Government gears up to bite the bullet

Government gears up to bite the bullet

Vincent Lingga, The Jakarta Post, Jakarta

The initially negative market reaction to the policy agenda of
President Susilo Bambang Yudhoyono could soon turn into positive
sentiment as technical details on how and when the reforms will
be implemented begin to be unveiled on Monday.

The market, predictably, was disappointed with the package of
measures on fiscal and monetary management, energy and investment
Susilo unveiled last Wednesday because they lacked specifics and
were not as bold as expected.

Nothing was actually new about the "new policy directives" --
in fact they had always been central to the reform package
prescribed for Indonesia by the International Monetary Fund
between 1998 and 2003.

Many analysts were even puzzled over the circumstances in
which the policy agenda was decided. The package was first
deliberated in a plenary Cabinet session on Tuesday night but was
later fine-tuned by a smaller team of ministers on Wednesday.

The absence of chief economics minister Aburizal Bakrie from
the final process, and from the grandstanding ceremony in which
President Susilo announced the major policies in a nationwide
television address on Wednesday afternoon, raised many eyebrows
and strengthened speculation about an imminent Cabinet reshuffle.

Why did Susilo hasten the policy announcement without waiting
for the return of Vice President Jusuf Kalla? A move that
unnecessarily raised questions amid the mounting demand for the
replacement of the economic team of the Cabinet.

After all, Kalla, who chairs the economic team, had decided to
cut short his visit to China and entirely canceled his
engagements in Japan to be able to return to Jakarta on Thursday
morning.

Susilo's move could nevertheless be understood if it was set
against the immensely intense pressures he was facing due to the
steady melting of the rupiah since mid-August. This situation had
forced the President either to act immediately or at least to
decide on and announce something to help calm the market,
otherwise the crisis of confidence in the government's economic
management could have escalated into panic.

But the Cabinet meeting Susilo again convened on Thursday --
also attended by Vice President Kalla, chief economic minister
Bakrie and almost all members of the economic team seemed able to
repair some of the damage caused by the President's haphazard
showmanship the day before.

The more conducive would it have been for the rupiah and
macroeconomic stability if the technical details for the action
plan on fiscal and monetary management, energy and investment had
been voted on by the market as economically and politically
feasible.

The Cabinet's decision to propose to the House of
Representatives on Monday several scenarios on how to phase out
fuel subsidies, which could explode to almost US$14 billion this
year, is quite strategic. Such a move would prevent political
turbulence as observed last March, when the government raised
fuel prices by about 30 percent.

Anyway, the new fuel policy will exact major changes in the
current and next year's state budgets, and all this process has
to be approved by the House.

The President's directive that the gradual removal of fuel
subsidies should be started only after a credible social-safety
net mechanism to compensate the poor is in place is similarly
vital to prevent social unrest and to minimize protests and
demonstration. The government should indeed ensure fairness by
protecting the poorest segment of society from the brunt of
higher prices.

Therefore, as the President has hinted, the phasing out of
fuel subsidies could begin only after October. November (after
the Idul Fitri celebrations) may be the most appropriate time for
ushering in the painful measure because the government needs more
time to establish a credible social-safety net program and to
precondition the people to the brunt.

Raising fuel prices this month or in October (the fasting
month) after the 29 percent increase last March could be
political suicide for Susilo's government.

The next two months are more than enough time for the
government and the House to deliberate and agree on amendments to
the current and next year's budgets to accommodate the new fuel
policy.

The next few weeks also will be sufficient time for the
government, business leaders, including bus companies, to discuss
and calculate the impact of the higher fuel prices and work out
what additional reforms are still urgently needed to cut the
costs of doing business in order to offset the higher costs of
energy and to further stimulate investment.

The central bank needs more time to introduce additional
monetary measures to cope with anticipated stronger inflationary
pressures after October.

These preparations are all necessary to prevent a reaction of
panic. At a time when many people are still suffering from the
brunt of the economic crisis and millions of others are either
unemployed or underemployed, additional burdens stemming from
higher fuel prices could easily incite public anger.

Massive street demonstrations, such as those in early 2003 and
last March, would only make things murkier, injecting a factor of
uncertainty. This in turn could press down the rupiah exchange
rate and set off a vicious circle within the economy.