Fuel price hike impact 'greater than expected'

JAKARTA (JP): The weekend fuel price increase could have a greater impact on the economy and the public than the government has anticipated, particularly amid the current social and political uncertainty, experts warned.

Economist Umar Juoro said that the fuel price increase would send inflation higher than projected which would in turn further erode consumer purchasing power.

"It (the fuel price increase) will create a greater burden on the people and will also cause a slowdown in economic activity," Umar said on Sunday.

The government raised fuel prices by an average of 30 percent on Saturday as part of measures to help limit the widening 2001 state budget deficit to a safer level. The government will also raise electricity rates by more than 17 percent early next month.

Srijanto Tjokro Sudarmo, an executive at the Indonesian indigenous businessmen association (HIPPI), also expressed concern about the impact of the fuel price increase on the public and the business sector.

"It is regrettable. Despite the already weak purchasing power of the people, they're still burdened with financing the (state budget) deficit," he said.

"The fuel price increase will create an intense negative impact on the development of a people's economy," he added.

The government, however, is confident that the public can cope with increase.

"The President expects that the people can cope with this. It (the impact) has been thoroughly studied by a (government) team," Adhie Massardi, spokesman of President Abdurrahman Wahid, told reporters on Saturday.

The government initially planned to raise the fuel price on Friday, however the move was delayed pending a final social and political assessment, particularly amid massive labor protests in major cities across the country.

Several economists warned the government to delay the fuel price increase, saying time was needed to publicize the new policy to avoid unrest.

Raising fuel prices has always been a politically sensitive issue in Indonesia. The downfall of former president Soeharto in 1998 was partly attributed to the fuel price increase in April that year.

Umar said that the fuel price increase would raise the inflation rate this year by 1.5 to 2 percentage points higher than the government's original projection of 9.3 percent.

He added that economic activity would also slow down due to the multiplier effect of the fuel price increase.

Umar said that the fuel price increase could trigger social unrest if the government failed to provide sufficient compensation to the people, particularly the poor.

The government has allocated around Rp 2.2 trillion in compensation for poor people badly affected by the fuel price increase.

The government will also provide compensation to operators of public transportation such as city buses so that the cost of fares does not increase.

Umar also said that the government must cooperate with the House of Representatives to deal with grievances from the public.

"The government can't face the protest alone," he said.

The House has given its approval to the government fuel price increase policy. Considering the current tension between President Abdurrahman Wahid and the House, however, it is difficult to imagine legislators defending the government against protesters of the fuel price increase policy.

The legislators had earlier asked the People's Consultative Assembly (MPR), the country's supreme legislature, to hold a special session to call for the President's accountability.

IMF

Meanwhile, the International Monetary Fund (IMF), which is providing a multibillion dollar bailout program to the country, cautiously praised the decision.

"We support the government's move on fuel prices but the compensation package for the poor is a very important element of it and we still have to study that," IMF senior representative in Jakarta John Dodsworth told Reuters.

"For long term sustainability, the issue of fuel prices has to be dealt with, but the timing is very delicate. Only the government can make that decision. We cannot make that decision," Dodsworth added. (rei)