IMF hails 'courageous' move to cut fuel subsidies

IMF hails 'courageous' move to cut fuel subsidies

Agence France-Presse, Singapore

The International Monetary Fund (IMF) on Wednesday welcomed Indonesia's "wise and courageous" decision to cut fuel subsidies and urged other countries to do the same.

Volatile world oil prices remain a risk to projected robust Asian economic growth this year and next, and maintaining fuel subsidies will hurt countries in the longer term, the IMF's top economists warned at a forum in Singapore.

But they said any reduction should be calibrated and well explained to the public.

In a move to avert a potentially explosive fiscal crisis, cash-strapped Indonesia said Saturday it was more than doubling the average cost of fuel, effectively slashing fuel subsidies.

The decision sparked street protests but the IMF said the move should shore up investor confidence in the country.

"This has been an extremely good step in the right direction," IMF chief economist Raghuram Rajan told the Singapore Press Club.

"The subsidies were weighing on the government's fiscal account and there were concerns being expressed by both international and domestic investors," he said, adding that Jakarta's subsequent move to raise interest rates was aimed at warding off inflation.

"I think the problem when governments absorb the price of fuel ... the question is when do they stop? And with Indonesia it was amounting to 3.0 percent of GDP (gross domestic product) approximately.

"We welcome this step and we think it is something that many countries in the region should adopt."

Rajan said that "unfortunately in a number of economies in emerging Asia, governments are getting trapped by a populism that they simply cannot afford" and stressed it was "important to recognize that this must change."

The IMF's deputy director for Asia, Wanda Tseng, described Indonesia's move as a "wise and courageous decision".

She said the subsidies were becoming "unsustainable" as they accounted for 25 percent of government spending.

Tseng also put Asian economic growth at about 6.0 percent this year and next, but both she and Rajan said oil prices remained a risk.

"The outlook for the region is favorable ... But looking forward, if international prices remain high, the impact on the region's outlook will certainly be increasingly felt," Tseng said.

Benchmark oil prices touched historic highs of above 70 US dollars a barrel on August 30 after Hurricane Katrina hammered the oil-producing US Gulf Coast.

Although they have fallen to around 64 dollars a barrel on Wednesday, analysts said prices remained highly volatile.

Among the reasons why soaring oil prices have had a limited impact on Asian economic growth so far are heavy government subsidies which have kept fuel costs artificially low, Tseng said.

Asian countries with subsidized fuel costs need to increase prices by around 40 percent if the real price of oil as of end August is to be reflected, she added.

The IMF economists said governments should fully explain to their people that oil prices are something they do not control, while providing targeted help to the poorest segments of society.

"The problem is that the longer you stay away from doing it, the bigger the mountain that you have to pass through (to consumers)," Rajan said.

Tseng said it was still too early to measure the impact of the reduction of the subsidies on the Indonesian economy but said it should boost investor confidence.

"I think the government has put on a very solid foundation for further growth and further development of the economy," she said.

"And on the energy side, I think it's very important in terms of energy conservation and also investments. Indonesia lags in investment in the oil sector and I think this is a positive step from that point of view."