More hardship ahead

More hardship ahead

We are horrified simply by wondering how the economy, still
reeling from the meltdown of the rupiah and punitively high
interest rate, will weather the havoc and social turmoil, which
is most likely to be triggered by the bold fiscal measures
scheduled for next month.

We cringe when we imagine the additional suffering that will
fall on the people with the series of price hikes, which will be
set off by the planned increase of 30 percent in fuel prices, 20
percent in electricity and telephone rates and 2.5 percentage
points in the rate of the value-added tax in the first half of
next month.

It does not matter if the painful measures, which were
proposed to the House of Representatives on Monday as part of the
massive amendments to the 2001 state budget, will accelerate the
fall of President Abdurrahman Wahid's government. After all, the
present government no longer has anything to lose -- in the way
of popularity, credibility and legitimacy -- by recommending such
bold moves. What really counts now is how the new government will
have enough credibility to ask for public support to manage the
implementation of the harsh measures.

No one would argue against the urgent need for preventing the
budget deficit from exploding at an unmanageable level. Fuel
prices should be raised, otherwise fuel subsidies, which were
originally estimated at Rp 41.3 trillion (US$3.6 billion), would
balloon to almost Rp 70 trillion, due to the weakening rupiah and
higher-than-estimated international oil prices. Moreover, quite a
portion of the subsidies is always enjoyed by well-off consumers,
and underpriced fuel has been causing a lot of wasteful use and
creating lucrative opportunities for smugglers.

The concern here is the severely limited time available for a
nationwide information campaign to sell the painful measures to
the public and prepare the business sector and bureaucratic
institutions for digesting the bitter medicine. One should
remember that the budget amendments will also include the
reduction of operating expenditures by Rp 5 trillion and
investment spending by Rp 3.3 trillion.

The greatest concern though is the social safety net program
to help protect the poor from additional pains resulting from the
harsh fiscal measures. The Rp 1.2 trillion the government will
spend specially on poor families to help cushion them from the
additional sufferings incurred by the price increases could be
wasted if a foolproof mechanism or system for distributing the
funds through social compensation in education, health and rural
infrastructure is not put in place.

In fact, the government's failure to establish an effective
system to execute social safety net programs was the main reason
for the World Bank's decision last December to cancel the
disbursement of the second $300 million tranche (Rp 3.3 trillion)
of its $600 million loan for poverty reduction in the country.

It is therefore most imperative that the House deliberations
on the proposed budget amendments focus on how to phase in the
painful measures without creating havoc on the macroeconomic
condition and triggering social turmoil and a labor revolt.

One thing, though, is clear. The measures can no longer be
postponed, otherwise a larger fiscal crisis will ensue, causing
the government to default on its domestic and foreign debts. It
should also be realized that no matter how the measures are
phased in, they will surely cause a lot of pain. It will
therefore be helpful if the public are made to understand that
the pains are being shared fairly and to believe that the
sufferings will eventually lead to better economic condition.

Here lies the pivotal role of a credible government, which
will hopefully emerge within the next few weeks. The role of the
House members is equally crucial. Therefore, besides discussing
preparations for the implementation of the bold moves, the House
deliberations, within the next one to two weeks, should also aim
at building a favorable public opinion and creating public
understanding.

As the people are now putting up more sacrifices, it is the
turn of Indonesia's international creditors, most notably the
International Monetary Fund, which is leading a $5 billion
bailout program for the country, the World Bank and Japan, to
come up with their contribution to help the government and nation
navigate through the severe turbulence ahead.

This is surely another highly critical time in the life of the
nation, an emergency situation that calls for contingency
measures on the part of Indonesia's international friends.