Hostage to fuel subsidies

Hostage to fuel subsidies

While the government is stepping up its fuel-conservation
programs and strengthening their implementation, it should
continue preparations for removing, once and for all, fuel
subsidies next year, except for kerosene for household use.
Otherwise, the state budget will remain a "hostage" to these
wasteful spendings.

Certainly, raising again fuel prices within the second
semester, after the 29 percent increase in March, seems more than
politically unacceptable. Such a drastic measure could also
jeopardize macroeconomic stability.

Even so, the next few months should be more than enough time
to make the necessary preparations for floating our domestic fuel
prices (except kerosene for household consumption) on
international prices, as we did in 2002.

The government, therefore, should seize the momentum --
created by the current fiscal dilemma and the increasing public
awareness of the huge wasteful spending on fuel subsidies -- for
further conditioning the general public and the business
community to fuel prices at their economic costs and for
preparing the institutional mechanism needed to protect the poor
from the inflationary impact of higher fuel prices.

The most opportune time for the government to launch the new
fuel pricing policy would be the unveiling on Aug. 16 by
President Susilo Bambang Yudhoyono of the 2006 draft state budget
to the House of Representatives.

The 2006 budget proposal should clearly stipulate the
government's fuel pricing policy because, as the current fiscal
fiasco has shown, oil price volatility alone has created a chain
of impacts that require the revision of estimates not only of
fuel subsidies but also of state revenues, the rupiah exchange
rate, interest rates and social-safety net programs for poor
people.

Since the state budget is also a political communication
system conveying signals about behavior, prices, priorities,
intentions and commitments, it should address structural
imbalances between expectations and resources. The market would
be comfortable with a more realistic budget, meaning that the
total amount of money the government would spend would be closely
aligned to what is affordable over the current year.

This clear signal in turn would improve policy predictability,
which is important for the efficient and effective implementation
of policies and programs.

The market now is surely nervous about the looming fiscal
debacle because oil prices since January have hovered at US$55 to
$60 a barrel and the rupiah exchange rate against the American
dollar averaged Rp 9,556 for the first six months, while the
budgeted fuel subsidy of Rp 76.5 trillion (US$7.88) for this year
assumes an average oil price of $45, a rupiah exchange rate of Rp
9,300 and a total consumption of nearly 60 million kiloliters.

Finance minister Jusuf Anwar estimated early this week that
fuel subsidies could reach as much as Rp 120 trillion and could
push up the budget deficit to over Rp 35 trillion or 1.3 percent
of the gross domestic product. Such a degree of fiscal deficit is
not yet critical. However, allowing such wasteful subsidies --
most of which are enjoyed by middle to high-income consumers-- to
take up to 24 percent of total government spending, is fiscally
unsustainable and utterly unfair to the majority of people.

The era of cheap oil has ended and will not likely return.
Selling oil at its economic costs would not only stop wasteful
subsidy spending but also make the condition for conducive for
developing the other energy resources richly available in the
country such as geothermal, natural gas, coal and hydropower.
Price parity with our neighboring countries would also curb
export smuggling.

Proposing a totally new fuel pricing policy together with the
unveiling of the 2006 budget proposal by the President in his
address on the eve of National Day would provide the government
with adequate time to make all the necessary preparations for
making the social, economic and political climate conducive for
the policy.

Included among the preparations should be a more accurate
geographical map of the poverty pockets throughout the country so
that the distribution of aid for food, education, health and
rural infrastructure reaches its targets.

The next few months would also be sufficient time to further
enlighten the general public and politicians on the great
benefits to the whole nation if the huge spending on fuel
subsidies could be reallocated for education, health and rural
infrastructure development.

Government dialogs with businesspeople on how they should
manage with the new fuel pricing policy would help usher in the
new policy without causing panic.