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Down to Earth IFIs Factsheet

No 32, March 2004

IFIs in Indonesia

This series of monthly factsheets on International Financial Institutions (IFIs) will include information on the World Bank Group, the International Monetary Fund (IMF) and the Asian Development Bank (ADB), focussing on their involvement in Indonesia.

The CGI: an alternative to the IMF?

On 10-11 December 2003, a meeting was held in Jakarta between the Indonesian Government and the Consultative Group on Indonesia (CGI) under the leadership of the World Bank.

This, the 36th meeting of the CGI, is particularly interesting as it coincides with Indonesia's exit from the IMF. The decision to adopt the post-programme monitoring strategy prevents the Indonesian Government from rescheduling with the Paris Club. This CGI meeting is an appropriate moment for examining how serious the Indonesian Government's commitment is to reducing debt and restoring Indonesia's sovereignty - or will the CGI again become another means of further increasing Indonesia's debt?

The CGI and the IMF The CGI is a consortium of creditors and donor countries to Indonesia established in 1992 to replace a similar consortium, the Inter-Governmental Group on Indonesia (IGGI). The CGI is made up of around 30 bilateral and multilateral creditors, including the World Bank, Asian Development Bank, IMF and the governments of industrial states such as Japan, the USA, UK and others (See IFI Factsheet No. 19).

As with the IMF, the Indonesian Government has used the CGI as a means of borrowing money to make up the state budget deficit. Thus the CGI meeting is part of the ritual normally carried out at the same time that the Government prepares the draft budget.

As with the IMF agreements, in order to borrow, the Indonesian Government must undertake a consultation process with the CGI. This consultation process results in an evaluation of Indonesia's economic performance and the extent to which the Indonesian Government is able to fulfil the conditions agreed at the previous CGI meeting. This evaluation determines the size of the loan and the conditions that Indonesia must fulfil.

CGI practices include the setting of conditions that threaten Indonesia's sovereignty and that are in line with the IMF's agenda, like those detailed in the 1999 Letter of Intent (LoI). From the perspective of the major creditors such as the World Bank, IMF and ADB, as well as Japan, the CGI also represents the interests and agenda of the International Financial Institutions (IFIs). The danger is that the CGI, as a cartel of creditors, weakens Indonesia's bargaining position and Indonesian might be better off negotiating with creditors bilaterally.

Increasing Indonesia's Debt Since Indonesia is no longer able to reschedule its debt via the Paris Club, the government has been at a loss to find funds for making up the deficit. The CGI meeting was received with great enthusiasm by the Indonesian Government in its search for new debt. Yet Indonesia's current debt is already large, including external debt of USD 77.1 billion (around Rp 693.9 trillion) and domestic debt of USD 68.9 billion (Rp 619.7 trillion).

The Indonesian Government's lack of commitment to freeing the country from debt dependency is evident from the statement made by the Finance Minister, Boediono, in the lead up to the CGI consultation meeting. Boediono underlined the fact that although in 2004 Indonesia had to reduce its dependency on external debt, this did not mean that loan commitments made by CGI members this year would be smaller than last year. In Boediono's terms, reducing dependency on debt does not mean that the government cannot increase its debt, indeed it may take out new loans as long as it continues to pay off the old ones.

In actual fact, the CGI meeting resulted in increased borrowing, agreeing loans of USD 3.4 billion. This commitment is an increase on the 12th CGI meeting of January 2003 (USD 3.14 billion). As with the previous year's loans, the largest creditors are the World Bank, the ADB and Japan. The World Bank has committed USD 800 million and the ADB USD 600 million. The press release from the Japanese embassy in Indonesia states that the Japanese Government has made a commitment of USD 880 million, USD 660 million of which represents loans already agreed upon, with new loans of USD 220 million in the form of export credit.

Table 1
Assistance and Loans
2004 APBN

Activity Assistance Loan (USD billions)
Make up the 2004 budget deficit Programme borrowing 1
Project assistance and grants
- grants
- project assistance
Assistance for use
other than budget deficit APBN
Export credit 0.525
Technical assistance for
Local Government and NGOs
TOTAL   3,4

Government and CGI Inconsistency and the Deepening Debt-Trap
Both the CGI and the Indonesian Government demonstrated their inconsistency at this last meeting. There has been strong pressure on the government to pull out of the IMF because IMF conditionalities are considered to be inconsistent with state sovereignty. Yet the CGI has set conditionalities that are consistent with the IMF's agenda, by continuing with the privatisation programme (including the controversial draft natural resources bill), the sale of state assets, the recovery of BPPN assets, the reduction of public sector subsidies, abolishing import tax in the agriculture and plantations sector, decentralisation, reform of the forestry sector, the establishment of an anti-corruption forum, all of which aim to create a climate favourable to investors and which prepare Indonesia for the WTO and AFTA. So in effect what has taken place is a diversion of conditionalities and debt from the IMF to the CGI and the World Bank.

