Govt bows to protests

Govt bows to protests

The government's decision on Monday to roll back the price
hikes for three of the most widely used fuels and to grant
industrial users of electricity a 2.5 percent discount on their
monthly power bills might reduce tension and mass protests but
will certainly damage the credibility of its policy-making
ability.

The market will be increasingly nervous about any tough
measures the government might take, fearing that the government,
faced with mass demonstrations, could easily bow to them, or
cancel or defer its policies. Such a policy inconsistency would
make it much more difficult and uncertain when doing business.

The dilemma, though, is that simply ignoring the nationwide
demonstrations, which entered their third week on Monday, could
embolden mass opposition to the President Megawati government.
The mounting protests could threaten political stability with
damage much more devastating than the Rp 19 trillion (US$2.1
billion) in subsidies that would have been saved through the fuel
price increases earlier this month.

Succumbing to the wave of raucous demonstrations, the Cabinet
decided to reduce the price hike for automotive diesel oil from
22 percent earlier this month to 6 percent, for industrial diesel
oil from 23 percent to 9 percent and for kerosene for big
industrial users from 28.7 percent to 17.65 percent. However, the
price of regular leaded gasoline and industrial fuel and the
subsidized price of kerosene for households and small businesses
were maintained at their pre-January levels and the average 15
percent rise in telephone rates was postponed last week.

The price decrease will, in theory, reduce the inflationary
impact on industrial production and public transportation costs.

However, there is still a big question as to whether the price
hike rollback will be politically acceptable and placate
protesters, who have been demanding total cancellation of the
price rises in utility and telephone calls.

The government's decision in January 2002, to float the price
of domestic fuel on the international market in Singapore, has
indeed placed the government between a rock and a hard place due
to the high vulnerability of the oil market to political
conditions in the Middle East, the world's largest oil producer.

When the international oil market remained fairly stable
within a short range of price movements, as it did throughout
last year, monthly price adjustments were politically acceptable
and economically painless.

However, the monthly price adjustments earlier this month were
quite painful, as international oil prices have been rising
steeply due to the expectation of a U.S. attack on major oil
producer Iraq and the oil workers' strike in Venezuela.

Much has been said about the government's mistakes: The bad
timing of the simultaneous price hikes and the social and
political climate within which such tough measures were
announced, virtually ignoring the public's sense of justice with
regard to sharing the burdens inflicted by the economic crisis.

The government seems to have realized its grave mistakes, as
can be seen from its decisions to reduce the steepness of the
price hikes and defer the rise in telephone rates.

Hopefully, the two factors behind the oil price spiral that
are entirely beyond the government's control will be resolved
soon, otherwise any contingency fund reserves the government
still holds will be insufficient to finance fuel subsidies.

The government also reiterated last week its resolve to
emphasize justice in its dealings with the largest corporate
debtors.

Even though the government's track record in combating
corruption and dealing with the largest debtors has so far been
terribly disappointing, it would still be well advised for its
critics and protesters to give the government the benefit of the
doubt. After all, politics is a game of ironing out compromises.

Insisting on wholesale cancellation of the price hikes, let
alone continuing mass street demonstrations, would only make
things murkier, injecting the factor of uncertainty into the
political situation. This, in turn, could depress the rupiah
exchange rate and consequently further increase fuel prices and
foreign debt servicing at the expense of government stimulus
spending and social safety net programs. It would be almost
impossible to do business viably under a wildly fluctuating
exchange rate.

A weakening rupiah amid the sharp upward trend in
international oil prices would certainly deal a double blow to
the economy, driving more people into absolute poverty and
leaving the economy in a seemingly hopeless position.

On the other hand, however, the mass protests should serve as
a final warning to the government that policy measures that may
seem economically sensible and rational are politically
unacceptable in the absence of justice and an equitable sharing
of burdens.