In the year 2000, Indonesia has to pay US$ 3 - 5 billion (around 34 trillion Rupiah) for servicing debt. In the year 2001 and 2002 this will increase to around US$ 5 - 9 billion (63 trillion Rupiah). For the next five years, economists warn that the level of debt servicing will rise to up to 50% of the state budget.

What are the choices for Indonesia? Does the Indonesian government (GoI) need to borrow US$4.8bn from the CGI in 2001 to pay the debt? This month’s factsheet takes a look at the issues of Indonesia’s debt and possible alternative sources of funds.

So who owes the money?

In 2000 Indonesia’s total foreign debt (private and government) reached US$144 billion, an amount almost equal to the country’s yearly economic production (GDP) and one of the highest debts in the world. (The most indebted country in the world is USA.)

Of Indonesia’s total foreign debt, 60% (US$85.9 US$bn) is public debt and 40% (US$58.5bn) is private debt. Of the public debt, - half is owed to the IFIs and half to bilateral donors. Of the private sector debt, half is owed by foreign multinationals and half by various others domestic private companies.

Indonesia’s debt has increased US$81billion in the three years after the financial crisis began. But yearly debt repayments have fallen from around US$6bn to about 3 or 4 US$bn due to reduced ability to repay.

Most of the debt increase was caused by the financial crisis and the fall of the Rupiah. This ‘new’ debt was however not really ‘new’ in that it was money lent to finance Suharto’s government. Further, the World Bank has noted at least a third of its own lending to the New Order was lost in corruption.

Almost all the US$81bn increase is GoI domestic debt caused by the financing of the banking rescue programme, as the World Bank notes in a June 2000 report (see end).

The same report chose not to mention that the IFIs had promoted the risky bank deregulation programme in the 1980s that opened up the banking system with little supervision (especially PAKTO 1988).

The large debt is also due to the IMF’s advice to increase interest rates to very high levels during the crisis and to allow the Rupiah to devalue. Every time the Rupiah falls 10%, another US$3bn is added to Indonesia’s total external debt, according to the World Bank. This year the Rupiah has fallen about 40-50%.

Indonesia not only has a massive foreign debt, but also its capacity to repay this debt at the moment is very limited. In early 1999, Indonesia’s debt service ratio was over 50% - this means that half of national export revenues are spent on debt repayments. Last year, the GoI allocated over 40% of the general budget to meet the interest repayments on the foreign debt. The situation is made even worse by Structural Adjustment Program/Loans (SAP/L) – a condition of lending introduced by the IMF in the 1997 economic crisis.

SAPs force Indonesia to accept binding conditionalities which impact directly on budget allocations, causing reductions in social expenditure, the liberalisation of markets and structural changes in all aspects of ordinary Indonesians’ lives from the legal system to the financial system; from workers’ rights to the public health sector to the over-exploitation of natural resources.
See DTE Factsheet 2

The World Bank and other donor countries and institutions regard Indonesia as being capable of repaying its debt and thus not eligible for a significant debt relief scheme. They are proposing the rescheduling of interest and principal repayments on a short-term basis and at high interest rates. This means that Indonesia will have to reduce substantially its social spending to be able to service the debt.

INFID, the International NGO Forum on Indonesian Development, noted at the November 2000 CGI Tokyo meeting, that the huge debt burden will have to be paid by increasing export earnings and liberalising Indonesia's market for imported goods. Further, that the huge burden of external debt will have to be paid by reducing the budget for basic social services such as health, education and food subsidy for marginalized groups in society: children, women and workers. And finally that it is unjust that the Indonesian people and the new government are being burdened with the repayment of loans which were misappropriated by Suharto's Orde Baru government.

However, there are alternatives to further foreign lending or severe cuts in the country’s ‘development’ budget. See table 2 below.

Table 1: What the IFIs think about Indonesia’s debt

World Bank

Asian Development Bank (ADB)

On debt: "Indonesia's debt is clearly high, government debt is about 100% of GDP. We get the clear message from the GoI that they take the debt issue seriously." On a far reaching debt rescheduling agreement: "As Indonesia is not a HIPC [Highly Indebted Poor Country], shareholders do not regard the problem as serious. Under the existing rules, it will be difficult to achieve." "WB is trying to find a language which makes it possible for Japan to reschedule debt." WB lending: WB is lending less than before. Budget support: approximately US$ 3 billion for 2000. "To meet the budget deficit actually very little new money is needed." "We will disburse US$ 50 million a month for projects, budget support will very quickly phase out. The GoI has a lot of flexibility not to borrow from the WB; WB is monitoring disbursement of funds probably better than others."

On debt: Indonesia is the ADB's largest overall borrower. There are no plans to raise debt forgiveness for multilateral debts. ADB is of the opinion that Indonesia can repay its debts - unlike the HIPC. In 1998, US$ 1 billion project loans were cancelled; in 1999 US$ 500 million. The ADB adopted a policy of poverty alleviation in November '99 as an overarching goal, e.g. no highways but market access roads. ADB will not raise debt reduction issues. As to the question of a moratorium, Robert May said that such a move would send a bad signal to investors as in principle Indonesia has sufficient resources to repay its debt.

NGOs Campaigning in Indonesia

The Anti-Debt Coalition – an Indonesian civil society coalition comprising 60 organizations of workers, farmers, indigenous peoples, women, non-governmental groups and students – is calling for fundamental action on the issue of foreign debt so that Indonesia can escape from the debt trap and start immediate economic recovery. They call for:

1. cancellation of all of Indonesia’s foreign debt;
2. a halt to the conversion of private debt to public debt;
3. independent investigation of the use of all loans to Indonesia;
4. no new debt for Indonesia.

