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.