The inconsistency on the part of the donors is also evident from the enthusiasm with which the donors make loans to Indonesia despite the still high levels of state corruption. The reports that praise Indonesia's macro-economic indicators are difficult to contest if only growth and inflations levels are taken into consideration. However, the sorry state of government administration and the level of corruption cannot be denied (this has also largely been acknowledged by the World Bank). A study carried out by Kaufman, Kraay and Mastruzzini also indicates that government efficiency, law enforcement, anti-corruption measures and general performance is below that of Vietnam, the Philippines and China. The level of corruption at the very least explains why the capacity for taking up CGI loans continues to decline from 69.3% in 1999 to around only 58.6% in 2002 whereas in 2003 the take-up capacity was as low as 50%.

The increase in the CGI loans, with this high rate of corruption, in fact has a major impact by further entrenching Indonesia in a debt trap. Kwik Kian Gie in an article in the national daily Kompas on "The CGI and Government Debt" includes a table that indicates the extent of Indonesia's indebtedness. Payment of interest is already at 92.67% of the whole of the development budget of USD 7.9 billion (Rp. 70.9 trillion). If the whole of the debt burden is added up, it would come to 185% of the development budget. INFID notes that the debt to Regional GDP ratio remains at around 60% and that almost a third of the 2004 budget is to be used to pay domestic and foreign debt.

Thus, the biggest sacrifices due to the reduction of the budget will be made by the education, health and poverty reduction sectors. The debt burden continues to be paid by the very poorest.

NGO Perspective
Strong reactions to this CGI forum have been made by a number of CSOs. INFID, KAU and WALHI have questioned the role of the CGI in continuing Indonesia's tradition of indebtedness and as a forum used to force the liberalisation of Indonesia's economy and trade.

INFID believes that the CGI continues to serve the interests of business, investment and creditor nation exports, whilst debt reduction and sustainable economic development in Indonesia has barely been touched upon. Binny Buchori, INFID Executive Secretary, has stated very strongly that the 13th session of the CGI was a great disappointment because it did nothing to resolve the main problem - the debt burden which is undermining the development process.

In addition, CGI support in the form of more loans consolidates Indonesia's debt dependency despite the fact that it has already been proven to encourage negative excesses in economic development and public service provision. According to INFID, the debt burden will reduce the education and health budget by up to 30%.

An even more critical statement on forest destruction was submitted by Forest Watch Indonesia, Telapak, the Environmental Investigation Agency, The Alliance of Indigenous Peoples of the Archipelago (AMAN), WWF-Indonesia and INFID. They believe the CGI has made a large contribution to forest destruction and that it must not be able to resolve the problem of the destruction of Indonesia's forests.

The forestry issue was discussed at the 8th CGI meeting in July 1999 and was included in the MoU between the CGI and the Indonesian Government. However, this commitment has yet to be implemented. CGI pressure to continue decentralisation has in fact had a major impact on increased exploitation of the forests and water resources. Illegal logging continues even though the problem is always at the top of the agenda of the CGI's forestry sector reform programme. The CGI itself is also unfair in its definition of illegal logging in which local and indigenous peoples are often blamed whilst the logging concession holders (HPH) and the business sector remain largely untouched. The CGI itself must continue to make efforts to persuade consumers of industrial nations not to buy stolen timber.

On the issue of water privatisation, a number of NGOs that belong to the Coalition of People for the Right to Water have demanded that CGI meetings should be more critical of loans to the water sectors. This coalition is concerned that this debt will force the Indonesian government to commit to the privatisation of the water sector.

The Coalition has also questioned the lack of transparency of the ADB, as a member of the CGI, which has taken over water sector lending (formerly under the World Bank's Water Resources Sector Adjustment Loan (Watsal)). At a December 11 meeting with the CGI delegation, the Coalition presented a number of studies concerning donor "contributions," from the World Bank and the ADB in particular, that have been allocated to projects in the water resources sector. The results of these studies indicate that government agencies which have already been privatised have suffered losses and are not able to pay off their foreign debts.

Various Recommendations
What the ongoing debate concerning the role of the CGI finally boils down to is whether the CGI is really necessary.

The Directorate of the Overseas Bilateral Funding at the National Planning Board (BAPPENAS) recommends that the CGI should continue, but with a more focussed function. This would include making changes to working mechanisms and the CGI leadership, more focussed issues and meeting agenda, holding policy dialogue outside the CGI, increasing management of loans and intensifying the commitment to bilateral cooperation.

Meanwhile, Kwik Kian Gie has spoken out against the continuation of the CGI and has suggested that the forum should be dissolved. If at some point Indonesia requires borrowing facilities, it would be better for it to enter into bilateral agreements because Indonesia's bargaining position would be better and there would be greater negotiation of conditionalities. Indonesia needs to pay off and reduce foreign debt. The Indonesian government could also charge CGI with "implication" in Indonesia's continued downfall into the chasm of debt.

A group of CSOs (KAU and WALHI) are calling for a reduction in debt dependency by reducing the number of new debts and paying off old debts. State corruption must be reduced. The debt burden should not be shouldered by the people!

World Bank Website www/
Department of Finance and the Economy Website
Japanese Embassy Website
Anti-Debt Coalition Website
INFID Indonesia Website
Kwik Kian Gie, Kompas, 16 December 2003.
Public Dialogue Document "CGI: Apakah Diperlukan?", (The CGI: Is it Necessary?) Anti-Debt Coalition and WALHI, 4 December 2003.
Kompas, 5 December 2003.
Tempo interaktif.
Jakarta Post, 13 December 2003.

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