[stop-imf] Indonesia: Doing without the IMF

Tue, 06 Aug 2002 18:24:43 -0700

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The Jakarta Post
August 6, 2002

Opinion

Doing without the IMF: Figuring out where the money comes from

Juergen Kaiser, Jubilee.De, Dusseldorf, Germany

State Minister of National Development Planning Kwik Kian Gie has not
been
the first influential politician of a southern country ever to suggest,
Indonesia might actually do better without the IMF.

>From Peru's Alan Garcia to Zambia's Kenneth Kaunda and more recently
Nigeria's Olusegun Obansanjo, southern statesmen and government leaders
have
for honest or somewhat less honest reasons pointed their fingers to the
"colonialists" from Washington, and suggested their respective countries

would do better on their own.
They all have made the same fatal mistake, which only very few of their
colleagues (Prime Minister Mahathir Mohamad of Malaysia being one of
them)
have managed to avoid: They have stood up, made a strong statement and
then
they have waited for the sky to fall upon their heads. They failed to do
the
decisive step, as they never answered the key question, where the money
they
needed was actually to come from, once the Fund personnel had cleared
their
offices in the Finance Ministries.

The Fund invests much efforts into making governments believe that there
is
no economic future without the seal of approval by the Fund.
Paradoxically
enough the opposite is true, the more indebted a country is. Where could
the
Funds come from? From the debt service which a country saves, once it
stops
servicing them.

Indonesia in fact, like most severely indebted countries, is producing a

primary surplus; i.e. leaving interest payments aside, the central
government
is receiving more money than it actually pays out. In the 2002 budget
the
surplus amounts to the equivalent of some US$5.3 billion. Internal
interest
payments of some 59.6 trillion rupiah ($6.5 billion) and external
interest
payments of some $3 billion, turn the surplus into a deficit of $4.2
billion.

It is the interest on the foreign and domestic debt which forces the
administration to seek new loans from inside or (mostly) outside the
country.
This goes not only for Indonesia. Even for such a prominent insolvency
case
as Argentina, this has been true until very recently.

So, first of all: If the government wants to bring the public finances
back
into balance, receiving new loans to pay off old ones is only a viable
solution, if you assume that the country is going to have
disproportional
growth rates. These have been projected by the World Bank in a full
series of
diagnoses, but never have materialized since the outbreak of the crisis.

So, it is adequate for a government to pay tribute to the IMF's poor
track
record as an economic consultant and to seek alternative ways of
organizing
its economy. However, if the government really took this initiative, it
would
need to do a few things at the same time:

* It would need to come up with a viable proposal of how to deal with
its
external and its internal debt. It needs to propose a regulation
tailored
according to the country's needs and debt servicing capacities. This
would
necessarily pose the bunch of the burden on external creditors,
including the
international financial institutions; however, it needs to steer the
distribution of internal hardships as well. Internal creditors,
including the
Banks which are enjoying a quite steady and risk-free stream of income,
would
have to have their haircuts as well.

* It needs to work for a fair and transparent framework through which it

could implement a solution, which has a real chance to meet with
general,
albeit sometimes grumbling consent of the creditors. The most important
element of this is an impartial institution, which would actually
arbitrate
between Indonesia and its creditors on the basis of an equally impartial

assessment of the country's economic situation.

One of the most important results of such an impartial procedure would
be the
key incentive for private (and some official) creditors, to join into
such a
far-reaching solution: The perspective of finding in Indonesia a new
financially viable partner and thus an investment sphere. Contrary to
the
favorite argument by creditors, that debt cancellation will cut the
debtor
off from financial markets, such a clear cut has for private as well as
for
public debtors regularly restored the debtor's access to capital
markets.

Does Indonesia have a chance to go any alternative way?

The answer is a double yes, for two quite different reasons.

