Despite this admission, a further delivery of 16 Hawks worth pounds 300m will still go ahead early next year. British Aerospace, the manufacturer, has received a government guarantee that the Treasury will pay for the aircraft if Indonesia cannot find the money.
Sales of the jets and of other military goods, including armoured cars and water cannon, angered many MPs and campaigning groups. They said Britain should not sell weapons to countries with poor human rights records.
It is estimated that 200,000 people have been killed in East Timor since it was invaded by Indonesia in 1975.
Although the Hawk deal was struck before last year's general election, there was further controversy over Labour's decision not to revoke export licences for the aircraft.
If the country's economic crisis abates, it will begin to catch up on the missed payments, all due in the next 20 months, in five years. In the mean time, the British Government will cover them.
About pounds 150m relates to arms sales and a further pounds 100m to civilian projects.
Indonesia's total debt to Britain under the government's Export Credit Guarantee Scheme stands at pounds 1.7bn, of which pounds 800m is for arms.
The bulk of the arms debt relates to the pounds 500m sale of 24 Hawks in 1993, which were due to be paid for over five years. A further deal for 16 jets, now due for delivery, was signed in 1996.
Other recent sales of arms included an pounds 80m order for armoured personnel carriers and Scorpion light tanks from a Coventry firm, Alvis.
The rescheduling deal was agreed by the Paris Club, a group of creditor nations, last week.
A spokeswoman for the Treasury said normal payments would restart in 2000 unless Indonesia applied for further rescheduling. The delayed payments would be repaid from 2003. "We will pay money out in the next few years, but we do expect to get that back," she said.
When The Independent disclosed earlier this year the extent of outstanding debts from Pacific Rim countries - pounds 3.2bn in total from Indonesia, the Philippines, Singapore, Malaysia and Thailand - official sources said they had no reason to believe the payments would not be made on time.
Menzies Campbell, the Liberal Democrat foreign affairs spokesman, said his warning that this might happen had been dismissed as "irrelevant and ill-founded".
"I take no pleasure in the fact that I have been proved right. We should not have been exporting arms to Indonesia for good, sound, moral and political reasons. But it now appears that there were powerful commercial reasons as well," he said.
Rachel Harford, joint co-ordinator of the Campaign Against the Arms Trade, said there should be an immediate embargo on arms sales to Indonesia.
"The Government should act swiftly and withdraw the current export licences for Indonesia.
"It is economic madness to call upon the Indonesian government to stabilise its economy whilst allowing the export of millions of pounds worth of military equipment which will simply exacerbate the Indonesian debt crisis," she said.Reuse content