INTELLIGENCE MEMORANDUM INDONESIAN DEBT SETTLEMENT: A PRECEDENT FOR OTHER LESS DEVELOPED COUNTRIES?

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030060-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: October 14, 2011
• Sequence Number: 60
• Publication Date: April 1, 1970
• Content Type: IM

Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
c fil- 6t .Iirr- 7o--rab Wt c'/ S E'1Z
Cbrrfiderrtwo!
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Indonesian Debt Settlement.
A Precedent For Other Less Developed Countries ?
Sonfident-el-
ER IM 70-60
April 1970
Copy No.
150
Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
 Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
WARNING
'I'his document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 79.1, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
txt'LVDrn IIIOM nuroMAlJC
IN,M NUIIAI`IN(/ ANTI
t1Yf:1.~M411'If'At1t11I
Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
 Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
CONFIDEN'T'IAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
April 1970
Indonesian Debt Settlement:
A Precedent For Other
Less Developed Countries?
Introduction
A debt repayment agreement reached on 24 April
1970 between Indonesia and its chief Western cred-
itors has broad policy implications for both major
foreign aid donors and other less developed coun-
tries now facing debt repayment problems. For the
f4irst time, creditor nations have agreed to a long-
term debt repayment schedule which realistically
takes into consideration the economic position of
the debtor nation. Past debt rescheduling arrange-
ments have largely been temporary, short-term expe-
dients which essentially formalized de facto debt
defaults and almost guaranteed a need for additional
rescheduling. This memorandum gives the background
for the agreement and its implications for Indonesia
and the world's major foreign aid creditors and
recipients.
Indonesia's Debt Problem
1. As have several other less developed coun-
tries, Indonesia has amassed a foreign debt with a
repayment schedule clearly beyond the country's
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Current In-
telligence and the Office of National Estimates.
1 CONFIDENTIAL
Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
 Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
CONFIDENTIAL
capability. Under fo;:mer President Sukarno, Indo-
nesia by mid-1966 had incurred foreign medium-term
and long-term liabilities totaling $1.7 billion
(see Table 1) . More than half the debt was owed
to Communist countries and arose mainly from pur-
chases of military equipment. Western donors,
accounting for the other half, gave loans mainly
for economic development projects and for importing
foodstuffs and other consumer goods. Although most
of the credits received from both Communist and non-
Communist sources were on liberal terms -- principal
repayment over several decades and low interest
rates -- debt servicing obligations nevertheless
rose to about $250 million in 1965, or the equiv-
alent of 40% of Indonesia's annual export earnings.
This was clearly an impossible amount, given the
state of the country's economy.
Indonesia:
Estimated Medium-Term and Long-Term
International Debt as of 30 June 1966
Total: $1.7 Billion
47
United States
10
West Germany
8
Japan
7
Italy
7
France
6
Yugoslavia
5
United Kingdom
1
Holland
2
Other
1
53
USSR
39
Other
14
- 2 -
CONFIDENTIAL
Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
 Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
CONFIDENTIAL
2. When Suharto took over in 1965, Indonesia
was already in default on most of its debt and
during 1966 was unable to make any debt service
payments. To forestall further defaults, Western
creditors agreed in December 1966 to a three-year
moratorium on the repayments on all medium-term and
long-term debts due before the end of 1967.
Actual repayments would then be stretched out over
eight years. Even these terms, however, were
clearly beyond Djakarta's means and additional
moratoriums had to be granted in 1968 and 1969.
While the Communist countries were not parties to
these rescheduling agreements, the USSR and the
East European countries generally had agreed in
bilateral negotiations in 1966 and 1967 to re-
schedule Indonesia's debt due to them. Meanwhile,
to stabilize the Indonesian economy, Western sources
provided new loans which increased the outstanding
debt to about $2.4 billion by the end of 1969 (see
Table 2).
Indonesia:
Estimated Medium-Term and Long-Term
International Debt as of 31 December 1969
Total: $2.4 Billion
59
Unites States
19
Japan
13
West Germany
8
France
5
Italy
5
Yugoslavia
4
Holland
2
United Kingdom
1
Other
2
41
USSR
30
Other
11
- 3 -
CONFIDENTIAL
Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
 Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
CONFIDENTIAL
3. Although repeated debt postponements and
new loans gave Indonesia breathing space for a few
years, and the state of the economy improved con-
siderably, the country in early 1970 was still
unable to meet scheduled repayments. Under terms
already agreed upon at the rescheduling sessions,
Indonesia during the next nine years (1970-78)
would have had to repay an average of about $220
million annually, of which $175 million would be
on the Sukarno debt.
The New "Paris Club" Agreement
4. In view of Indonesia's obvious inability
to meet the repayments due during the 1970s, a
long-term solution was essential to avoid either
repeated moratoriums and reschedulings or defaults.