The first is: There is in fact no alternative to a new approach, unless
the
country is prepared to engage itself in an endless series of
reschedulings
with its external creditors, and to suffer internal financial turmoil,
when
it will have to default selectively on some of its internal commitments
(and
has to decide, which ones), or through trying to work itself out of its
Rupiah-denominated debt by starting an inflationary spiral.

In 2004 the internal debt service will increase to some Rp 80 trillion
($7
billion) and then remain in that range for about a decade. With annual
external debt service also rising to over $5 billion from 2005 on, there
is
no way for the Indonesian economy to produce enough revenue in order to
afford that huge tribute to internal and external capital owners.

Nobody in the administration has a clue about where this money might
actually
come from. If the government wastes the precious time it has won through
the
latest Paris and London Club reschedulings between futile attempts to
accomplish the extraordinary growth rates demanded by the international
financial institutions and occasional tough rhetoric, it will find
itself
quite empty-handed, when the moment of truth comes in January 2004.

The second reason is that creditors themselves have started to consider
new
frameworks, particularly an international insolvency procedure, first of
all
in order to overcome their internal coherence problems.

The proposal for a new Sovereign Debt Restructuring Mechanism (SDRM),
started
last November by the IMF Deputy Director Anne Krueger bears a huge
potential
for Indonesia.

It can pave the way for some neutral institution to judge over
Indonesia's
debt problem -- instead of allowing the creditors to further claim this
role
for themselves. It can bind all creditors into a solution which is based
on a
realistic assessment of the country's debt sustainability, and it can
halt
resource outflows, in order to allow for an orderly debt workout.

Again, however, the crucial role will be with the Indonesian government.
Only
when Jakarta stops accommodating itself at the receiving end of
decisions
being taken elsewhere, can the reform debate in the Fund and in the
broader
international community (which has not been set in motion to please
Indonesia), become fruitful for the country. That is why the debate
started
by Minister Kwik must not be allowed to die down.

Jubilee.De (Jubilee 2000) is an international organization seeking
alternatives on debt issues.

