Indonesia's Efforts to Bridge Debt Restructuring Gap

Restructuring the debt of poor and developing countries is an important G20 Summit agenda item. Indonesia seeks to bridge the gap between debtors and creditors that come in the form of multilateral banks and countries.

AP PHOTO/ERANGA JAYAWARDENA

A Sri Lankan navy soldier guards a street during a relaxation in a nationwide curfew that began Monday evening in Colombo, Sri Lanka, Thursday, May 12, 2022. Sri Lanka's president on Wednesday promised to appoint a new prime minister, empower the Parliament and abolish the all-powerful executive presidential system as reforms to stabilize the country engulfed in a political crisis and violence triggered by the worst economic crises in memory.

Indonesia's mission in serving as the president of G20 in 2022 is to bridge the gap between rich and developing countries. An important problem for developing countries is debt entanglement. These countries find themselves unable to pay installments to state or multilateral lending institutions.

The impact of the COVID-19 pandemic in 2020 has led to the stagnation of various economic activities. The wheels of development have stopped turning. Moreover, there is also a gap in access to vaccines. A number of developing and poor countries have not been able to meet minimum quotas for mass vaccinations on account of them either not receiving a sufficient amount of vaccines or not having the proper vaccination facilities and infrastructure. As a result, their economies are getting eroded.

"Indonesia is expanding all efforts and methods to invite lenders and financiers to sit together to discuss this issue multilaterally," Foreign Minister Retno Marsudi said in an exclusive interview with Kompas, on Friday (28/10/2022).

He said that the purpose of this two-way dialogue is to find a solution that both parties can agree upon. Indonesia understands that both sides are feeling the pressure. Creditors want their money back so that the economy can turn around. Debtors are also under pressure. They are unable to pay off their debts as a result of their economy suffering from the pandemic and as a result of the food and energy crises arising from the Russia-Ukraine conflict.

Due to the globalized economy, the whole world will be affected and the crisis will remain.

However, if debtors continue to be pressured, they will most likely not be able to emerge from this crisis. Due to the globalized economy, the whole world will be affected and the crisis will remain. With all of this in mind, Retno said that Indonesia was striving to prevent the economic crisis from turning into a security crisis. The key is to invite all relevant parties to negotiate.

According to World Bank data, there has been a shift of creditors in developing countries going from multilateral banks to specific countries such as China. This has been evident since 2010 after multilateral banks restructured debt and tightened their lending requirements. It was around that time that China began to become a popular creditor with a total of 40 billion US dollars in loans in 2014. In 2020, the total funding it lent abroad reached 170 billion US dollars.

According to the World Bank, the countries with the largest debts to China in nominal terms were Pakistan with a value of 77.3 billion US dollars, Angola with 36.3 billion dollars, Ethiopia with 7.9 billion dollars, and Kenya with 7.4 billion dollars. In addition, there are also countries with large debts when compared to their gross domestic income. Those countries are Djibouti with 43 percent of GDP, Angola with 41 percent, Maldives with 38 percent, and Laos with 30 percent.

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Ikrar Nusa Bhakti, a senior political researcher at the Indonesian Institute of Sciences from 1984-2017, explained his observations about the situation on the African continent, especially when it came to North Africa. He served as the Indonesian Ambassador to Tunisia from 2017 to 2021 period. "Multilateral institutions have certainly entered Africa, such as the African Development Bank (AfDB) and the African Trade and Development Bank (TDB)," he said.

He said that the choice of creditors depended on the requirements and the speed with which the funds dropped. Multilateral institutions generally have more stringent requirements than bilateral money borrowing. Because of this, countries in North Africa have prioritized the bilateral route.

Filling in the Void

Providing further elaboration on this topic was Yose Rizal Damuri, an economist and Executive Director of the Centre for International and Strategic Studies (CSIS). Essentially, the history of developing countries shows that bilateral loans are their main source of budget. Western countries and Japan, for example, diligently provided loans to developing countries, including Indonesia, Brazil, and Mexico during the period spanning the 1970s to 1990s.

President Director of PT Kereta Cepat Indonesia China Budi Wiryawan (second from left) and China Development Bank Chairman Hu Huai Bang (right) signing a facility loan agreement of US$ 4.4 billion to be used to build Jakarta-Bandung high-speed railway project in Beijing, Sunday (14/5/2022).

"They learned from experience that there were also many bad loans. As a result, bilateral countries now apply the same stringent requirements as multilateral banks," he said.

It was China that proceeded to fill the void, according to Yose. The loans provided are the result of domestic liquidity and must be channeled outside so as not to settle and cause an economic bubble. As new players in the position of creditors, they also had to evaluate the situation. The number of debtor countries struggling to repay debt is likely to make China tighten its future requirements for new borrowers.

Indonesia can help bridge the process because it has access and bargaining power to developed countries and multilateral institutions.

He emphasized that an approach must be carried out in three directions: to borrowers, lending countries, and multilateral banks. Indonesia can help bridge the process because it has access and bargaining power to developed countries and multilateral institutions. At the same time, Indonesia also understands the perspective of developing countries.

"This must be approached from financial and diplomatic channels. Indonesia must persuade creditors to want to restructure debt. It must also persuade debtors to improve their financial management," Yose said.

Minister of Finance Sri Mulyani Indrawati had mentioned that multilateral banks can lend to poor countries using existing equity. Loans can then be given on a concessional basis. At the same time, multilateral banks can lend to developing countries at market-appropriate interest and plus 70 basic points so as to not cause losses.

This article was translated by Prasiddha Gustanto