A poisoned chalice?

A poisoned chalice?

Although slashing fuel subsidies should be at the top of
president-elect Susilo Bambang Yudhoyono's economic agenda during
the first 100 days of his administration, raising fuel prices in
November as recommended by the outgoing House of Representatives
(DPR) could be political suicide for the new government.

Increasing fuel prices only 10 days after the Oct. 20
inauguration of the new president, and at a time when consumer
demand for basic commodities is at its peak due to the Idul
Fitri, Christmas and New Year festivities, would surely be the
most effective way of causing major socio-economic upheavals. The
combination of stronger demand and higher costs could cause
inflation to spiral and shatter macroeconomic stability.

We therefore wonder about the true hidden agenda of the House
-- which is dominated by the Nationhood Coalition of the losing
candidate in the Sept. 20 presidential election runoff -- in
deciding suddenly to cut Rp 3.8 trillion (US$422 million) from
the Rp 63 trillion budget originally allocated toward fuel
subsidies for the 2004 fiscal year.

The House, which will end its tenure later this week,
recommended three alternatives last Wednesday for the incoming
government to meet the Rp 3.8 trillion shortfall in this year's
fuel subsidy, which, actually, is still the responsibility of the
current government.

Certainly, none of the three alternative measures -- raising
fuel prices in November, cutting down fuel consumption and taking
tough efficiency measures -- would be feasible within the short
time available for the new government soon after its
inauguration.

No one will argue against the economic necessity to cut the
huge fuel subsidies, most of which was enjoyed by people of the
middle- and high-income bracket. Fuel subsidies also cut into the
budget for poverty alleviation and other social safety net
programs, and threaten fiscal sustainability.

Yet, even more damaging is that subsidies encourage gross
inefficiency in fuel use, while the country has now become a net
oil importer.

The new government, however, cannot simply raise fuel prices
to market levels, irrespective of the strong political mandate
the new president received in the runoff. This painful measure
requires a set of preconditions to prepare the people and
business community.

The new government needs some time to establish a reliable
mechanism for ensuring that the poor are fully protected from the
additional burdens to be inflicted by the new fuel-pricing policy
-- that is, that the remaining subsidies really reach their
target beneficiaries. The government and business leaders also
need to sit down and calculate the impact of the new fuel-pricing
policy on production costs for goods and services; the central
bank needs to design appropriate monetary policies to manage
anticipated inflationary pressures.

These preparations are all necessary to prevent a panic in
response to such a drastic policy.

At a time when many people are still suffering from the brunt
of the economic crisis and millions of others are either
unemployed or underemployed, additional burdens stemming from
higher fuel prices could easily incite public anger.

A favorable public opinion climate is therefore vital to usher
in such a policy. Public acceptance, which is key to the
effectiveness of the measure to achieve its objective, will
depend on how the general public will perceive the painful policy
as fair, necessary and effective.

Raising fuel prices therefore cannot be conducted as a single
measure. It must be introduced in a package with other programs
to ensure fairness in sharing the burden and its effectiveness in
achieving its objective.

But the public perception of fairness also depends on the
people's impressions as to whether the government is taking its
full share of the responsibility by minimizing waste and
inefficiency caused by corruption, and by behaving and acting out
of a real sense of urgency and crisis.

It is certainly rather impossible for the new government to
build these preconditions for raising fuel prices in November. We
think it is better the government to draw on part if its reserves
at Bank Indonesia to cover the Rp 3.8 trillion shortfall.

January, the start of the 2005 fiscal year, is the most
appropriate time for introducing a new fuel-pricing policy. By
then, the incoming government will have had at least one month to
finalize the 2005 state budget with the new House in November,
and another one month to precondition the general public to the
new measure and preparing adequate institutional capacity for its
implementation.