Political consensus on fuel

We should commend the House of Representatives for approving on Tuesday the government's plan to increase domestic fuel prices in light of concerted efforts to reduce fiscal deficit, increase fuel conservation and reallocate the subsidy from the middle and top-income bracket directly to the poorest segment of the society.

The House plenary session agreed, through a vote, to limit the fuel subsidy during the current fiscal year at Rp 89.2 trillion (US$9 billion), thereby enabling the government to allocate greater resources for poverty alleviation and improvement of public services and basic infrastructure.

The government has yet to set the amount of the increase to be made on Oct. 1 -- on top of the average 29 percent rise imposed last March -- but without the upcoming price increase, the total fuel subsidy would balloon to almost Rp 130 trillion throughout this year.

It is however, well advised for the government to realize that the conclusion of the national political consensus on the fuel subsidy allocation is only the first step within the most challenging and delicate process of biting the bullet.

Economic reform, especially as tough as the fuel-price increase, is never easy because it involves taking away rents that have built up in the economic system.

The painful measure, however economically rational it seems to be, will surely trigger massive street demonstrations which, if not well managed, could cause a social and political backlash at the expense of macroeconomic stability and set off "panic rises" in the prices of goods.

However, protest rallies would be short lived if the government goes all out to ensure a smooth phasing-in of the new fuel price policy without an excessive inflationary impact on the economy.

There are several conditions that will help smoothen the implementation of the painful measure.

First of all, the government must ensure, through inter- ministerial coordination, that the Rp 4.8 trillion in compensation funds already allocated for distribution during the last quarter of this year reach their targeted 62 million poor people.

The government should see to it that bus and trucking companies increase their fares only in proportion to the upcoming fuel-price rise. This will, however, be possible only if the companies are given some fiscal incentives, and the government reduces the regulatory and bureaucratic costs of their operations.

Any shortage of bus companies to transport revelers during the upcoming Idul Fitri celebrations in early November could trigger massive social unrest. Likewise, any disruption in the distribution of goods, especially during the next three months where inflationary pressures are seasonally very high, will set off an inflation spiral to sabotage the economic stability.

Manufacturing companies should also help maintain adequate supplies of essential commodities to prevent excessive price hikes during the period of the panic reaction a few weeks after the fuel price increase.

How good it would be for building public support for the bold fuel measure, if several big oil smugglers, crude oil stealers and embezzlers could be brought to justice within the next few weeks as this would convey a clear and strong message that the government does act out of a real sense of urgency and crisis.

The next quarter will surely be a tough period for all businesses as they have to weather a general price increase and face stronger demand from workers for pay increases at least to offset the rising inflation. The government should help these companies survive the turbulence without any massive layoffs.

It is also most imperative that companies pay their workers the annual Idul Fitri bonus because failure to give this socially-sensitive gratuity could trigger nation-wide protest rallies.

Most important, too, is that the size of the fuel-price increase to be announced on Saturday should be significant enough to avoid another wave of price hikes next year.

University students who usually are the vanguard in street demonstrations against fuel price increases should realize that price subsidies are actually a future tax that should be borne by the next generation. The huge burden of the fuel subsidy we now bear are the cumulative tax left behind by the previous governments.

Further postponing the long-delayed fuel-price increase will only add to the already heavy debt burdens of the next generation. Are the young generation willing to inherit a bankrupt economy?