WSJ: Donors Pile Cash Into Indon As Leaders Say Debt Ails Nation

[Robert Weissman <rob@essential.org>]

Don't miss the last paragraph.

Robert Weissman
Essential Information			|   Internet:	rob@essential.org

July 29, 1999
Donors Pile Cash Into Indonesia
As Leaders Say Debt Ails Nation
By JAY SOLOMON
Staff Reporter of THE WALL STREET JOURNAL
JAKARTA, Indonesia -- Donor nations are pumping billions of dollars of new
loans into Indonesia, just as a number of the nation's emerging crop of
leaders are questioning the merits of paying back some previous debt.
In Paris on Wednesday, a World Bank-sponsored group of international
lenders
agreed to dole out $5.9 billion in fresh funds to help Jakarta finance a
budget deficit targeted at 5.8% of annual economic output for the year
ending
March 31. Since Asia's economic crisis broke out in 1997, Indonesia has
consistently run budget deficits, financed by external sources, as a means
to
pay for everything from poverty alleviation to economic-stimulus programs.
Severe food and medical shortages haven't materialized in Indonesia.
Nevertheless, the World Bank still sees the funds as vital to propping up
the
country's social safety nets.
But a number of opposition political leaders, many close to presidential
front-runner Megawati Sukarnoputri, are critical of what they see as the
reckless use of aid by the governments of former President Suharto and his
successor, B.J. Habibie. If she forms a new government following a November
presidential vote, they are promising to investigate the uses of these and
other loans.
In return for the loans, Indonesia recommitted itself to implementing
painful
economic reforms and stamping out corruption. It also pledged to continue
democratization initiatives and to insure a peaceful vote on independence
for
its restive province of East Timor. A number of nations, including the
U.S.,
are threatening to withhold future aid to Jakarta if the scheduled August
referendum doesn't proceed smoothly.
Out of Control?
The government's biggest selling point to the Consultative Group for
Indonesia, the lenders' group, was the country's peaceful June
parliamentary
vote -- its freest in decades. "The elections proved to be a beacon of
democracy ... a first step in the direction of more transparent, democratic
and open institutions," Indonesia's chief economic minister, Ginandjar
Kartasasmita, told a Paris news conference.
But fears are mounting, even within the World Bank, that Indonesia's debt
position may be spiraling out of control. The latest pledges will bring the
government's sovereign borrowings to well over $70 billion, and at least
another 550 trillion rupiah ($78.8 billion) will be needed by the
government
to bail out the nation's banking system. The World Bank estimates the
government's debt load will be a "staggering" 102% of economic output by
the
end of the year, a fourfold increase from precrisis levels.
"The level of public-sector indebtedness could be larger" when government
guarantees on domestic bank and foreign-exchange liabilities are included,
the bank added. And corporate Indonesia owes another $80 billion to foreign
creditors.
Mr. Habibie's government has vowed to tackle the ballooning debt problem
through two channels: Already, it has rescheduled payment deadlines on some
$4.2 billion in sovereign borrowings through an international lenders'
forum
called the Paris Club, and is likely to seek the rescheduling of nearly
another $3 billion this year. Mr. Ginandjar also promised this week to
increase the government's revenues through improved tax collection, the
selling of state assets and the recovery of assets held by the nation's
bank-restructuring agency.
Mr. Ginandjar has explicitly refrained, however, from requesting any form
of
debt forgiveness, similar to recent calls by a large number of heavily
indebted African countries. Debt forgiveness was also a major topic at a
recent meeting of the Group of Eight most-industrialized countries; the
consensus was that many developing countries are so weighed down with
external debts that they will never revitalize their economies without debt
relief.
Seeking Relief
But an increasing number of Indonesian leaders fear their country has
fallen
into a similar debt trap. They also believe many of these loans were looted
by friends and cronies of former President Suharto, in some instances with
the tacit knowledge of international lenders. The example they most often
cite is the World Bank's, where by its own internal estimates 20% to 30% of
their loans to Indonesia were siphoned through markups in projects, along
with other corruption.
A number of leading opposition figures -- who could be given important
roles
when Indonesia forms its new government, by November -- don't believe the
Indonesian people should bear these costs alone. Sri Mulyani Indrawati, a
university economist tipped as a potential senior official, advises a new
government to establish a task force to break down and analyze the nation's
obligations. Those identified as corrupt must be renegotiated, she says.
"The lenders need to realize that they were part of the problem in many
cases," says Ms. Mulyani, adding, "How can we be expected to service these
debts when we can barely can cover our people's salaries."
Rizal Ramli, another opposition economist, cites the debts of high-cost
infrastructure projects as also needing renegotations. Invariably, they
involved Suharto family members and were funded by export credit agencies
from Europe, Japan and the U.S. "Debt relief has to be one of the options,"
he says.
Ultimately, the issue will weigh heavily on Megawati Sukarnoputri, the
presidential front-runner, should she form a government later this year. A
number of her top aides have repeatedly criticized the reckless lending of
foreign institutions to Indonesia and have suggested forms of debt relief.
They realize, however, that taking such an approach could be
self-defeating.
"We'd run the risk of being isolated from the international economy," said
Kwik Kian Gie, a top economic adviser to Ms. Megawati. Indeed, officials
from
both the IMF and World Bank say debt forgiveness isn't an option.