Due to This Institution's Advice, Indonesia's President Raised Fuel Prices

Jakarta - Increases in fuel prices often trigger public controversy. In Indonesia’s history, the government once raised fuel prices after receiving advice from the International Monetary Fund (IMF).

This occurred in 1998 when Indonesia was facing a severe monetary crisis that began with turmoil in the Thai Baht. According to Jan Luiten van Zanden in Ekonomi Indonesia 1800-2010 (2012), the crisis caused the rupiah exchange rate, previously around Rp2,000 per US dollar, to plunge to around Rp10,000-16,000 per US dollar.

Consequently, the prices of basic necessities rose, causing public suffering. To overcome the crisis, the government accepted IMF assistance. On 15 January 1998, Indonesia agreed to a Letter of Intent (LoI) signed by President Soeharto and the IMF.

One of the key points in the IMF programme was the reduction of energy subsidies. The IMF stated the government needed to adjust state-controlled prices to ease the fiscal burden. “To reduce economic distortions and strengthen the fiscal position, the government intends to adjust administered prices with the aim of gradually eliminating fuel and electricity subsidies,” the IMF wrote in the document.

This recommendation was subsequently implemented by the government through increases in fuel prices and electricity tariffs. Based on reporting by Kompas (4 May 1998), the government announced an average fuel price increase of 46.3%, whilst electricity tariffs rose by up to 60%.

Through Presidential Decree No. 69 of 1998, Soeharto then declared that from 5 May 1998 at 00.00 WIB, the price of Premium rose to Rp1,200 per litre, kerosene to Rp350 per litre, and diesel to Rp600 per litre. The increase immediately spread to various economic sectors, including public transport fares and the prices of basic necessities.

However, the policy intended to improve the fiscal condition instead sparked public anger. Amid an economic situation already depressed by the crisis, the fuel and electricity price hikes worsened the burden on people’s lives.

Economist Boediono in Ekonomi Indonesia Dalam Lintasan Sejarah (2016) noted that after the IMF programme was implemented, Indonesia was actually dragged further into economic and political crisis. Instead of accelerating recovery, the reduction of fuel subsidies helped trigger social unrest that further worsened the national situation.

The growing wave of protests eventually culminated in a political crisis. Only a few weeks after the fuel price increase, Indonesia was rocked by major riots in May 1998 that led to Soeharto’s resignation on 21 May 1998, ending his 32-year rule.