East West Debt, solving defaulted trade and bank debt

East-West Debt oct. 2002 news, update : INDONESIA

Indonesia   The IMF highly appreciated the implementation of Indonesia's economic reform program. Wise monetary policy, which is supported by other reforms, has stabilised the exchange rate and allowed for a significant reduction in inflation together with declines in interest rates. Moreover, the budget for 2002 has been brought back on track - following a temporary failure in the first quarter - and the targeted budget deficit of 2.5% of GDP is within reach.

However, the Indonesian government has to renew efforts to build on macro-economic stability and transform these positive signs into stronger economic growth and employment prospects. There are still many problems which are a threat to the economy. These problems consist mainly out of the slow progress in the recovery of the real estate sector, the banking sector which has not yet fully recovered and the huge public debt. The state budget remains heavily weighed down by $130 billion in foreign and domestic debts.

The total sovereign external debt of Indonesia was $75 billion at the end of 2001. The stock of debt owed to all Paris Club creditors in January 2002 was estimated to be $40 billion. Indonesia is currently tied to the IMF under a three-year $5 billion loan program. In exchange for the IMF money, the government must implement various economic reform programs. A successful review by the IMF will permit Indonesia to draw about $360 million under the $5 billion IMF Extended Fund Facility. The IMF's decision to extend its financial involvement in Indonesia until the end of 2003 was the basis which allowed rescheduling of some of the country's external debt. The Paris Club agreed in April on restructuring the external debt service of Indonesia to continue support for the economic reforms undertaken by the Indonesian government.

Before the rescheduling, the maturities in principal and interest of the external debt of Indonesia owed to the Paris Club group of government creditors amounted to $7.5 billion. Indonesia will now be able to reschedule $5.4 billion out of this amount. Credits from Official Donor Agencies will be repaid over 20 years, after a 10 years of grace period, and commercial credits are to be repaid over 18 years with progressive repayment, following 5 years of grace.

The involvement of the IMF and the rollover of the Paris Club debt allowed the government of Indonesia to start negotiations with the London Club. Indonesia is hoping to reschedule $1.3 billion of commercial loans from the group of creditors in the London Club. Approval from the London Club, which would be in line with the decision of the IMF and the Paris Club, would strengthen Indonesia's efforts to emerge from the Asian financial crisis of 1997-1998.

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