Indonesia Seeks Easier Debt Repayment Terms : Asks Japan, Its Main Trading Partner, to Grant Lower Interest Rate

Western aid donors meeting in The Hague this week are expected to finalize a multibillion-dollar aid package to help Indonesia meet its mounting debts.

Some bankers and government officials now appear to believe that longer-term solutions are needed to tackle the country’s rising external debt, now the largest in Asia.

Finance Minister Johannes Sumarlin proposed in a speech last week three measures that Japan, Indonesia’s main trading partner and foreign investor, could adopt to alleviate part of the problem.

He said Japan could convert all or part of existing debt into grants, it could switch future commitments from loans to outright grants or it could provide Indonesia with the option of repaying loans at the exchange rate prevailing when the loans were originally signed.

Sumarlin said the most favored option, which should be considered urgently by Tokyo, was the third.

He estimated backdating interest levels could save Indonesia $1.5 billion in debt repayments this year alone.

The World Bank forecast Indonesia’s total external debt would rise to $50 billion at the end of 1988, against $47.3 billion in 1987 and $32.1 billion in 1985.

Much of the rise is a result of the rapid appreciation of the Japanese currency because one third of Indonesia’s official debt is denominated in yen.

The suggestions took most bankers and diplomats by surprise.

“It’s difficult to accept,” said a Japanese embassy spokesman in Jakarta, when asked if Tokyo would consider allowing Jakarta to repay debt at earlier exchange rates.

“This has been proposed privately by the Indonesians in Tokyo and we said it is totally against normal lending practice.”

A western diplomat said: “The biggest problem for Indonesia is that this rise in their debt repayments is eating up about a third of their state budget, but is totally beyond their control because most of it is the result not of new borrowing but of the rise in the value of the yen.”

Japan takes half of Indonesia’s oil output and many Indonesian officials believe it would be in Tokyo’s interest to grant President Suharto’s government the breathing space needed to get the economy in order.

“Indonesia is not asking for a handout from Japan, but simply a significant gesture of understanding on the part of ‘an old brother,’ ” the Jakarta Post said in an editorial.

The suggestions were the first publicly presented proposals for easier debt repayment terms made by Indonesia, the largest country in Southeast Asia with a population of 175 million.

Sumarlin presented them ahead of the meeting in The Hague on Tuesday and Wednesday of Indonesia’a main aid donors, who have helped underpin President Suharto’s military-backed government for the past 20 years.

The World Bank is proposing that the 14 donors, which include Japan, the U.S. and several Western European countries, increase their aid package to $3.6 billion in the present financial year, which ends in March, from $3.19 billion pledged in assistance and soft loans last year.

Japan has already announced its assistance to Indonesia would total $2.3 billion in the current financial year, up from $1.23 billion last year.

Around half of this will be channelled through the donors’ organization known as the Inter-Governmental Group on Indonesia.