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.