The fuel price debate<\/p>\n
The World Bank's suggestion to the Indonesian government to
\nincrease domestic fuel prices is only one of the fiscal
\ntightening measures it recommended recently to reduce aggregate
\ndemand and the risk of economic overheating. But given the
\ncentral role of fuel in all economic activities and since any
\nrise in fuel prices has an immediate and direct impact on the
\nwhole population, the suggestion has naturally incited a most
\nheated debate.<\/p>\n
The government and politicians who are geared up for the
\ngeneral election next year obviously do not see any political
\nviability in the suggestion which, given the country's economic
\ncondition, actually makes a lot of sense.<\/p>\n
However the World Bank has apparently learnt from its
\nexperiences in monitoring Indonesia's policy-making environment
\nin the past, in that it knows the government has overruled
\npolitical considerations in taking bold, yet rational economic
\nmeasures. For example, the government increased fuel prices by
\n17.7 percent and electricity tariffs by 20 percent in mid-July,
\n1991, only about 10 months before the 1992 general election. Fuel
\nand electricity prices were raised again by a range of 10 to 27
\npercent in January, 1993, only two months before the Presidential
\nelection by the People's Consultative Assembly in mid-March.<\/p>\n
There are, however, several reasons as to why the suggestion
\nfor a fuel price increase is not seen as critically urgent at the
\nmoment. Indonesia's current economic condition is not as bad as
\nat the time of the price increases in 1991 and 1993. Moreover,
\ndomestic fuel prices are now, by and large, on par with those in
\nneighboring countries. In fact, the government expects Rp 827.8
\nbillion (US$355 million) in profits from domestic fuel sales in
\nthe current fiscal year. Even though domestic fuel sales in April
\nrequired Rp 54.3 billion in price subsidies because the crude oil
\nprices averaged $19.21\/barrel in April, (much higher than the
\n$16.50 estimated in the stage budget), the bottom line for the
\nwhole year may still be positive. The fact is that the higher-
\nthan-estimated oil prices will also increase government oil
\nrevenues and these additional receipts can fund any subsidies
\nincurred.<\/p>\n
But we also reckon that the government does not want to risk
\neither any public upheaval in the run-up to the next general
\nelection or stronger inflationary pressures at a time when it is
\ntrying very hard to keep the inflation rate at the low range of
\nthe single-digit level.<\/p>\n
These factors do not, however, reduce the essence and
\nsignificance of the recommendation. Instead, the proposed fuel
\nprice increase should be seen in the broader context of the
\nimperative need to reduce aggregate demand in order to prevent
\nthe current account deficit from exceeding the estimated $8.7
\nbillion, or almost 4 percent of the gross domestic product. The
\nrecommended measures also include the reduction of public
\nspending on telecommunications and power generation, raising
\nforestry fees, imposing a moratorium on personnel, raising
\nproperty assessments to increase receipts from the property tax,
\nslowing down the growth of personnel spending and developing
\nbetter sources of non-tax revenues, fees for services and user
\ncharges.<\/p>\n
The strongest message behind the suggestion for tighter fiscal
\nand monetary measures is that Indonesia now needs, more than
\never, sufficient capital inflows to finance the big current
\naccount deficit. But foreign capital will keep flowing in only if
\nthe country is able to keep the deficit within a sustainable
\nlevel. Any developments, such as higher-than-estimated imports
\ngrowth, which will expand the deficit in excess of the tolerable
\nlevel will not only discourage further capital inflows but may
\nalso trigger a wave of capital flight. This would have
\ndevastating repercussions.<\/p>\n
The message, we think, is quite relevant especially in the
\nrun-up to the coming general election, a period in which many
\ngovernments are often tempted to distribute political goodies at
\nthe expense of prudent macro-economic management.<\/p>",
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