INFID’S STATEMENT

Indonesia Must Engage in Diplomacy for the

Comprehensive Relief and Cancellation of Debt

During a Limited Cabinet Meeting on the economy held Monday, 19 July 2010 which discussed
issues related to fiscal policies and the national budget, President SBY yet again urged that
Indonesia reduces the level of development financing drawn from foreign debt in order to ease
the burden on the national budget.

INFID welcomes this word of caution, but of much graver importance is for the SBY-Boediono
administration to initiate follow-up action. SBY’s call for less dependency on foreign debt is
indeed not for the first time. The main concern lies at the government’s failure to translate
President SBY’s appeal into tangible follow-up actions aimed at alleviating the country’s debt
burden.

Ongoing facts have shown that throughout SBY’s leadership (both with Jusuf Kalla and now
Boediono), foreign debt has persistently become the main source of development financing.
These facts among others include:
• Since SBY came into power (together with Jusuf Kalla) from October 2004 to October
2009, foreign debt has risen from Rp 1,229.5 trillion in 2004 to Rp 1,590.66 trillion (a
debt increase of Rp 361.16 trillion over the course of 5 years) (Debt statistics, July 2010,
DJPU, Finance Ministry)
• Since the re-election of SBY (together with Boediono), foreign debt has soared to Rp
1,612.85 trillion (a debt increase of Rp 22.19 trillion in one semester) (Debt statistics,
July 2010, DJPU, Finance Ministry)
• With such significant debt burden, it is ironic that the amount of debt that the country has
entered into is less than the amount of debt service payment (interest and principal
payment) due every year in the national budget. Indonesia’s annual debt service payment
reaches an average of 15% to 20%. In the revised national budget for 2010, the amount of
 debt service that the country must settle registers at Rp 168,354.1trillion (17.27% from
total state revenue).

President SBY’s statement that the government will focus more on seeking foreign financing
sources through the grant mechanism continues to demonstrate on how Indonesia remains
dependent on donor countries and multilateral financial institutions. Essentially, development
financing that relies heavily on foreign debt and grants equally become a political burden as such
financing mechanisms normally entail preconditions that profoundly affect political sovereignty
and the nation’s economy.

In view of the country’s foreign debt burden which exerts a heavy toll on the national budget, a
viable way out that INFID proposes is through diplomacy to gain comprehensive debt
cancellation. As a country that has previously been under authoritarian rule, Indonesia can now
explore opportunities for debt cancellation schemes particularly for debts identified as
illegitimate debt. Debts included under this category among others are those used for human
rights violation or corrupted by an authoritarian regime.

Norway is a creditor country which in 2006 has cancelled debts for Egypt, Ecuador, Jamaica,
Sierra Leone and Peru especially those classified as illegitimate debt. A major proportion of
these debts are part of the export credit guarantee for the sales of ships in the 1970s. This policy
was proven to have only been intended to salvage the shipping industry in Norway itself and
brought no meaningful benefit for the debtor countries. Based on this experience, Indonesia can
indeed seize on the opportunity to engage in bilateral and multilateral diplomacy for debt
cancellation primarily for debts proven to be illegitimate either due to corruption, futile projects
or failure to provide benefit to the people.

One example of debt that should have been absolved is the debt between the governments of
Norway and Indonesia entered into in1995 for the steam power plant at Baron Coast. Even to
this day, after receiving debt amounting to USD 3.5 million, there is still no sign of the promised
technology for the power plant. The obligation to settle its debt service payment however,
continues to be a burden for the people of Indonesia.
This also holds true for the debt used to finance the procurement contract of 39 warships from
the former East German navy, for a total value of USD 442 million which has proven to be
illegitimate debt. The warships consist of 16 Parchim Corvettes, 14 Frosch Troop Landing Ship
Tanks (LSTs) and 9 Condor minesweepers. The entire process, beginning early on from the
signing of the contract to debt utilization and ships’ deployment, has led to a range of legal,
political and humanitarian issues.

INFID also proposes for a political initiative to secure debt relief and cancellation in the form of
a debt audit. This is deemed crucial as it identifies the status of Indonesia’s past foreign debts. It
is critical to ascertain which debts are classified as illegitimate/odious debts as this will serve as
vital input for political negotiations with creditor countries and decide on whether to cancel or
convert such debts through the debt swap mechanism.

Jakarta, 20 July 2010

Sincerely,

Wahyu Susilo
INFID Program Manager
(wahyu@infid.org, 0815 1039 2859)