October 1, 2001
In the 1980s environmentalists were delighted to find a new mechanism to finance conservation. In 1984, Thomas Lovejoy, deputy chairperson of the World Wildlife Fund (WWF) in the U.S., proposed that environmental organizations should enter the capital market by "buying" developing countries' debts from American and European banks at discounted prices. Once the debt is bought out, the government of a debtor country would no longer be required to repay the debt. Instead, the government should do something useful for the environment, such as financing conservation undertakings in its own currency through NGOs. Lovejoy's idea led to the establishment of an international financial mechanism known as a "Debt for Nature and Development Swap", or DNDS.
DNDS is intended to reduce a country's offshore debt by commitment to supporting social development and natural resources conservation. In other words, DNDS is another way of writing off the offshore loans by swapping them for the commitment to mobilizing its domestic financial resources for conservation activities. The DNDS was first put to use in 1987, when Conservation International (CI) purchased the Bolivian government's debts amounting to US$650,000 at an agreed price of US$100,000. In return, the Bolivian government designated three conservation areas and injected local funds worth US$250,000 for the management of these areas.
Since then, over 30 conservation projects in 20 countries have been implemented, resulting in the writing off of debts worth some $177 million. In the Third World, the debts purchased by international environmental organizations have reached US$46.3 million. In return, debtor countries have been required to make available US$128.7 million to prove their commitment to financing conservation. In Costarica, the Philippines, Madagascar, Guatemala and Panama, funds generated by this swap mechanism have reached 95 percent of the total DNDS.
In Indonesia, top budgetary priorities have been the repayment of offshore and onshore loans over the past three years. In the 2002 state budget, the servicing of offshore and onshore loans -- both the interest and the principal -- will eat up close to Rp 130 trillion, or some 44 percent of total revenues. Meanwhile, development spending gets only Rp 47,1 trillion -- only about 2.8 percent of gross domestic product as estimated in the 2002 state budget.
Indonesia's offshore loan burden is becoming heavier with the obligation to pay ever increasing domestic debts. By the end of December 2001 alone, Indonesia's domestic debts will reach Rp 656.7 trillion, an amount of outstanding debt that the Indonesian government will have to pay until 2018. Besides, as a logical consequence of the intervention of the International Monetary Fund (IMF) in Indonesia through its economic recovery programs, the government will also have to pay the IMF US$1.3 billion this year. This liability will continue to swell and next year Indonesia is expected to allocate US$2.7 billion for the payment of both interest and principal to IMF. As a tight debt repayment schedule has been drawn up for Indonesia, the budget allocated for debt repayments will be larger than that for development.
The heavy debt burden has made Indonesia turn to the DNDS scheme. The government has formed a team to make the necessary preparations. "The government is opting for the DNDS mechanism mainly because the monetary crisis has made the burden of interest and principal payments exceed the threshold," said State Minister for the Environment Nabiel Makarim. DNDS, Nabiel believes, will reduce the state's financial burden, particularly in the environmental sector.
"I am of the view that DNDS will bring the environment to the mainstream of development in Indonesia," he said, adding that Indonesia should concentrate on reforestation. It has been predicted that DNDS in Indonesia will have a small impact on the country's foreign debt repayments but it will be significant for the government's efforts to increase development funds.
According to Nabiel, the wealthy countries which have given loans to Indonesia have no objections to the planned scheme. For example, the U.S. government has offered to support DNDS through its Tropical Forest Conservation Act to reduce Indonesia's debts to the American government. The German government has also promised to cut Indonesia's bilateral debts to ensure sustainable development in Indonesia through DNDS. The DNDS is a positive scheme. It is expected that more countries will be interested in helping Indonesia and other poor states. Now, it remains up to the government to demonstrate its skills in negotiating with creditors on DNDS.
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