Indonesian non-government organisations call for massive relief
Binny Buchori & Sugeng Bahagijo
Indonesia has just freed itself from an authoritarian regime, but the
Indonesian people are not free from the debt burden. Unless massive
debt relief is extended to Indonesia, the next decade will be lost for
millions of Indonesians and their children. Supported by international
public institutions such as the World Bank, the IMF and the Paris Club,
the Suharto regime accumulated US$159 billion in external debt. This
debt now threatens Indonesian economic recovery.
The highlights of Indonesian external debt are as follows:
Over the period 1993-1998, Indonesia suffered a net transfer of
minus US$ 5,354 million. This means that the inflow of money from loans
by various creditors (bilateral, multilateral and private) was smaller
than the outflow under Indonesia's repayment obligations by this amount.
Indonesia has to pay more than half of her export earnings to
service its debt. This means that over half the country's hard
currency, which could be used to buy goods and services for economic
recovery and for the social safety net, goes to the rich countries and
banks in the north.
Without rescheduling or debt relief, the principal repayments
on Indonesia's public external debt will increase from about $2 billion
in 1999 to $5 billion in 2000, rising to $9 billion a year in both 2001
and 2002, according to the credit rating firm Standard & Poor.
Indonesian debt now amounts to over 140 percent of the annual gross domestic product, double what it was eight years ago.
How bad is it?
Before the 1997 financial crisis, Suharto preferred to call foreign
debt by the name foreign aid. Because of mismanagement in handling loan
proceeds, and corruption in the collection of taxes, Indonesia was not
able to rely on domestic resources like manufacturing and oil and gas
to gradually reduce the external debt. Indonesia continued to increase
her external debt every year. At the same time the World Bank, IMF, ADB
and other creditors (Paris Club, CGI) were always eager to extend new
loans, despite knowing about this corruption and mismanagement.
A recent study by the independent Jakarta economic think tank Econit
(table) pictures continually increasing government or public debt -
that is, debt owed not by private companies but ultimately by the
public through the state. In 1998, the year an IMF package kicked in,
it rose to US$144 billion. This debt is now higher than the total
amount Indonesia produces in a year (gross domestic product, GDP). The
debt service ratio (DSR) measures debt repayments (interest and
principal) as a proportion of export earning. It now stands at well
over half.
Indonesia's debt
The financial crisis of 1997 became an economic crisis due to rapid
devaluation, spiraling external debt, and a loss of investor
confidence. When the IMF came to Indonesia's rescue it applied its
classic prescription of increased taxes, reduced public spending, and
increased interest rates. The package caused a dramatic surge in
Indonesia indebtedness. In the words of aid agency Oxfam, the IMF was
not responsible for East Asia's crisis, but it was responsible for
deepening and prolonging the recession.
Behind these statistics lies a real human cost suffered by Indonesians.
Here are some of the facts on how the crisis directly affects child and
maternal welfare:
In West Sumatra, more than 32 thousand children out of 300
thousand children under 5 years old are critically malnourished. In
Riau province, the incidence of malnourishment among children under
five is 27,690 children. Across Indonesia, malnourishment among
children under 5 is found in 200 district (kabupatens) out of 320.
Vitamin A deficiency has reemerged. The proportion of children
aged between one and two years that do not consume eggs (the main
source of vitamin A) has almost doubled to 14 percent (Hellen Keller
International - HKI - data, quoted by Oxfam report, 1999)
Iron Deficiency Anemia (IDA), which impairs the immune system
and the intellectual development of children, has increased from 50 per
cent in 1985 to 64 percent. Both childhood and maternal anemia rates
have risen during the crisis (HKI data).
Maternal malnutrition is increasing. Since 1996 the average
body mass among women of reproductive age fell by 1 kg - almost
reversing the increase achieved over the past 30 years. (HKI data).
The effects are also visible in education. Oxfam reports recently:
A decrease of 4-5 per cent in school enrolments. This
translates to about 1.3 million children who are deprived of access to
the education they need to escape a life of poverty. The rate of
decline for girls' enrollment is twice that for boys.
The most significant reductions in enrolment level have been recorded in Central Java, Jakarta and Maluku.
A proposal
There are at least five arguments in favour of debt relief for Indonesia:
Without relief, economic and social recovery will be
threatened. Indonesia post-crisis is similar to post-second world war
Germany. Many schools, factories, and offices are closed. Many children
under five are malnourished. Many public health clinics do not have
medicines. Unemployment is rising. The only hope is revenue from
exporting oil and manufactured products. But if the debt service ratio
continues at its current level of more than 50%, the prospect for
recovery is long and difficult. Certainly the budget for health,
education, and subsidies for medicine, food and kerosene will be
sacrificed.
The new government under president Gus Dur needs budget and
fiscal flexibility to allow it to stimulate economic growth through
increased public spending, increased real sector investment and to
finance the costs of the social safety net. (The current social safety
net is financed, once more, by loan money from the World Bank with
adjustment conditionalities.) Without such flexibility, any government
will have difficulty in delivering its economic recovery agenda.
Loans that were misused or corrupted by Suharto cronies and
New Order officials cannot be the responsibility of the new government.
We propose that odious or criminal debts be cancelled. The World Bank
admitted the leakage and estimated it amounted to about 30%. We propose
that the coming Consultative Group on Indonesia (CGI) meeting, and
talks with the IMF, should include the cancellation of this debt.
Creditors are ready to discuss the issue of debt and debt
relief now. During World Bank consultations with Infid, World Bank
country director for Indonesia Mark Baird expressed his concern about
the rising Indonesia debt burden, both external (owed to bilateral,
multilateral and private banks in the north) and domestic (the
government has issued billions of rupiahs in bonds to finance the
recapitalisation of sick banks).
Debt relief experience in the past has been workable and good,
both for debtors and creditors. The massive debt relief extended to
Germany after world war two by the allied powers, and the huge debt
relief for Indonesia granted by the Paris Club (for bilateral debt) in
1970-71 are prime examples. The debtor economy can use the money to buy
goods and services for recovery. As long as there is common sense and
political will on the side of the creditors, debt relief is workable.
The International Non-government organisations (NGO) Forum on
Indonesian Development, Infid, therefore proposes debt relief for
Indonesia as follows:
A minimum 30% debt cancellation/ reduction to be taken out of
the US$70 billion government debt owed to multilateral (WB, IMF and
ADB), bilateral (Japan, US, Germany) and private banks;
Indonesia only to repay debt at an annual level not to exceed
5% of DSR ( 5 per cent from export revenues). This will free up money
for public spending and the social safety net;
Private debt should not become a burden for public debt. The
Indonesian government should not be forced to pay the private debt.
Creditor and debtor should both be held responsible for bad lending and
bad decisions.
Binny Buchori is executive secretary of Infid (the International
Non-government organisations Forum on Indonesian Development). Sugeng
Bahagijo is information manager. Contact Infid: Jalan Mampang Prapatan
XI/23, Jakarta 12790, Indonesia, tel +62-21-79196721, 79196722, fax
+62-21-794 1577, email infid@nusa.or.id or krakatau@cbn.net.id
| � |
Public external debt (US$bn) |
% of GDP |
DSR % |
| 1991 |
72 |
62 |
45 |
| 1995 |
107 |
53 |
43 |
| 1997 |
137 |
63 |
46 |
| 1998 |
144 |
147 |
52 |
Source: Econit 1999.
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