Alarm over rising debt

Down to Earth No. 42, August 1999

A new approach to lending is needed among Indonesia's creditors which addresses the problems of poverty, the abuse of human rights and the degradation of natural resources.

The International Non-governmental Forum on Indonesian Development (INFID) has urged Indonesia's creditor countries not to make any new loans or release more funds for previously approved loans until Indonesia's democratically elected government is in place. Jakarta secured another US $5.9 billion from the CGI, Indonesia's creditor group, which met in Paris on July 27-28th. All five of the leading political parties in the recent elections agreed that this budget "top-up" request should go ahead.

INFID argues that the World Bank, which chairs the group, needs to change its policies and start dealing with past corruption of loans as high as 30% before agreeing to any more funds. "If the World Bank does not want to change, there can be no doubt that the organisation will be considered extraneous, or at the very least, not able to understand the wishes of the Indonesian people", said INFID spokesman Rizki Cahyanto in July.

In its memorandum to Bank Executive Directors entitled "The World Bank Must Change!", INFID also urged the Bank to implement commitments set forth in its policies and operational directives: "We demand the implementation of the promises and commitments of the World Bank regarding transparency, eradication of corruption, participation of and consultation with the people, and promotion of human rights, good governance and environmental sustainability."

In a list of proposals, INFID urges the World Bank actively to support debt relief for Indonesia and to make public in Indonesian as well as English the conditionalities of its loans and the response of the Indonesian government.


Bailing out the creditors

The approach to dealing with Indonesia's economic collapse has, until now, focussed on the need to avoid defaulting on its massive debts and stay in the international financial system. This means serving the interests of its creditors – both the public institutions like the International Monetary Fund and the World Bank as well as the private banks. What critics of this approach point out is that the lenders are not paying the price for their ill-advised bank-rolling of the Suharto business empire. Instead this is being paid by ordinary Indonesians thrown into dire poverty by the rising costs of living. In the back streets of urban centres and in many rural areas, there is widespread malnutrition and people are dying of curable disease because they cannot afford to buy the medicines they need.

The Social Safety Net scheme, which was designed to lessen the impact of the recovery programme on the poor, has not achieved its aims. The scheme, which is funded by the World Bank, has been riddled with corruption and inefficiency, so much so that NGOs called on the Bank to delay the most recent payment until after the June elections (see DTE 41, Supplement). There was a delay, but within days after the elections the Bank paid out a further US$16 million and the IMF $450 million in new loans. The Urban Poor Consortium reckons that about 70% of the Social Safety Net funds disbursed in Jakarta were believed to have been misused by local government officials. INFID believes that without tight monitoring by the Bank and Indonesian government and more independent investigation into the corruption of funds, there is "little hope" that the Social Safety Net Spending will "answer the pressing needs of the poor in Indonesia."

At the same time, there are grave doubts about the effectiveness of the recovery programme as a whole. Recent IMF and World Bank statements are optimistic that Indonesia is making good progress – inflation has fallen and the Rupiah is worth more than twice as much against the US dollar as it was a year ago. Foreign investors are returning, focussing on medium-scale businesses (among them are hedge fund companies reported to be representing Suharto-family interests and trying to buy back their own bankrupt companies at rock-bottom prices). But the amount of money Jakarta must repay to its creditors just to stay afloat is staggering. The debt is currently estimated at US $81.5 billion corporate debt (up from an earlier estimate of 65 billion) with the total debt standing somewhere around US $145-160 billion. The debt currently eats up 33% of routine state budget expenditure and 52% of export revenues are used to service it. Huge amounts of cash are needed to resuscitate Indonesia's banks too. The seven state banks amassed losses of 201 trillion Rupiah (US $29 billion) in 1998 and the cost of recapitalising state and private banks is estimated at over Rp 550 trillion (US $82 billion) – or almost 150% as large as Indonesia's gross domestic product in 1998. With IMF bail-out funds running out next year, and other creditors likely to scale down new lending, the fragile edifice of economic improvements the programme has constructed could easily come crashing down.

Whether the international lending community would then give up on Indonesia is another matter: analysts think that the country is too important geopolitically to be allowed to languish bereft of "aid" for too long. What will be certain is that, unless there is a fundamental change in the global economic power-play, the orientation of Indonesia's 'development' will be in line with the interests of the dominant richer nations and the institutions and corporations who stand behind them.

According to H.S. Dillon, a member of Indonesia's Human Rights Commission, the focus of the IMF recovery programme is elitist and urban. In a July interview with the Jakarta Post he said: "More or less I accuse them of trying to recreate Suharto's Indonesia. No, I want a people's Indonesia. So we'll have to renegotiate with the IMF."

But this would require the people who run the IMF to open their ears to what people on the ground are demanding. They would have to admit they need to learn lessons from the people whose economic agendas they are accustomed to setting.

Indonesia's creditors in CGI are Austria, Belgium, Canada, Denmark, Finland, France, Britain, Germany, Italy, Japan, New Zealand, Spain, Norway, Sweden, Switzerland, the United States, and South Korea. Institutional funders are the World Bank, the Asian Development Bank, the Kuwait Fund for Arab Economic Development, the Saudi Fund for Development, the Nordic Investment Bank and the Islamic Development Bank.

(Sources: INIFD Memorandum to the World Bank 7/7/99; AFP 7/8/99, 28/7/99; The Australian 14/7/99; Business Weekly 26/7/99; Jakarta Post 14/7/99, 17/7/99; 21/7/99; Bloomberg 5/7/99; Dow Jones 6/7/99)