IMF warns public and business to be ready for new price hikes

A'an Suryana, The Jakarta Post, Jakarta

The International Monetary Fund "can understand" the government's decision to revise its recent price hikes policy, but warned that the public and businesses would eventually have to be confronted with the reality of higher fuel prices and electricity tariffs if it wanted to fix the ailing economy.

Visiting IMF senior adviser Daniel Citrin was quoted by Antara as saying on Tuesday that the delay was only a "temporary" measure to help keep prices at home stable.

He was speaking on the sidelines of the Consultative Group on Indonesia (CGI) donors meeting on the resort island of Bali.

The government on Monday decided to reduce the prices of automotive diesel, industrial diesel, kerosene for industries and to provide an electricity discount for industries and businesses. Prices of other fuel products remain unchanged.

The move followed nationwide protests over the government's decision earlier this month to simultaneously increase fuel prices, electricity tariffs and telephone charges by cutting expensive subsidies and help ailing state utilities. The phone charge increases were delayed last week.

Previous governments have provided expensive subsidies on fuel and electricity, creating a huge burden on the state budget.

But after the economy plunged into crisis in 1998, the government has no option other than to eliminate the subsidies to maintain a healthy budget and create sustainable economic growth.

The IMF, which is providing a multi billion dollar bailout package for the country, has argued that the expensive subsidies had largely benefited the rich and large businesses. It said the subsidies would be better off being allocated for financing infrastructure facilities and other development programs that would benefit the overall economy.

Many analysts have also said that the costly fuel subsidies had only benefited fuel smugglers.

The IMF also plays an important role in helping the country maintain international financial support.

The policy u-turn was made on the eve of the CGI meeting, which will decide on a fresh loan facility to help plug the 2003 state budget deficit.

The country's traditional donors are expected to question the government's latest decision during the two-day meeting.

The government has said the new fuel price level would be maintained until international oil prices, which have surged to around US$30 per barrel due to concern over the U.S.'s planned attack on Iraq and the strikes in oil exporting country Venezuela, had stabilized.

The soaring international oil prices would markedly increase fuel prices at home if the government did not provide subsidies.

The government said the delay in the fuel price hikes and discount for electricity tariffs would cost around Rp 1 trillion (around $112 million) per month. The government would use contingency funds in the state budget to cover the costs.

But it added that the 2003 state budget deficit would still be kept at a healthy level of around 1.8 percent of gross domestic product as originally projected. The government would discuss with the House of Representatives over the possibility of using windfall profits from oil sales to replenish the contingency fund.

Meanwhile, Center for Strategic and International Studies (CSIS) economist Hadi Soesastro said the revision of the utility price hikes was strong proof that the government lacked the strength to push through tough economic reforms.

He said the delay in the fuel price increase would not necessarily bring domestic prices at home lower, particularly on goods or services controlled by monopolies.

He criticized the government for failing to clearly explain to the public the importance of cutting the subsidies.