Rising utility prices: Something we have to give

Jati Hidayat, Business Analyst, Jakarta

Economics is the study of how to manage unlimited wants with limited means. Nobody can have everything, and all of us must make choices -- remember that when we scream foul at rising utility prices or the privatization of our state companies.

It takes money to suppress prices at certain levels.

Fuel subsidies alone cost the government Rp 30 trillion (US$3.3 billion) last year. Similarly, when the state maintains companies with questionable management credibility (Semen Padang) or an obsolete business model (Indosat) on its balance sheets, it foregoes potential cash receipts at today's values and instead will be stuck with elusive future dividends.

Maintaining subsidies and canceling privatization basically mean that scarce resources -- money -- are diverted from one destination to another.

Should the government really forsake cash that could be used to build public schools, just to name one example, to appease large consumers of energy (read: big business) and vested interest groups around state-owned companies?

That said, we must ask whether it is possible for the government to cut down its other major expenses, so that perhaps it can, or should, maintain its subsidies and waive the privatization of state companies altogether.

This directly brings us to domestic debt, the government's single largest routine expenditure, costing approximately Rp 60 trillion per year on interest payments alone.

The government's domestic debt burdens come from two closely related areas: the annual coupons/interest carried by bank recapitalization bonds and from the principal value of the bonds themselves. Of course, the major blow will be when the bonds actually mature.

The necessary but painful bank recapitalization program was carried out to keep the corruption-riddled banking sector afloat. But yes, the costs were, and still are, huge.

As an illustration, the Habibie government allocated Rp 170 trillion, in the form of recapitalization bond issuances, to bail out four state banks that later merged to form Bank Mandiri, while providing a mere Rp 1 trillion for public education in 1998.

The nasty catch is that there is no easy shortcut in dealing with these bonds once they are issued.

A radical rescheduling of maturities without taking into account the bonds' net present values or an overly aggressive financial re-engineering to reduce the domestic debt stock may undermine the banking sector again, since these bonds are the dominant assets of the bailed out banks.

In other words, we cannot write down the value of the recap bonds -- or the banks' assets -- without causing significant impact on the banks' financial well-being.

What is a burden on the government's budget on one side of the equation is also a life-support system for practically the entire banking sector on the other.

Is our desire for cheap fuel so strong that it is worth risking a banking panic?

But trade-offs, or sacrifices, are precisely the crux of the matter.

The recapitalization program, as well as many other aspects of the ongoing economic reform, feels repugnant because the government has failed to prosecute those who destroyed the banking industry -- thus our economy -- through corruption. The pain of necessary economic reforms has not been evenly shared.

The failure to prosecute many former bank owners, who defaulted on billions of dollars of short-term liquidity loans extended by the state, is an insult to the collective sense of justice.

This is not to mention the indication that some of these debtors grossly misused the loans in the first place.

The government added salt to the wound by announcing its intention to "release and discharge" some of those former bank owners weeks apart from the decision to raise prices in order to reduce the budget deficit.

The sternness we saw (so far) in the decision to cut subsidies was totally absent when the government dealt with wealthy defaulters -- this process is riddled with inconsistencies, question marks and innuendoes of corruption, if not the real thing.

The same story goes with regard to all the high-profile corruption cases. Justice has been ignored in the pursuit for some semblance of economic reform and political consolidation.

If the government continues to make these types of trade-offs, it is unavoidable that the public will soon lose the taste for further needed economic reforms.

Ideas and policies endorsing such reforms, often painful initially, will loose credibility. They will be taken hostage by the government's political shortcomings. Already, one much quoted activist, writing in a recent edition of Tempo magazine, basically charged that structural reforms are a sign of "economics fundamentalism".

Opportunistic and populist politicians, meanwhile, have already smelled the public's mood and the political snowball against economic reforms is forming.

Their determination to block reforms is real, much more so than the will to fight corruption. President Megawati, blessed with the magic of genealogy, may survive all this, of course.

We only hope that needed economic reforms will too.