The case for debt relief

Published: Jul 30, 2007

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:

The effects are also visible in education. Oxfam reports recently:

A proposal

There are at least five arguments in favour of debt relief for Indonesia:

The International Non-government organisations (NGO) Forum on Indonesian Development, Infid, therefore proposes debt relief for Indonesia as follows:

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 or

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.


Inside Indonesia 61: Jan - Mar 2000