Fri, 25 Sep 2009
When Susilo Bambang Yudhoyono, the Indonesian president, opens a Group of 20 summit discussion on how to reduce fuel subsidies while protecting the poor, he will have first-hand experience to draw on.

In October 2005 and May 2008 he increased subsidised fuel prices by 126 per cent and 29 per cent respectively as fuel and electricity subsidies ballooned out of control in the wake of soaring oil costs, and simultaneously introduced cash transfers to the nation's poor.

These handouts were initially given unconditionally to the poorest 19.4m families, representing about 42 per cent of the population.

After several months the transfers became conditional on families ensuring all children were fully immunised and attended school. They cost about half the money saved by raising prices, so the government was not obliged to issue as many bonds as expected to cover the budget deficit.

Jakarta also saved money by phasing out highly subsidised kerosene, which the poor used for cooking, and replacing it with much cheaper liquefied petroleum gas and free stoves.

But It remains to be seen whether Mr Yudhoyono will admit to his fellow G20 leaders that his success was limited. Analysts say the president has failed to convince the richest 70 per cent of Indonesians that it is in their interests to pay more for fuel and power to free up government funds for much-needed infrastructure projects and poverty-alleviation programmes.

Energy subsidies in 2008, for example, were still about 25 per cent of government spending, despite the price increase and data showing that only 10 per cent of the subsidies went to the poor, since more than 90 per cent of vehicle owners use subsidised fuel.

And this year's figure is likely to be about 15 per cent, despite the massive fall in international oil prices since the peak in June last year.

One foreign diplomat said: "The real problem is that the government doesn't have an automatic adjustment mechanism, so raising fuel prices becomes something like pulling out teeth without an anaesthetic."

Government technocrats lobbied hard for such a mechanism to be introduced at the end of 2008. Mr Yudhoyono, with perhaps an eye on this year's parliamentary and presidential elections, originally balked at such a mechanism. He instead cut subsidised fuel prices three times.

Now that he has been re-elected, the former general appears to have found some courage. He said last month that his second-term subsidy policies "will include a gradual transfer of price subsidies to a more accurately targeted subsidy".



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