INFID

INFID’s main debt demands at the recent CGI in Tokyo were:

1. moratorium on debt service payment by giving a 30-year grace period for multilateral debt;
2. debt relief of the so-called odious or criminal debt - it is estimated that approx. 30% of all loans the Orde Baru regime received have been misused and corruptly spent;
3. establishment of an independent international commission to investigate the extent of ‘odious’ debt;
4. a far reaching debt rescheduling agreement similar to the one the Suharto regime was granted in 1970;
5. make it a condition of new loans to have full public disclosure and public discussion, civil society monitoring. The aim being to ensure that the proceeds of new loans will be used to promote equitable and sustainable development;
6. reduce Indonesia’s dependency on foreign loans.

Alternative sources of funding: are there other choices for Indonesia?

The table below proposes some potential alternative funding sources for Indonesia and the implications of each. Although few are without consequences the overall conclusion is: it is not necessary for Indonesia to borrow from the IFIs. Mostly, the consequences are that the rich pay more.

The question then is why does the GoI follow the IMF? Perhaps it is because avoiding upsetting the Indonesian elite and building a strong friendship with the USA are seen as the only way to stay in power in Indonesia.

DTE is the first NGO to analyse these alternatives. Comments are very much welcome at dte@gn.apc.org

Table 2: Are there other choices for Indonesia?

	US$ potential	Source	Policy	Implications
1.	Billions	Budget assumptions (1) Budget assumptions (2)	Change budget assumptions from oil prices of 17-22 US$/barrel to market rate of US$33/barrel. Change Rupiah budget rate from 7300/US$ to market rate of 9200/US$.	Increases revenues from oil, no side effects. Reduces debt in dollar terms, no side effects.
2.	Up to US$ 6bn	Foreign exchange reserves	Not to increase foreign exchange reserves by such a large amount in this year (US$9bn).	Foreign exchange reserves are already relatively high, increasing them is unlikely to stabilise the Rupiah, as long as there is enough to cover three months imports and short run debt interest.
3.	Billions	Audit of 'off-budget' funds, especially military businesses	Auditing all ministries and military businesses could reveal billions of dollars.	Might upset powerful people in Indonesia and will take a long time to complete.
4.	Billions	Tax luxury imports	Tax on imports of luxury cars, jewellery, etc.	Might upset powerful people in Indonesia.
5.	Up to US$3-5bn	Debt relief of 'corrupt/criminal' debt	Agree with international community for debt relief.	May find in short run borrowing is more expensive as credit rating falls but debt rating of GoI is so low that unlikely to make much difference.
6.	Up to US$3-5bn	Debt interest 'standstill' or 'moratorium'	GoI declares a unilateral standstill on debt repayment until 2005, for example.	Would need to be in conjunction with capital controls, but stock market, Rupiah and capital inflows already very low. May upset powerful people globally and donors, IFIs etc.
7.	Up to US$2.8bn	Controls of Foreign Direct Investment outflows	Last year almost US$3bn left Indonesia as profit repatriation by multinationals, overtaking new investments. In the boom years this was US$5-6bn.	May upset powerful people globally and donors, IFIs etc. Might discourage FDI in future. Malaysia successfully used policies like this against IFI wishes.
8.	At least US$1.8bn	Controls on Foreign Portfolio Investment outflows	Last year almost US$2bn left Indonesia as outflows on the stock market, exceeding new investments. During the crisis this was much higher (US$9bn/year).	May upset powerful people globally and donors, IFIs etc. Might discourage FDI in future. Malaysia successfully used policies like this against IFI wishes
9.	Up to US$6.9bn	Controls on other private capital flows	Last year almost US$7bn left Indonesia in transfers of money to offshore bank accounts by rich people and in other outflows on debt repayments. During the crisis this was US$23bn/year.	May upset powerful people globally and donors, IFIs etc. Malaysia successfully used policies like this against IFI wishes.
10.	Billions	Reduce military spending rather than social spending	The official military budget is US$1.8bn according to the USA state Dept. Better to cut this than social spending.	Might upset powerful people in Indonesia

Sources

Asian Development Bank, October 2000, Asian Recovery Report, ADB: Manila
INFID, January 2000, Statement to the CGI, INFID: Jakarta
INFID, October, 2000, Statement to the CGI, INFID: Jakarta
INFID, October 2000, CGI Meeting Notes, INFID: Jakarta
Koalisi Anti Utang (KAU), January 2000, Statement to the CGI, KAU: Jakarta
Winters, J., July 2000, Criminal Debt in the Indonesian Context, INFID Seminar on Foreign Debt, Jakarta
World Bank, April 2000, Public spending in a time of change, World Bank: Jakarta
World Bank, June 2000, Managing Government Debt and its Risks, World Bank: Jakarta

Links/Contacts

Jubilee 2000	http://www.jubilee2000uk.org/
INFID	http://infid.ngonet.be/
KAU	Chris Wangkay, INFID chris@nusa.or.id Tel: +62 8129425727 Longgena Ginting,WALHI kuleh@indo.net.id Tel. +62 811927038 Titi Suntoro, Solidaritas Permempuan euron@indo.net.id Telp. +62 818 912 418
Debt Watch	Arimbi elawina@rad.net.id Tel. 0811 848514