Political consensus on fuel

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?