Bad Loans and Lost Forests | Center for International Forestry Research

Bad Loans and Lost Forests

By David Kaimowitz

Governments don’t like closing down big businesses. But that’s what international donors will probably demand of the Indonesian government when the World Bank-sponsored Consultative Group on Indonesia (CGI) meets this week in Bali to discuss a new foreign assistance package.

The big businesses in question are the debt-ridden timber companies that borrowed billions of dollars during the twilight years of the Suharto regime. Those loans fueled massive growth in timber-processing industries, particularly pulp and paper. As a result, Indonesia lost millions of acres of tropical rainforest and the wood-processing industries now need three to four times more wood than the forests can sustainably produce.

After the 1997 Asian financial crisis, most Indonesian conglomerates stopped servicing their loans. Some couldn’t pay. Others simply decided not to pay once they realized there was no functioning bankruptcy system that could force them to.

With frightened customers withdrawing their deposits and companies not paying loans, most banks were on the verge of collapse. The Indonesian government bailed them out with billions of dollars of taxpayer and donor funds. In return, the banks handed over their bad loans to the government, which created the Indonesian Bank Restructuring Agency (IBRA) to get companies to pay off these loans.

Meanwhile, most forestry – and non-forestry – companies kept on with business as usual. Many donors felt that allowing timber conglomerates to continue destroying some of the world’s most valuable rainforest, while they picked up the tab for the companies’ bad loans, was adding insult to injury. They called on the Indonesian government to shut down timber companies that wouldn’t pay up.

In February 2000, the Indonesian government promised to do just that. Three years later, it has yet to close any of these companies.

After several half-hearted efforts to get companies to pay their loans, IBRA now wants to call it quits. It plans to wash its hands of the matter and sell the loans for whatever price investors – mostly banks – are willing to pay. However, if it does that it will only recover fifteen to twenty cents for each dollar of debt.

But why would any bank purchase a bad loan in a country where creditors have no way to force debtors to pay? The answer is that the banks are counting on indebted companies being willing to repay the reduced debt plus interest if that allows them to wipe the rest of the debt off their books – because then they could go out and borrow again.

The real losers here will be Indonesian taxpayers and international donors, as well as the country’s tropical forests. The former because they will be picking up the bill for most of the forest companies’ original debt; the latter because the companies will continue to plunder the forests to provide timber, wood pulp, and palm oil.

IBRA claims that with no functioning bankruptcy system to make companies pay, it has no choice but to sell the loans cheaply. But that claim simply does not hold water. If the Indonesian government revoked the licenses of some of the indebted timber companies, as they promised they would, other companies would see the writing on the wall and pay. That would mean less forest destruction, and the government would have more money to devote to pressing social needs.

If this solution is so easy, why hasn’t it happened? Because the big timber conglomerates have been lobbying hard behind the scenes to avoid closure, and the Indonesian government wants to raise quick cash by selling the loans now, rather than wait for a better return in the future.

The CGI meeting this week provides a unique opportunity for the government to look beyond its short-term budget deficit and act to save the country’s forests. Failure to do so will not only further endanger threatened species such as tigers and orangutans, but lead to the eventual collapse of the forestry industry itself.

Unless debt sales are postponed and unsound companies are closed down, so that the companies stop logging more timber than the forest can produce, Indonesia will lose most of its high value timber in the next ten to fifteen years. That means that instead of providing moderate levels of employment far into the future, the industry will employ people for a few more years but then virtually disappear. That would be devastating for the country’s foreign exchange earnings and tax revenues. It would also lead to major job losses and more social unrest.

The stakes are high since Indonesia is the world’s fourth most populous country, and forestry makes up a big piece of its economy. The CGI meeting in Bali presents a perfect opportunity to finally get things right and ensure that forestry companies that don’t pay their debts are closed down. Let’s hope that happens.

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