Slashing the fuel subsidy<\/p>\n
Barring any major disturbances to Indonesia's social and
\npolitical stability, the market should react positively to the
\ngovernment's bold move last week to raise domestic fuel prices by
\nan average of 125 percent, which in turn will lead to improved
\nconfidence in the country's economic outlook.<\/p>\n
While bold this policy will be painful for the majority of
\nIndonesians, as the cost of living will rise steeply and
\ninefficient businesses that depend on subsidized fuel might have
\nto close down, leaving more people out of work.<\/p>\n
The fuel price increases can be expected to initially trigger
\ndisproportionately steep hikes in the prices of basic foods such
\nas rice, fish and vegetables and in transportation fares, lifting
\ninflation to as high as 11 percent this year, above the earlier
\nprojection of 9 percent.<\/p>\n
The prices of goods and services will rise, especially with
\nRamadhan days away, the Idul Fitri holiday next month and
\nChristmas in December.<\/p>\n
However, if the government manages to maintain adequate
\nsupplies and ensure the smooth distribution of goods, the rate of
\ngeneral price increases should be proportional to the role of
\nfuel in the respective production costs of the goods. Any panic
\ncan be expected to recede after a few weeks, with the market
\nreturning to a new equilibrium after absorbing the impact of the
\nhigher fuel prices.<\/p>\n
The pain of the new fuel policy can be contained if the
\ngovernment fully implements its package of fiscal incentives and
\nreform measures introduced on Saturday.<\/p>\n
But it is simply a relief now to know that by cutting the
\nmassive fuel subsidy, the government will be able to channel
\nmore funds directly to the poorest segment of society through
\ndirect cash payments and increased spending on basic health
\nservices, education and rural infrastructure.<\/p>\n
The short-term pain of this policy is better than allowing the
\nwasteful fuel subsidy to lead the economy into a new crisis that
\ncould be much more devastating than the economic fiasco of 1998,
\nbecause of an unsustainable fiscal deficit that would increase
\nthe sovereign risks of the government.<\/p>\n
Higher sovereign risks would damage market confidence in the
\nRp 650 trillion (US$65 billion) worth of bonds the government has
\nthus far issued, including over Rp 400 trillion to recapitalize
\nbanks, and depress the prices of the Rp 56.3 trillion worth of
\nnew bonds the government plans to float this year to plug the
\nbudget hole and shore up the rupiah exchange rate.<\/p>\n
Many observers believe the fuel price increases announced last
\nweek are too steep to be absorbed given the current economic
\nconditions.<\/p>\n
However, the government has a good reason to raise the prices
\nof regular gasoline and automotive diesel oil to as high as 80
\npercent of market prices. This will discourage export smuggling
\nby narrowing the differences between domestic and market prices,
\nand will make it easier gradually to increase fuel prices fully
\nto market prices by January 2007.<\/p>\n
The market will reward the government's boldness with a
\nvirtuous circle, because the smaller fuel subsidy will enable the
\ngovernment to improve overall economic efficiency through larger
\ninvestments in infrastructure, public services and utilities.<\/p>\n
The protests, the criticism by analysts and the outright
\nopposition by many students to the new fuel price policy were
\nexpected. This is what democracy is all about.<\/p>\n
The public debates should serve to educate the public about
\nthe economics of commercial energy, to help people realize that
\nsooner or later they will have to pay for fuel based on its
\neconomic costs or suffer supply disruptions.<\/p>\n
Protracted, raucous street demonstrations will only divert the
\nattention and resources of the government from the much more
\nurgent tasks of managing the distribution of funds to the poor
\nand maintaining the smooth distribution of essential commodities
\nto control the inflationary impact.<\/p>\n
If the opponents of the new fuel policy care about the
\ninterests of the people they should help oversee the distribution
\nof the funds for the poor, and should see to it that the
\ngovernment fully implements its Oct. 1 package of deregulation
\nand reform measures to help people and businesses weather the
\ndifficult months ahead.<\/p>",
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"sponsor": "Okusi Associates",
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