For years, the Indonesian government has a dominant dependency on the foreign debt to cover the budget deficit in the national budget (APBN). These debts are basically aimed to reach the Economic growth through the budget deficit policy. But, one could understand that this massive dependency has become major sustainability problems in the recent years, Indonesia has fallen into a debt trap. Theoretically if the external debt as a proportion of GDP exceeds 20-25 per cent, there is no luxury of increasing foreign borrowing, particularly in circumstances where it is likely to be counterproductive. Further foreign borrowing, in order to achieve what would be a temporary interest rate advantage, would question the country's credit standing; would increase the drain on the economy from foreign debt service payments; and expose the country to any sudden change in international sentiment. The fact is, Indonesia are now facing over 45% debt to GDP ratio.
The ignorance from the government in term of reducing the dependency from the foreign debt has drained the revenue resource in Indonesia. The result is that Indonesia is no longer spending a large part of its yearly budget on the basic needs of its populations, due to having to use it to pay off its debts. The proportion of debt repayment compared with the tax revenue has clearly gave a clear description of how the domestic resource being drained.
In 2007, there are 41.45 percent of the tax revenue (PPh and PPN) being drained to cover the debt payments. The condition has resulted in the loss of suppleness in the national budget to use its domestic revenue for reaching the development goals such as reducing unemployment rate and eradicating poverty. In 2007, Indonesia spent 24.3 percent of its budget on servicing debt, compared with 3.08 percent on health, 0.06 percent on employment and 10.3 percent on education. The needs to pay its debt have undoubtedly driven the government to have a bigger proportion of natural resource based revenue. So, besides creating a problem in the people’s welfare, the burden of foreign debt has also created a massive depletion of the natural resource. The fact of deterioration of the natural resource because of the external debt burden has been sounded by WALHI on the CGI Forestry Meeting 26th Jan 2000. They said that The international and domestic macro-economies including public debt and international financing are intimately related to the shrinking of Indonesia’s forests. International aid and loans make the Government of Indonesia dependent on rich countries and tend to drain resources from the South to the North.
In other words, deforestation increases as a direct reflection of the pressure to pay back principle and interest on national debt and actually reflects national and international social injustice. The need for state revenues (foreign exchange) has driven many developing countries towards debt-orientated development modes for many years. The result is that these countries must now pay for their increased debt through exploiting their natural resources. Combined with the fact that financial institutions provide loans for environmentally damaging projects, such policies are yet another underlying cause of forest destruction and degradation. Besides that, financial demands often cause the accumulation of levels of loans for projects, which have a tendency to be beyond the government’s effective control. A case in point is the ADB and Japanese government loans for the Philippine forestry sector.
These loans must be repaid in foreign currency through increased exports which are typically linked to the over-exploitation of natural resources. In other words, foreign debt has created more problems by export-orientated natural resource management, which will almost certainly destroy the resource base. For the international scoop, this gigantic drain of resources operating for more than a quarter of a century has changed neither the status of the dependant economies, nor the nature of their relations with the developed countries of the North. It contributes, on the contrary, to the ever increasing concentration of wealth, at national level in favour of the dominant classes of the countries of the South and at international level in favour of the countries of the North. It explains in large part the dramatic increase over the last few years, in intra and international inequalities and in relative and absolute poverty.
International debt repayment constitutes one of the forms of transfer of surplus produced by the countries of the South to the North and of that produced by the workers of the South to the capitalists of their own countries and to those of the North. This has tended to increase the rate of labour force exploitation in the South. In this way, developing countries and newly emerging market economies have had to transfer to their creditors, an annual average of 3.68% of their GNP (Gross National Product) during the decade following the crisis (1980-1989). In the past six years (1997-2006), marked by a series of financial crises and a growing polarization of the international capitalist system, this transfer rose to 6.20% of GNP.
So, if the external debt can cause all the trouble, why does the Indonesian government make the debt for the first place? As the Harrod-Domar Model suggest, the rate of economic growth can be achieve by accumulating the capital. If there is a savings gap, or in other words the capital accumulation is less than needed, the gap should be filled by borrowings from abroad. But this model has a major shortcoming that is the dependency on foreign debt along with the economic growth. Our concern is, the government still uses this obsolete model which in fact creates problems as mentioned above. Besides the failure of the model, the Indonesian government is often has unclear purpose for making the debt.
For example, back in the early 70’s when Indonesia had a major windfall profit because of the oil boom, the number of external debt had also increased tremendously. One could understand that at that time the rate of economic growth can be boost even without making debt.
So at that time, the government had an ample amount of money, because of the debt and the oil revenue, without knowing the priority of development. This error has undoubtedly creates problems in present and future generations. The Need For Debt Cancellation All of this phenomena has triggered the idea of having a debt cancellation, as the Alternative Treaties that were being established by “Concerns and Pledges of Development and Environment Social Movements and Non-Government Organizations (NGOs)” in the Earth Summit on 1992 that says the foreign debt is the most recent mechanism of the exploitation of Southern peoples and the environment by the North, thus adding an extra burden to the historical, resource and cultural debt of the North to the South; the more Southern countries pay the debt, the more they owe -- has generated massive net financial transfers from the poor to the rich, thus perpetuating a process of decapitalization, impoverishment and environmental destruction that has devastating consequences for the South; there are also negative impacts to the peoples of the North with taxpayers' money bailing out banks, growth in unemployment and an increase in drug abuse; decisive action on the debt will make resources more available for the promotion of socially just and ecologically sustainable development models; the indebtedness of Southern countries is rooted in a development model which is not responsive to the needs of the majorities of their populations, but rather involves the harmful exploitation of people, resources and the environment of Southern countries, through adverse terms of trade, trade protectionism and the power wielded by international capital by, for example, transnational corporations.
The main idea is the foreign debt in Indonesia only functions as a burden in the economy. There are massive resource drains that create a major shortcoming for the people. This resource is transferred to the creditor country which benefit them most and has a negative effect for the Indonesia’s budget sustainability. In fact, the foreign debt originates in the continuing economic dependence from the creditor countries, from which they continued to acquire manufactured goods with the increasingly lower income from their agricultural and mining exports.
To cope with this imbalance, Indonesia were obliged to accept foreign capital loans, with which they also sought to construct infrastructures and achieve a first stage of industrialisation (both tasks naturally entrusted to companies from the creditor countries), endeavours which not only failed, but turned out to be far more expensive than expected, implying even greater debt.
The gradual and partial cancelling the Indonesian debt is the consequence to the evidence of resource drain. The cancellation is therefore the tacit recognition of the collapse of a perverse model of development aid that must be substituted by more efficient and truly fair measures ensuring the presence of poverty alleviation and the natural resource preservation program in Indonesia.
Wrapping Things Up: Solution without Debt
Although the external debts have more flaws than benefits, the Indonesian government still holds its initial standings that is making more of the debts and refusing all the possibilities for proposing debt cancellation. The fact of resource drain has been presented repeatedly but there is still no change in position. The argument of the governments is always the same, they argue that they don’t have any other alternatives in covering the deficits whereas the proposal for debt cancellation will clearly shut the doors of making new debts. As far as I concern, the problems do not solely rely from the debt strategy, but it depends heavily in the success of strengthening the revenue side. The dependency on the debt, the external debt to be more specific, is the consequence of the government incapability in increasing domestic revenues so that every time the government wants to increase its spending, the debt is always be the dominant source of financing. Besides that, the easiness of drawing more debts has cause the government to be infected by the lazy fiscal regime. So the most suitable remedy in curing the debt dependency illness is by the tax reform. This solution is might be not the best of all but for the time being it is the most possible solution.
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