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.