Preparing public for higher fuel prices

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.