Fuel price hike policy causes confusion

Fuel price hike policy causes confusion

Moch. N. Kurniawan, The Jakarta Post, Jakarta

The government's new fuel price hike policy has created confusion
among economists and legislators as fear of soaring prices of
basic goods starts to haunt the public.

Centre for Strategic and International Studies (CSIS)
economist Pande Radja Silalahi feared the fuel price increase
would create new uncertainty as it could trigger hoarding and
high inflation.

"It's worse than I thought. The previous (fuel hike) policy
was simpler, clearer and better," he told The Jakarta Post.

Umar Juoro of the Center for Indonesian Development and
Economic Studies (CIDES) concurred, saying that since the
domestic fuel price would be set based on the international price
starting March, with the expectation of rising international oil
prices ahead, people would be tempted to start hoarding fuel
products and goods.

He predicted inflation to be between 12 percent and 13 percent
this year, compared to the government target of 9 percent.

"It is difficult for inflation to stay as a single digit this
year. Be realistic, we are now facing not only a fuel price hike,
but also an increase in electricity and telephone rates," Umar
said.

The economy last year was also hit by double-digit inflation
of 12.5 percent, forcing Bank Indonesia to keep interest rates
high, which created difficulties for cash-strapped businesses in
obtaining badly needed bank loans and in restructuring their
debts.

The government raised fuel prices by an average of 22 percent,
effective Thursday, and pegged most fuel products except kerosene
for households and small industry to prices in neighboring
Singapore.

Among the increases, the price of gasoline was increased to Rp
1,550 per liter from Rp 1,450 and kerosene for households and
small industries to Rp 600 from Rp 400.

The new prices will only apply until the end of February, and
starting March they will be set based monthly on the price of the
Mid Oil Platts Singapore (MOPS), although the government has also
set a floor price and ceiling price to anticipate sharp
fluctuation in the international price. The floor price and
ceiling price for premium gasoline, for instance, is set at Rp
1,450 and Rp 1,750.

The domestic fuel prices are now set equal to or at 75 percent
of the MOPS prices.

The government has said that the new fuel price hike was
necessary to help ease pressure on the state budget, heavily
burdened by the massive cost of bailing out weak banks.

The new policy is also vital to help end rampant smuggling of
subsidized fuel out of the country as set prices based on
international price would no longer provide the incentive for
people to smuggle fuel.

But raising fuel prices has been a politically sensitive issue
in the country where millions of poor people have suffered from
three years of economic hardship and where people had long been
used to heavily subsidized fuel during the authoritarian rule of
president Soeharto.

Legislators are also confused with the new fuel price hike
policy as the House of Representatives gave approval in November
last year for a 30 percent average increase in fuel prices for
2002, not an arrangement for fuel prices to be set based on fuel
prices in Singapore.

Husni Thamrin of the Golkar party said the House planned to
summon Minister of Energy and Mineral Resources Purnomo
Yusgiantoro next week to explain the complicated fuel prices
formula.

"The (new) scheme is out of track. We never made a commitment
to raise the fuel prices based on that formula," he said.

Legislator Budi Priyo Santoso sees the new policy as a
government trick to avoid consulting with the House in raising
fuel prices in the future.

"It's a trick of the government. Three months ago (November),
there was no discussion of such a plan, so my colleagues and I
were surprised with the new policy."

Elsewhere, Pande said that pegging the price of domestic fuel
products to prices in Singapore was ridiculous as the latter was
not even a major oil producer.