Odious Debts

Time to call for debt relief one year after the tsunami

Ivan A. Hadar
The Jakarta Post
January 23, 2006

One year after the tsunami, new Coordinating Minister for the Economy Dr. Boediono stated that in 2006 there would be no call for debt rescheduling, adding that Indonesia had to be careful in calling for debt relief.

In truth, it is time for the government of Indonesia to become more proactive in seeking debt relief, since some creditor countries offered debt moratoriums, reductions and cancellations for countries affected by the largest natural disaster in living memory.

Indonesia’s total debts amount to US$134.85 billion (foreign and domestic), or more than 40 per cent of GDP, and the national budget deficit is more than $3 billion, leaving the government little space to engage in development.

In a 2000 report on Global Development Finance, the World Bank placed Indonesia in the category of “severely indebted low income country”, in the same group with the poorest countries in the world, including Mali, Malawi and Ethiopia.

After the Asian economic crisis in 1997, Indonesia was “forced” to implement a “structural adjustment program” initiated by the IMF, which lasted until the end of 2003.

Since this programme, the nominal value of the country’s debt installments have been larger than the money allocated for poverty reduction. More often than not, the impact of the IMF program was trauma, misery, the destruction of various aspects of life, the eviction of poor farmers, and the elimination of subsidies for education, health services and social benefits.

The United Nations Children’s Fund (Unicef) warned in 2002 that in the future, Indonesia could face the reality of a “lost generation” as a consequence of a lack of nutrition, poor health services and low education levels. Millions of people in the country will be robbed of their opportunity to improve their lives, because the government is required to repay its foreign debts.

According to rough estimates, every day Indonesia must allocate about US$2.5 million to pay the interest on its debts to international financial institutions.

After the tsunami, and especially after the government sharply increased fuel prices, it is guaranteed that the number of people living below the poverty line will increase sharply.

Much of the Indonesia’s debt could actually be classified as odious or illegitimate. The majority of the country’s debt was accumulated during Soeharto’s 32-year regime.

This is a clear instance of odious debt, or debt that was contracted without the knowledge or consent of the population, with the government abusing the money to oppress its people. The lenders knew what was happening. It is a kind of “crime by omission”.

The combination of persistent and widespread poverty in Indonesia and the odious nature of Soeharto-era debts provides a compelling argument for the cancellation of all of Indonesia’s debts. And such a cancellation must come without harmful economic conditions attached.

There is the argument that the money from the lenders was taken from taxpayers in those countries. The counter argument would be that the money to repay these illegitimate debts is taken from the Indonesian people who never consented to the debts. At the least, an agreement to share the responsibility should be negotiated between the new government, which acts in the name of the entire nation, and creditors.

Several days after the tsunami in Aceh and North Sumatra, some creditors offered the Indonesian government debt relief. Proposals from Germany and England were refreshing and a good omen.

This is because, through the London Agreement in 1953, Germany, which was still rising from the ruins, obtained relief with the cancellation of a huge part of its foreign debts. What is important to note here is that debt cancellation is not what our government is worried about, because it would not decrease the debt rating or credibility of the country.

In his autobiography, a German negotiator at the London Agreement, Josef Abs, wrote that “the regulation for the cancellation of a huge part of the foreign debts of Germany did not only increase her credibility; it also regained the trust of the international community in Germany”.

It is not surprising that historian Ernst Tauber concluded that the London Agreement not only was one of the decisive factors in the development of the economy of Germany, which was in a shambles after World War II, but it actually became a reference point in restructuring her international “debt relations” in the future.

The most important result of the London negotiations was the cancellation of 51.5 per cent of the nominal foreign debts of Germany.

What is interesting is that this “German Model” was applied during the New Order government. Based on the real capability of the economy of Indonesia at the time, a 57 per cent foreign debt cancellation was proposed. After experiencing various obstacles, in particular, the objections of creditor countries, the deal was approved on April 24, 1970.

Like the London Agreement, this Paris Agreement also helped in the development of the economy of developing countries, as debtor countries. A 1987 study by a German institution concluded that these two cases should be used as models in resolving the foreign debts of many current developing countries.

The government has a constitutional duty to protect the lives of its people, which is why it must demand debt cancellation. Recently, Argentina and Nigeria have been able to convince lenders to cancel significant portions of their debts.

The Indonesian government must convince lenders that the country deserves debt cancellation. But will Indonesia be able to bring to justice those who stole the loans before asking its creditors for mercy?

The writer is executive director of the Indonesian Institute for Democracy Education (IDE). He can be reached at ivan-ah@centrin.net.id.

Categories: Odious Debts

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