On Debts and Local Currency Borrowing

Note: The following has been based on my experimental posting titled "WIP: On Foreign Debts."

"Avoid debts so that you can live with independence," said Bung Hatta, a thinker, also Indonesia's first VP reknown for his thrift; and "Shun yourself from sins so you can stare at death with more ease," said Buya Hamka, another great Indonesian, thinker and autodidact scholar.

The two statements summed up two golden rules of thumb many families in the world subscribe to in the olden days, including Indonesians. One secular, the other religious. However, along with banking "innovations", with its interest based derivative transactability, and the ensuing sophistication of business practices, the values were fast marginalized. After the demise of King Henry VIII of Great Britain, the ruling by Queen Elizabeth reinstated the use of interest rate. I surmised this served as one of the most important milestones marking the proliferation of banking in Europe, or Great Britain at least.

Today, with no single institution existing to dissuade lending or borrowing with interest, it should only be considered normal that some banks lend shamelessly or citizens borrow equally so. Some banking representatives may call us to say that we have been the select few to deserve more loans. Sometimes they sell their products as if they were doing us a big favor.

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They say, the people of a nation get the leaders that they deserve. Is there some truth in this adage! Now Indonesia ranks as the country with the biggest debts, domestic and foreign types alike. Most of these debts, being long-term, shall outlive most of the decision makers that committed to these sums. By the time you and I cease to breathe for good, our children will … well, I guess we know the consequence. I need not say it lest this post becomes superfluous, which would be a great pity because I never mean it to be a damning indictment of what has continued to happen, but rather a call for more meaningful and responsible living...

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Discussions on local-currency lending and borrowing have been far few and between. This topic has only started to circulate in the last decade, mostly from supply-side viewpoints, at the initiatives of the lending institutions. On the one hand, the lack of interest in the subject may have been caused by the prevailing notion of inefficiency; that it would be an additional work without bringing additional profits to lenders. On the other, it may show the imbalances of lender-borrower position in this playing field. However, lending and borrowing cadences, when they concern governments, cannot and should not mean just business!

Since it is unlikely for developing countries to liberate themselves from debts--at least in the near future, governments of developing countries need to unite and consider collective efforts to commit to reduction of foreign debt dependency. Call this a political move, if you like. The decision to borrow is no less political than economic.

Also important for them is effort to promote or necessitate that multinational development banks and international lenders to only lend in respective local currencies.

Economically, this practice may be an effective internal hedging mechanism, especially in a bigger scale. It can help "insulate" developing countries from unnecessary currency mismatches. Politically, local currency borrowing can allow them to exercise the sovereignty of each local currency. Moreover, because rating does matter; international development banks, at the assumption that they are more credible to the eyes of international market than governments of developing countries, can sponsor the practice, i.e. through bond issuances.

No easy stuff to do, but not impossible.