Preparing public for higher fuel prices

Vincent Lingga, Jakarta

While economic rationale was initially the main demand arising from the plan to increase fuel prices, discussion is now focused on how to make the painful measure politically acceptable to the House of Representatives and palatable to the general public.

Virtually no one will argue against the economic necessity to cut the huge fuel subsidies, most (80 percent) of which have been enjoyed by people of the middle- and high-income brackets.

Fuel subsidies, which could explode to over Rp 70 trillion (US$7.8 billion) this year, also cut into the budget for poverty alleviation and other social safety net programs, and threaten fiscal sustainability.

Even more damaging is that subsidies encourage gross inefficiency in fuel use -- while the country has now become a net oil importer -- hinder the development of alternative energy and make export smuggling a highly lucrative business.

However, as the government experienced in early 2003, what had been established as economically rational and approved through a national political consensus at the House was not automatically accepted by the general public.

The government in late January, 2003 was forced to scale back the fuel price hikes it introduced early that month due to a massive wave of demonstrations, thereby damaging its policymaking credibility.

Public acceptance, which is the key to the effectiveness of the upcoming fuel-price increase to achieve its objectives, will depend on whether the reform can be promoted as fair.

Therefore, the bold move to slash fuel subsidies, which is expected before the end of next month, cannot be conducted as a single, isolated measure. It must be introduced in a package with other programs to ensure fairness in sharing the burden and to build a conducive environment for rational public opinion. .

And the price increase should not be so steep as to unduly shock the economy.

This is what the government has been preparing for the last few weeks, though the process has been rather slow and haphazard.

The government is trying to establish fairness through the protection of the poor from bearing the brunt of the higher prices. The government has said it will maintain subsidies for kerosene, the most widely used fuel in poor households.

A Cabinet meeting last week decided to increase budgetary appropriations for helping poor families bear the higher prices to almost Rp 18 trillion from Rp 7.3 trillion originally allocated. These funds will be used for health services, education, rice subsidies, rural infrastructure and public housing.

But public acceptance also depends on the government's willingness to take on its full share of the burden through minimizing waste and inefficiency caused by corruption and by truly behaving and acting out of a real sense of urgency and crisis.

The government should go all out to convince the people that the fuel-price hike is really for their benefit, otherwise a new bout of social unrest could surface at the expense of economic and political stability.

The government needs to establish a reliable mechanism for ensuring that the poor are fully protected from the additional burdens to be inflicted by the new fuel-pricing policy -- that is, that the remaining subsidies reach their target beneficiaries.

Encouraging, though, is that the government already has a fairly comprehensive map of the country's poverty pockets so that the various forms of assistance have a better chance of reaching their target beneficiaries.

However, the government and business leaders are yet to sit down and calculate the impact of the higher fuel prices on production costs for goods and services, and the central bank needs to design appropriate monetary policies to manage anticipated inflationary pressures.

These preparations are all necessary to prevent a reaction of panic. At a time when many people are still suffering the brunt of the economic crisis and millions of others are either unemployed or underemployed, additional burdens stemming from higher fuel prices could easily incite public anger.

The absence of justice and an equitable sharing of burdens could sabotage the whole reform movement.

Massive street demonstrations, such as those in early 2003, would only make things murkier, increase uncertainty and affect political stability. This in turn could press down the rupiah exchange rate and consequently further increase fuel prices and foreign debt servicing at the expense of government spending on social safety net programs.

Moreover, it would be almost impossible to do business under a wildly fluctuating exchange rate.

There are only a few weeks left for the government to consult the House about the planned fuel-price hike, prepare the business community to cope with its consequences and sell the idea to the general public.

Time is not on the government's side. Delaying the measure would only create uncertainty, breed speculation and further damage the government's policymaking credibility.

The writer is a senior editor of The Jakarta Post.