is a debt swap option.

EXISTING MECHANISM INAPPROPRIATE TO INDONESIA

The international financial system and the model of debt management for poor and third world countries are considered inequitable because they are, for the most part, determined and dominated by creditor parties in collaboration with the IMF and the World Bank.10 In both the Paris Club and London Club, analogous to a court, creditors act as judge, jury, and prosecutor.  This is clearly contrary to the rule of law.  In addition, poor and third world countries are still required to repay their debts even if this means sacrificing human rights, children not being educated.  Prof. Kunibert Raffer of Vienna University has proposed an international insolvency arbitration/tribunal, in which debtor nations would put their facts and arguments before an independent judge.  In this way a country could win alleviation or cancellation and not be forced to repay its debts, thereby preventing the suffering or death of its citizens.  This is not a new concept, since immediately following its debt crisis in 1982, Mexico declared itself insolvent.  David Suratgar, a British banker, has proposed a different mechanism, namely bankruptcy courts.  Modelled on the US Bankruptcy Law (articles 9 and 11), a regency capital or administration would not be forced by creditors or by the courts to repay its debts if doing so would mean sacrificing the rights of its citizens to the point of starvation or death.  This proposal has gained fairly widespread support, including from the UN Secretary General Kofi Annan, the OECD financial crisis work tem, Harvard economist Jeffry Sachs, and others.

DEBT CRISIS AND HIPC

Indonesia is not alone in its debt crisis.  Since 1982, when Mexico declared itself unable to repay its debts (default), the debt crises in many Southern hemisphere nations could no longer be addressed by patchwork and grossly inadequate debt resolution mechanisms, such as rescheduling by the Paris Club and London Club, disbursement of new loans to repay existing loans, Brady bonds, and others.

And yet only in the 1990’s did creditors acknowledge this reality.  In 1996, following insistent pressure from social movements in the North and South, creditor nations and agencies (IMF, World Bank) decided to seek an alternative mechanism/solution to this debt crisis.  That year, they designed a debt alleviation programme for highly indebted and poor countries (HIPC).  Around 41 countries in Africa, Latin America and Asia were included in this programme.

However, 3 years later, implementation of this programme proved to be too late and insufficient to be of help to poor countries. In 1999, G-8 Summit again acknowledged that the promises they had made were insufficient and had come too late.  So they drew up another promise, namely a commitment to cancel US$ 100 billion of HIPC debt.

But, to the conclusion of the last G8 Summit in Okinawa, this promise remained just a promise.  It is estimated that by the end of 2000, only US$ 15 billion of the US$ 100 billion promised at the 1999 Cologne Summit will actually be cancelled.

Indonesia is not categorised as an HIPC, and in our opinion, it would be preferable for Indonesia not to be categorised thus, since being classified as an HIPC would mean Indonesia would have to accept strict economic conditions, generally in the form of an SAP programme led by the IMF, which would not necessarily be advantageous or beneficial to Indonesia.

RECOMMENDATIONS

First, that the CGI and the Indonesian government include in their analysis the goal of poverty alleviation, or reducing the number of poor by half within a set time period (by 2010).

Second, that the CGI resolves to reduce and cancel foreign debt as a key instrument to poverty alleviation.

Third, that the CGI resolves to undertake investigation into loan funds disbursed during the 32-year New Order regime.  Investigation is crucial to identifying and changing mechanisms and systems that encourage corruption.

Jakarta, October 4 2000

INFID u International NGO Forum on Indonesian Development

Jl. Mampang Prapatan XI No. 23
Jakarta 12790, Indonesia
Phone (62-21) 791 96721-2 Fax. (62-21) 794 1577
E-mail: infid@nusa.or.id
Homepage: http://www.infid.or.id