The case for debt relief

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

Source: Econit 1999.

Inside Indonesia 61: Jan - Mar 2000