Monday, February 13, 2006

Indonesia May Repay Debt Ahead of Maturity

A minister says the government is considering repaying Indonesia's US$8 billion debt to the International Monetary Fund ahead of its 2010 maturity date.

The suggestion comes amid recent calls to reduce the country's reliance on foreign borrowing.

The government will, however, study and proceed with the plan carefully, Coordinating Minister for the Economy Boediono told reporters on Thursday, taking into particular account the constraints on this year's
state budget.

"If we can speed up the payments, than we will do so, but I don't think we should overly force ourselves," Boediono said.

"If the government has enough money this year to repay the debt ahead of schedule, then it would be better to do so. But if not, and we instead just pay the debt as scheduled, then this would still be fine. Let's just wait for a full analysis of the plan from the finance minister."

Finance Minister Sri Mulyani Indrawati first suggested early repayment during a hearing Wednesday night with the House finance commission.

"The Finance Ministry and the central bank are currently studying the possibility of speeding up the repayment of our debt to the IMF," she said, adding that the country currently owed $8 billion to the Fund.

Sri Mulyani, a former executive director of the Fund, did not elaborate further on how the cash-strapped government might accelerate repayment.

Between 1997 and 2003, the IMF provided some $25 billion in loans to help Indonesia rescue its banking system, rehabilitate the economy by restructuring private and government debt, and strengthen its foreign
exchange reserves.

Criticism however quickly arose as the loan program called for the government to implement a number of tough economic reform programs under IMF supervision, including privatizing state firms and reducing subsidies, which many nationalists saw as damaging the nation's interests without significantly improving the economy.

A stand-by loan, managed by Bank Indonesia (BI), for supporting Indonesia's forex reserves was also criticized as it could only be used as a last resort fund, while the government still had to shoulder the
principle and interest payments.

This eventually led to the government, under public pressure, terminating its program with the IMF at the end of 2003. Indonesia is now in what is termed "post-program monitoring", where the Fund reviews
the country's economic progress every two years to see whether the government's own reform targets are being met.

Under the current IMF monitoring scheme, Indonesia must also annually repay some $1 billion of the remaining $10 billion debt over a period of seven years, until it brings down its debt to below the IMF member-quota level of $2.8 billion, and totally exit all IMF programs.

Although IMF monitoring and the publication of detailed economic programs helps restore investor confidence, Indonesia is no longer eligible for Paris Club debt rescheduling as a consequence of ending the
IMF program.

Sri Mulyani acknowledged this, explaining to lawmakers that Indonesia has little hope of securing debt relief or reductions in the future, aside in the form of bilateral debt swap agreements.

The government plans to raise $3.5 billion in foreign loans and issue Rp 28.4 trillion worth of bonds this year to help cover the budget deficit.

By comparison, it will spend Rp 63.5 trillion to pay of part of its sovereign debt, which currently stands at $61 billion, leading to further criticism that the government is spending more on repaying its debts than on improving public welfare.


Loan, taken as an aid comes with a package of non-negotiable policies from the lending body, the IMF. There is little wonder why those poorer nations only fall deeper into debt.

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