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<html>
The Jakarta Post
 August 6, 2002
Opinion
Doing without the IMF: Figuring out where
the money comes from
Juergen Kaiser, Jubilee.De, Dusseldorf,
Germany
State Minister of National Development
Planning Kwik Kian Gie has not been
 the first influential politician of
a southern country ever to suggest,
 Indonesia might actually do better without
the IMF.
From Peru's Alan Garcia to Zambia's Kenneth
Kaunda and more recently
 Nigeria's Olusegun Obansanjo, southern
statesmen and government leaders have
 for honest or somewhat less honest reasons
pointed their fingers to the
 "colonialists" from Washington, and
suggested their respective countries
 would do better on their own.
 They all have made the same fatal mistake,
which only very few of their
 colleagues (Prime Minister Mahathir
Mohamad of Malaysia being one of them)
 have managed to avoid: They have stood
up, made a strong statement and then
 they have waited for the sky to fall
upon their heads. They failed to do the
 decisive step, as they never answered
the key question, where the money they
 needed was actually to come from, once
the Fund personnel had cleared their
 offices in the Finance Ministries.
The Fund invests much efforts into making
governments believe that there is
 no economic future without the seal
of approval by the Fund. Paradoxically
 enough the opposite is true, the more
indebted a country is. Where could the
 Funds come from? From the debt service
which a country saves, once it stops
 servicing them.
Indonesia in fact, like most severely
indebted countries, is producing a
 primary surplus; i.e. leaving interest
payments aside, the central government
 is receiving more money than it actually
pays out. In the 2002 budget the
 surplus amounts to the equivalent of
some US$5.3 billion. Internal interest
 payments of some 59.6 trillion rupiah
($6.5 billion) and external interest
 payments of some $3 billion, turn the
surplus into a deficit of $4.2 billion.
It is the interest on the foreign and
domestic debt which forces the
 administration to seek new loans from
inside or (mostly) outside the country.
 This goes not only for Indonesia. Even
for such a prominent insolvency case
 as Argentina, this has been true until
very recently.
So, first of all: If the government wants
to bring the public finances back
 into balance, receiving new loans to
pay off old ones is only a viable
 solution, if you assume that the country
is going to have disproportional
 growth rates. These have been projected
by the World Bank in a full series of
 diagnoses, but never have materialized
since the outbreak of the crisis.
So, it is adequate for a government to
pay tribute to the IMF's poor track
 record as an economic consultant and
to seek alternative ways of organizing
 its economy. However, if the government
really took this initiative, it would
 need to do a few things at the same
time:
* It would need to come up with a viable
proposal of how to deal with its
 external and its internal debt. It needs
to propose a regulation tailored
 according to the country's needs and
debt servicing capacities. This would
 necessarily pose the bunch of the burden
on external creditors, including the
 international financial institutions;
however, it needs to steer the
 distribution of internal hardships as
well. Internal creditors, including the
 Banks which are enjoying a quite steady
and risk-free stream of income, would
 have to have their haircuts as well.
* It needs to work for a fair and transparent
framework through which it
 could implement a solution, which has
a real chance to meet with general,
 albeit sometimes grumbling consent of
the creditors. The most important
 element of this is an impartial institution,
which would actually arbitrate
 between Indonesia and its creditors
on the basis of an equally impartial
 assessment of the country's economic
situation.
One of the most important results of
such an impartial procedure would be the
 key incentive for private (and some
official) creditors, to join into such a
 far-reaching solution: The perspective
of finding in Indonesia a new
 financially viable partner and thus
an investment sphere. Contrary to the
 favorite argument by creditors, that
debt cancellation will cut the debtor
 off from financial markets, such a clear
cut has for private as well as for
 public debtors regularly restored the
debtor's access to capital markets.
Does Indonesia have a chance to go any
alternative way?
The answer is a double yes, for two quite
different reasons.
The first is: There is in fact no alternative
to a new approach, unless the
 country is prepared to engage itself
in an endless series of reschedulings
 with its external creditors, and to
suffer internal financial turmoil, when
 it will have to default selectively
on some of its internal commitments (and
 has to decide, which ones), or through
trying to work itself out of its
 Rupiah-denominated debt by starting
an inflationary spiral.
In 2004 the internal debt service will
increase to some Rp 80 trillion ($7
 billion) and then remain in that range
for about a decade. With annual
 external debt service also rising to
over $5 billion from 2005 on, there is
 no way for the Indonesian economy to
produce enough revenue in order to
 afford that huge tribute to internal
and external capital owners.
Nobody in the administration has a clue
about where this money might actually
 come from. If the government wastes
the precious time it has won through the
 latest Paris and London Club reschedulings
between futile attempts to
 accomplish the extraordinary growth
rates demanded by the international
 financial institutions and occasional
tough rhetoric, it will find itself
 quite empty-handed, when the moment
of truth comes in January 2004.
The second reason is that creditors themselves
have started to consider new
 frameworks, particularly an international
insolvency procedure, first of all
 in order to overcome their internal
coherence problems.
The proposal for a new Sovereign Debt
Restructuring Mechanism (SDRM), started
 last November by the IMF Deputy Director
Anne Krueger bears a huge potential
 for Indonesia.
It can pave the way for some neutral
institution to judge over Indonesia's
 debt problem -- instead of allowing
the creditors to further claim this role
 for themselves. It can bind all creditors
into a solution which is based on a
 realistic assessment of the country's
debt sustainability, and it can halt
 resource outflows, in order to allow
for an orderly debt workout.
Again, however, the crucial role will
be with the Indonesian government. Only
 when Jakarta stops accommodating itself
at the receiving end of decisions
 being taken elsewhere, can the reform
debate in the Fund and in the broader
 international community (which has not
been set in motion to please
 Indonesia), become fruitful for the
country. That is why the debate started
 by Minister Kwik must not be allowed
to die down.
Jubilee.De (Jubilee 2000) is an international
organization seeking
 alternatives on debt issues.
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