Fuel for debate
The arguments made by several factions at the House of Representatives to support their stubborn demands for the total cancellation of the March 1 fuel price hikes not only miss the whole point of good energy policy and prudent fiscal management but also have little to do with what they claim to be the interests of the people.
House members who have been campaigning for an outright rollback of the new fuel-price policy could not have been so ignorant of the strategic importance of gradually reducing fuel subsidies for the long-term good of the economy and for developing energy security, which is as vital as food security.
The current government could choose the easy way, taking the populist measure by continuing the wasteful subsidy spending at the risk of leading the economy into a much more devastating crisis within two to three years.
A subsidy is a future tax and consequently burdens the economy and a fuel-price subsidy is even more damaging because it causes the misallocation of scarce resources. Instead of helping the large poor segment of the population, such an across-the-board subsidy benefits the middle and upper classes more -- those who own motor vehicles.
The economic rationale of gradually bringing fuel prices to their real economic cost has been so obvious that it has intermittently been introduced since the 1980s. Between 1998 and 2004 alone, fuel prices have been raised 14 times.
Take for example, the development of alternative energy resources. Our economy's increasingly heavy dependence on subsidized fuel has hindered the development of geothermal and natural gas for domestic use. The country has more than 150 trillion standard cubic feet of proven natural gas reserves, but the development of domestic gas distribution networks has been made commercially unfeasible by the abnormally cheap fuel.
Conveniently maintaining the domestic fuel prices at their pre-March 1 levels would also cause a most devastating impact on the fiscal sector in that the state budget deficit would explode to an unmanageable level. This would breach the fiscal guidelines the House has imposed on the government.
An unsustainable fiscal deficit would steeply increase the country's sovereign risks, which in turn would sharply hike the interest charges of the more than Rp 610 trillion (US$68 billion) of bonds the government has issued to bail out the banking sector. Higher sovereign risks would also adversely affect the interest payments on the Rp 50 trillion worth of new rupiah and international bonds the government plans to float this year to plug the budget hole.
Yet a more damaging impact of perceived high sovereign risks would be the dumping of government bonds in the secondary market by jittery investors. This is not an exaggerated risk because the oil price assumed for the estimated Rp 40 trillion in fuel subsidies this year after the March 1 price increase is US$35 a barrel, while the actual international crude oil prices, which are now hovering at around $50 a barrel, will most likely average $40 a barrel for the whole year
Protracted debates about the March 1 fuel price policy have diverted the attention and resources of the government from the much more urgent task of managing the distribution of a relief package for the poor and ensuring the smooth distribution of essential commodities to control the inflationary impact of the policy.
We wonder what is the real agenda of the party that led the opposition to the fuel price hike, the Democratic Party of Struggle (PDI-P). It was the PDI-P leader, the former president Megawati Soekarnoputri, who should have bitten the bullet, lifting the subsidies in early 2004.
If the PDI-P's motive is really to serve the interests of the people, they should campaign for a more effective mechanism for distributing the aid package and help scrutinize the government's fuel distribution scheme to prevent speculation and smuggling.
If the fuel-price hike opponents truly want to prevent those on the brink of absolute poverty from plunging into the abyss, they should analyze and critique the government's pro-business policies to create jobs, or come up with feasible alternatives of their own.
"Harassing" the government with pointless arguments and unfeasible alternative policy instruments to fuel-price hikes could cause a prolonged political deadlock and continued street demonstrations at the expense of social, political and economic stability.
However, this stalemate should also prompt the government to speed up an independent audit of the refining and distribution costs of the state oil monopoly, Pertamina, to make its fuel pricing more credible.
A credible pricing policy would make the political and economic environment more conducive to floating fuel prices -- except kerosene for household use -- in line with those of our neighbors, as was done in 2002. This would shield the government from the political strife it must weather every time local prices have to adjust to international ones.