Biting the bullet

Biting the bullet

We should commend President Susilo Bambang Yudhoyono's
determination to make the unpopular-but-necessary decision to
forge ahead and increase fuel prices. The increases will enable
the government to allocate a larger share of resources to poverty
alleviation and improve public services and other basic
infrastructure in the country.

However, the effectiveness of this reform measure, which
should have been taken by then-president Megawati Soekarnoputri
in January last year, depends very much on leadership. It has
nothing to do with popular legitimacy, as Megawati's failure to
get reelected last September has convincingly proven.

But mishandling the policy, which removes the subsidies that
affect the middle- and upper-income groups to help the poor,
could still trigger massive street demonstrations and cause a
social and political backlash at the expense of macroeconomic
stability. The potential damage of such a backlash should not be
belittled, given the lack of a nationwide, well-coordinated
campaign to explain to the general public why prices will go up.

The government is right in arguing that it no longer requires
approval from the House of Representatives to raise domestic fuel
prices because the 2005 state budget, which was approved by the
House late last year, allocates only Rp 19 trillion (US$2.1
billion) for the fuel subsidies, compared to an estimated actual
need of almost Rp 60 trillion. Even this estimate is considered
by many analysts to be conservative because the $35 a barrel
average crude oil price used as the basis for the fuel prices
could end up averaging at about $40 a barrel for the whole year.

Most analysts have concluded from the empirical evidence of
the fuel price hikes between 2000 and 2003 that if future hikes
are well managed they would not cause inflation to spiral out of
control. They estimate that an average 30 percent price increase
would cause inflation to increase by only between 1 and 1.2
percentage points, bringing up inflation for the whole year to
about 7 percent.

Business leaders have estimated that a 30 percent rise in fuel
prices would increase the production costs of goods and services,
including transportation by 15-20 percent.

But all these assumptions about the moderate impact of higher
fuel prices depend on the government's ability to sell the
increases to the public; on people's perceptions of the fairness
of the increase and of whether the government is acting out of a
real sense of urgency and crisis.

Unfortunately, the government has done little to explain the
increases and win over the public.

It seems to have wrongly assumed that since most of the fuel
subsidies have always been enjoyed by the middle- and top-income
segments of society that it needed only the understanding and
support of the common people for the move. But the government
should realize that within the political scheme of things here it
is not the poor majority but the middle- and top-income groups
that dominate the public opinion-making process. It is also
businesspeople who could sabotage the reform policy through
speculative measures. Vested-interest politicians in the House
could make a lot of noise, confusing the issue to advance their
hidden political agenda.

The House has insisted that it would support higher fuel
prices if the government can guarantee that all the compensation
funds for the poor reach their target beneficiaries, if the
inflationary impact is well controlled and if the government
works to stop waste and inefficiencies in fuel distribution.

While these requirements are important ones, they cannot be
fulfilled overnight. It is therefore unreasonable for the House
to impose these demands as the main preconditions of support of a
badly-needed reform that has so long been postponed.

The government should indeed work harder to enlighten House
leaders, university students, the media and other opinion leaders
about the wider scope of the changes.

However, most important is for the government to improve
inter-ministerial coordination to ensure that the compensation
funds accrued from the rise in fuel prices reach their target
beneficiaries, that the supplies of essential commodities remain
adequate and their distribution remains smooth to prevent
excessive price increases. All this would be necessary to prevent
an excessively panicky reaction of the market.

More concerted efforts to prevent the waste and inefficiency
caused by corruption -- bringing high-profile graft suspects to
court within the next few weeks, for example -- would convey a
clear message that the government was acting out of a real sense
of urgency and crisis.

Increasing fuel prices are always likely to cause some
protests and demonstrations but such rallies are likely to be
short-lived if the government goes all out to ensure a smooth
introduction.