Rising fuel price benefit economy: Economist Sadli

Urip Hudiono, The Jakarta Post, Jakarta

The government's policy to increase fuel prices will eventually benefit the country's economy by helping it achieve healthier economic growth, an economist says.

"Higher fuel prices will not turn the nation's economy into a catastrophe," senior economist M. Sadli told a discussion on Sunday. "Indonesia has experienced fuel price hikes 25 times during the past six decades and has still managed to overcome them while at the same time maintaining a decent economic growth of at least 5 percent."

Apart from stable growth, Sadli said, Indonesia with a current annual income per capita of US$1,000 is now classified as a middle-income country and its economy was less susceptible to inflation shocks from fuel price surges.

"If we were still a low-income country, then a major fuel price hike would cause a soaring inflation rate that could devastate the economy," he said. "But now, the only thing that could bring Indonesia's economy to its knees is another financial crisis like that of 1997."

Sadli pointed to a study by economists M. Ikhsan and Chatib Basri from University of Indonesia's Institute for Economic and Social Research that showed the recent fuel price hike would only result in an inflation rise of between 1 and 2 percent.

Studies by other economists, despite their fierce opposition towards the policy, also came up with similar low rises in inflation by a maximum of 3 percent.

"The important thing is how the government maintains sound macroeconomic policies to control the inflation rate and more importantly, improve investment climate to ensure further economic growth," he said.

Sadli said Indonesia could afford to keep the fuel subsidy but many economists would say that the country would miss out on achieving more with the funds. "We could save the funds and use it to spur productivity and improve people's welfare."

He explained that a country experiencing a growth of 5 percent would usually show a fuel consumption of the same rate.

But Minister of Energy and Mineral Resources Purnomo Yusgiantoro said fuel consumption in the country has continued to grow by an average of 7 percent per year, indicating that part of the consumption was not used for productive activities.

The government cut fuel subsidies and hiked domestic fuel prices on March 1 to ease the state budget's burden from soaring global oil prices and create a more efficient use of fuel in the country.

The government has allocated Rp 17.8 trillion ($1.9 billion) for various assistance programs for the poor, to ease their burden from the fuel price hike.

Sadli also advised the government not to back down on its decision, as it would only erode the government's image and legitimacy. "If the decision is revoked, the prices of goods will not come down again anyway."

However, he reminded the government to focus on making sure the assistance programs reached their target.

Minister of Communications and Information Sofyan A. Djalil said such programs had "leakages" in the past but this time the government would plug the leaks.

"We have provided safeguards for the programs by working together with the public to ensure the monitoring and transparency of the programs," he said.