Fuel politics

One could read many things into the government's decision to delay the raising of domestic fuel prices. Skeptics would accuse President Abdurrahman Wahid of resorting to populism. Others would see this as common sense. Whatever interpretation we use, it is clear that political considerations have prevailed once again, even though the economic considerations for hiking prices are so compelling.

The government said the decision to delay the hikes was taken because the political situation was not conducive. Labor demonstrations in some big cities in Indonesia this past week were originally held to protest against the government's policy with regard to severance or compensation payments, but some expanded into violent protests over the planned 30 percent average increases in fuel prices, starting on June 15.

We could extend this argument and link it with the fact that the People's Consultative Assembly (MPR) is planning to hold a special session on Aug. 1 to begin an impeachment process against President Abdurrahman. At a time when his popularity is at such a low ebb, now would be the worst moment for him to implement unpopular measures like increasing fuel prices.

If history is any indication, such a measure would amount to political suicide. President Soeharto's powerful regime collapsed in May 1998, barely a month after he tried to increase fuel prices. When he retracted the policy, the damage had already been done and the protests turned into uncontrollable, violent unrests. That, and the massive student protests against his regime, forced Soeharto to resign.

There is no doubt that fuel prices must rise sooner or later. Current prices, which are well below world levels, are indefensible, without bankrupting the government or the nation.

The government said the cost of subsidizing fuel, originally estimated at Rp 41.3 trillion (US$3.75 billion at current prices) in the budget year ending Dec. 31, could soar to over Rp 70 trillion because of a combination of rising world oil prices and falling rupiah exchange rate since January.

With the government hard pressed for money, it was forced to review its budget spending, and the fuel subsidy became an obvious target for the axe. The House of Representatives, which had blocked some of the government's economic programs in the past, endorsed with ease the proposal to increase fuel prices. Ultimately, however, it is the government, especially President Abdurrahman, that would have to carry the political risks.

It is not so much the timing, but the reason given, that is so very wrong about the government's decision to hike fuel prices.

The way the proposal was pushed through the House left the impression that the increase was authorized because the government was running out of money. The soaring cost of the fuel subsidy resulted not so much from the increase in world oil prices, but from the fall in the value of the rupiah.

The public would therefore perceive the fuel price hikes as resulting from the government's failure to defend the rupiah's value. In other words, they would feel they were being penalized for the incompetence of this government.

It would have been much more palatable had the government hammered the point home that fuel subsidies should be phased out because they have led not only to gross inefficiency in the use of scarce resources, but also because they had caused massive inequality. Since this is an across-the-board subsidy, the largest users of fuel are the chief beneficiaries. These include industrialists and the wealthier members of society. This is essentially a subsidy for the rich by the poor, which is morally as well as economically indefensible.

Putting the timing factor aside, any plan to raise fuel prices in the future should send the message that it is being done in the name of efficiency and equality, and never, as the case with the current plan, to plug the government's budget deficit.

Unfortunately for this administration, however, efficiency has never been part of its vocabulary. For the government to argue that fuel prices are being increased in the name of efficiency, it must lead the way in striving for the most efficient use of scarce budgets, especially at a time of deep economic crisis.

This week is a classic example. On the same week that the government was planning to increase fuel prices, which would mean more hardship for the people, aides to the President announced his plan for another one of his extravagant foreign trips, to Australia and the United States. It would be hard to find a government that is more insensitive than that.