Phasing out fuel subsidy<\/p>\n
Automatic monthly fuel price adjustments to Mid Oil Platts
\nSingapore (Mops) quotations and the rupiah's exchange rate seem
\nto be the most economically and politically feasible one of the
\nthree alternatives for removing fuel subsidies the government
\nproposed on Monday to the House of Representatives.<\/p>\n
This policy would lift fuel subsidies only gradually, thereby
\nprotecting the economy from shocking inflationary pressures, and
\nwould spare the government 'trouble' with the House every time it
\nwanted to change fuel prices.<\/p>\n
The other two alternatives -- altogether increasing domestic
\nfuel prices to Mops quotations and gradual price adjustments to
\nMops but set in absolute numbers -- would be extremely difficult
\nto implement. Adjusting prices to Mops quotations by one stroke
\nwould cause a devastating shock to the economy, while setting
\nprice adjustments in absolute numbers would be like shooting a
\nmoving target, given the oil price fluctuations.<\/p>\n
Under the price-floating scheme, subsidies for regular
\ngasoline and automotive diesel oil will be phased out until they
\ncompletely end in January, 2007, and those for kerosene will
\ngradually be removed within two to three years. Minister of
\nEnergy and Mineral Resources Purnomo Yusgiantoro did not propose
\na specific date for the introduction of the planned fuel-pricing
\npolicy, however October or November have often been cited as the
\nmost appropriate launching dates.<\/p>\n
The removal of fuel subsidies is one of four major policy
\nagendas President Susilo Bambang Yudhoyono announced last
\nWednesday to cope with the melting rupiah and rising fiscal
\ndeficit. The three other programs cover monetary measures to
\ncontrol inflation -- the responsibility of the central bank --
\nand further reforms in the overall energy policy and investment
\nclimate.<\/p>\n
Certainly, setting the prices of fuels at their economic costs
\nwill indeed have an immediate bearing on fuel conservation and
\nthe viability of new investments in fuel-efficient machinery.
\nHowever, these measures will not by themselves help develop a
\nmore diversified base of energy and reduce the country's
\nvulnerability of being too heavily dependent on fossil-based
\nfuels. Hence, a comprehensive energy development policy, complete
\nwith fiscal and financial incentives for the development of
\nrenewable energy sources, should supplement fuel-conservation
\nprograms to enhance the fuel efficiency of our economy.<\/p>\n
A better investment climate--lowering the costs of doing
\nbusiness through improvements in governance practices such as
\nless red tape, less illegal levies, more efficient tax and
\ncustoms services -- is also more imperative now to offset the
\nadditional burdens caused by costlier energy and the higher
\ninterests as a result of the tighter monetary policy imposed by
\nthe central bank to curb inflation.<\/p>\n
Indonesia has performed very poorly in all international
\nratings of economic competitiveness and always ranks well below
\nall other founding members of ASEAN. Various surveys have shown
\nthat overall, businesses in Indonesia bear almost twice the
\nadministrative costs and have to struggle through bureaucratic
\nprocedures that are twice as arduous as their counterparts in
\nother ASEAN countries.<\/p>\n
Increasing our domestic fuel prices, which are now only 40
\npercent as high as Mops quotations, will certainly exert strong
\ninflationary pressures on the economy, especially because the
\ngovernment is to accelerate the disbursement of more than 70
\npercent of its 2005 development (investment) budget during the
\nremaining four months.<\/p>\n
The central bank will consequently keep tightening its
\nmonetary policy -- many analysts even expect Bank Indonesia's
\nshort-term benchmark interest rate to rise steadily to as high as
\n11 percent this year -- and this will impose additional burdens
\non businesses.<\/p>\n
The government, therefore, should reduce its bureaucratic and
\nregulatory costs and step up the battle against corruption to
\nhelp businesses cut their production costs.<\/p>\n
Without significant reduction in bureaucratic and regulatory
\ncosts and illegal levies, many businesses may not be able to
\nweather the strong inflationary pressures and higher interest
\ncosts within the next few months. This in turn could cause many
\ncredits to turn sour, consequently affecting the still fragile
\nbanking sector and setting off a vicious circle within the
\neconomy.<\/p>",
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"sponsor": "Okusi Associates",
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