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.