A poisoned chalice?<\/p>\n
Although slashing fuel subsidies should be at the top of
\npresident-elect Susilo Bambang Yudhoyono's economic agenda during
\nthe first 100 days of his administration, raising fuel prices in
\nNovember as recommended by the outgoing House of Representatives
\n(DPR) could be political suicide for the new government.<\/p>\n
Increasing fuel prices only 10 days after the Oct. 20
\ninauguration of the new president, and at a time when consumer
\ndemand for basic commodities is at its peak due to the Idul
\nFitri, Christmas and New Year festivities, would surely be the
\nmost effective way of causing major socio-economic upheavals. The
\ncombination of stronger demand and higher costs could cause
\ninflation to spiral and shatter macroeconomic stability.<\/p>\n
We therefore wonder about the true hidden agenda of the House
\n-- which is dominated by the Nationhood Coalition of the losing
\ncandidate in the Sept. 20 presidential election runoff -- in
\ndeciding suddenly to cut Rp 3.8 trillion (US$422 million) from
\nthe Rp 63 trillion budget originally allocated toward fuel
\nsubsidies for the 2004 fiscal year.<\/p>\n
The House, which will end its tenure later this week,
\nrecommended three alternatives last Wednesday for the incoming
\ngovernment to meet the Rp 3.8 trillion shortfall in this year's
\nfuel subsidy, which, actually, is still the responsibility of the
\ncurrent government.<\/p>\n
Certainly, none of the three alternative measures -- raising
\nfuel prices in November, cutting down fuel consumption and taking
\ntough efficiency measures -- would be feasible within the short
\ntime available for the new government soon after its
\ninauguration.<\/p>\n
No one will argue against the economic necessity to cut the
\nhuge fuel subsidies, most of which was enjoyed by people of the
\nmiddle- and high-income bracket. Fuel subsidies also cut into the
\nbudget for poverty alleviation and other social safety net
\nprograms, and threaten fiscal sustainability.<\/p>\n
Yet, even more damaging is that subsidies encourage gross
\ninefficiency in fuel use, while the country has now become a net
\noil importer.<\/p>\n
The new government, however, cannot simply raise fuel prices
\nto market levels, irrespective of the strong political mandate
\nthe new president received in the runoff. This painful measure
\nrequires a set of preconditions to prepare the people and
\nbusiness community.<\/p>\n
The new government needs some time to establish a reliable
\nmechanism for ensuring that the poor are fully protected from the
\nadditional burdens to be inflicted by the new fuel-pricing policy
\n-- that is, that the remaining subsidies really reach their
\ntarget beneficiaries. The government and business leaders also
\nneed to sit down and calculate the impact of the new fuel-pricing
\npolicy on production costs for goods and services; the central
\nbank needs to design appropriate monetary policies to manage
\nanticipated inflationary pressures.<\/p>\n
These preparations are all necessary to prevent a panic in
\nresponse to such a drastic policy.<\/p>\n
At a time when many people are still suffering from the brunt
\nof the economic crisis and millions of others are either
\nunemployed or underemployed, additional burdens stemming from
\nhigher fuel prices could easily incite public anger.<\/p>\n
A favorable public opinion climate is therefore vital to usher
\nin such a policy. Public acceptance, which is key to the
\neffectiveness of the measure to achieve its objective, will
\ndepend on how the general public will perceive the painful policy
\nas fair, necessary and effective.<\/p>\n
Raising fuel prices therefore cannot be conducted as a single
\nmeasure. It must be introduced in a package with other programs
\nto ensure fairness in sharing the burden and its effectiveness in
\nachieving its objective.<\/p>\n
But the public perception of fairness also depends on the
\npeople's impressions as to whether the government is taking its
\nfull share of the responsibility by minimizing waste and
\ninefficiency caused by corruption, and by behaving and acting out
\nof a real sense of urgency and crisis.<\/p>\n
It is certainly rather impossible for the new government to
\nbuild these preconditions for raising fuel prices in November. We
\nthink it is better the government to draw on part if its reserves
\nat Bank Indonesia to cover the Rp 3.8 trillion shortfall.<\/p>\n
January, the start of the 2005 fiscal year, is the most
\nappropriate time for introducing a new fuel-pricing policy. By
\nthen, the incoming government will have had at least one month to
\nfinalize the 2005 state budget with the new House in November,
\nand another one month to precondition the general public to the
\nnew measure and preparing adequate institutional capacity for its
\nimplementation.<\/p>",
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"sponsor": "Okusi Associates",
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