In late 1968, Djakarta's major Western creditors,
the so-called "Paris Club," requested Dr. Herman
Abs, former head of the West German Bundesbank, to
prepare a plan aimed at resolving the Indonesian
debt question. Dr. Abs submitted his solution
late in 1969. He proposed that interest on the
Sukarno debt (some $450 million) be waived and
that the principal (about $1.7 billion) be repaid
in 30 equal annual installments. No distinction
would be made between military and economic debt
or between Communist and non-Communist creditors.
The post-Sukarno debt was excluded from Abs' re-
scheduling plan because he said its inclusion
would obviously discriminate against Western coun-
tries that had continued giving aid to Indonesia
in favor of Communist countries that had not.
5. The agreement finally reached between Indo-
nesia and the Paris group which met on 23-24 April
1970 comes close to the Abs proposal. The key
element calls for stretching out repayment of the
principal on the Sukarno debt over a 30-year period
beginning in 1970. All interest on that debt,
contrary to the Abs proposal, will have to be
repaid, but the interest payments will not begin
until 1985. Under the agreed plan, Indonesia's
repayments to both Communist and non-Communist
creditors on the Sukarno debt would amount at a
maximum to only $57 million annually through 1985.
The plan further provides that repayments of up
to a cumulative total of $164 million can be de-
ferred. at Djakarta's option, although in any one
year such deferments cannot exceed 50% cf the
payments due. If Indonesia uses this option
- 4 -
CONFIDENTIAL
Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
 Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
CONFIDENTIAL
immediately, as seems highly likely, actual repay-
ments on the Sukarno debt could be as low as $28
million annually during 1970-75 (see Table 3).
Table 3
Indonesia: Service Payments on the Sukarno Debt a/
Million US $
Year
Original
Schedule
Schedule as of
31 December 1969
Schedule Underb/
1970 Paris Plan -
1965
250
1968
209
1969
190
1970
189
149
28
1971
149
178
28
1972
115
175
28
1973
89
177
28
1974
80
177
28
1.975
70
179
33
1976
64
173
57
1977
52
180
57
1978
14
188
57
1979
8
127
57
1980
5
101
57
a. Excluding payments due as compensation for
nationalized properties.
b. If Indonesia, as allowed in the Paris plan,
chooses to defer 50% of annual payments due during
1970-75 until total deferments reach a cumulative
value of $164 million.
Repayments on debts incurred since 1966 would raise
debt servicing to about $65 million annually during
this period.
6. The Paris plan goes a long way toward re-
solving the problem of Indonesia's debt burden in
the years immediately ahead. The program is not
binding on creditor countries, however, and Indo-
nesia must still reach final agreement through bi-
lateral negotiations. Western countries will almost
certainly accept the essential elements of the plan.
Although Communist countries took no part in the
- 5 -
CONFIDENTIAL
Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
 Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2
CONFIDENTIAL
Paris meetings, they would seem to have little choice
but to go along with the principles of the plan.
Djakarta would probably refuse to make any debt re-
payments whatsoever to them if the USSR and the East
European countries reject the repayment schedule.
A Precedent for Debt Relief
in the Less Developed World
7. Although under the new Paris plan Indonesia
must finally resume debt repayments, the amounts are
relatively small. These limited repayments should
have little adverse economic effect. Average annual
debt repayments through 1975 -- including those on
the post-Sukarno debt -- will amount to only about
7% of expected export earnings if Djakarta exercises
its option of making smaller payment on the Sukarno
portion of the debt. Repayments for the remainder
of the 1970s would increase, but Indonesia should
have little problem meeting them, especially with
rapidly increasing oil export revenues and continu-
ing large foreign aid. An additional feature of
the debt agreement that calls for a review of Indo-
nesia's economic progress and debt repayment ability
in 1980 leaves an opening for a further rescheduling
should one be needed then.
8. Perhaps the major significance of the Paris
plan is that it has probably set a precedent by
recognizing the inability of certain debtor coun-
tries to meet their foreign obligations. In Indo-
nesia -- as elsewhere - most previous debt re-
scheduling involved relatively high repayments
after only a few years of moratorium, which merely
postponed but never solved the problem. The recent
Indonesian agreement, on the other hand, is problem
solving in that it allows for modest payments --
which are demonstrably within the country's capa-
bilities -- to be made over a relatively long time
period. This approach also alleviates the constant
creditor-debtor friction and uncertainty arising
from frequent debt renegotiations and allows for
more realistic long-term planning in developing
countries. Undoubtedly, other developing countries
with large and binding debt repayment problems now
will seek a solution similar to the Indonesia
arrangement.
- 6 -
CONFIDENTIAL
Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030060-2