Subsidy removal will not jack up prices: Experts

JAKARTA (JP): Removal of subsidies on wheat flour, sugar and soybeans is the right move and will not significantly impact consumers because the commodities already sell at market prices, experts and businessmen said Thursday.

But the associations of food and beverage entrepreneurs and sugar and wheat distributors urged the government to allow the State Logistics Agency (Bulog) to import the commodities -- at prevailing market prices -- to prevent a possible drop in supplies.

Economist Didik J. Rachbini of the Institute for Development of Economics and Finance argued that the subsidy removal -- announced Wednesday and effective immediately -- would not jack up prices, particularly for wheat flour.

"The wheat flour price may increase, but it will not be very high because the price after the last increase was already almost as high as the international price," Didik told The Jakarta Post.

H.S Dillon of the Center of Agriculture Policy Studies concurred, saying the market was aware of the decision since April when the government agreed with the International Monetary Fund (IMF) to end the subsidies.

"Since then the market price has increased, so it is not likely to go up again," Dillon said.

Bulog increased the price of wheat flour beginning in January in line with the government's program to phase out the subsidy.

The price was increased by 86 percent in July and 46 percent in August to Rp 3,290.

According to the agency's projection, wheat flour will sell at Rp 4,000 (37 U.S. cents) per kilogram with the subsidy elimination.

The chairman of the Federation of the Association of Sugar and Wheat Flour Distributors, Ishadi, estimated that the wheat flour price might increase to Rp 82,000 per 25-kg sack by next week after old stocks are finished, up slightly from the current Rp 80,000.

The chairman of Association of Food and Beverage Entrepreneurs, Thomas Dharmawan, said Bulog should continue to import wheat flour, sugar and soybeans until general importers were ready to assume its role.

He argued that Bulog's sudden withdrawal from the market could disrupt supplies of the commodities.

"Therefore, Bulog must still be able to import them but must act purely as a trading company," Thomas said.

Bulog's sole right to import wheat, sugar and soybean ended on Wednesday with the lifting of the subsidies.

The agency retains the monopoly on the import of rice, which is also the only subsidy retained by the government.

Thomas said wheat, sugar and soybeans must be bought for import in large quantities of at least 10,000 tons.

A company would need between US$3 million and $4 million for the import, he said, adding that the high transport cost would serve to push prices up.

Thomas said most companies would be unable to obtain the capital to import the commodities directly because the government's credit crunch sent interest rates soaring.

To help importers and lower prices, he urged the government to lift all value-added taxes on the imports of the commodities after the subsidies were lifted.

Didik said the subsidies on both wheat flour and rice had put a burden on the government, which was left making a choice between the two.

"Rice is more important than wheat flour for our people," he argued.

Didik said some of the country's private companies had the resources to import wheat, but were probably reluctant because they had enjoyed the subsidy for a long time.

He and Dillon cited PT Bogasari Flour Mill, the country's biggest wheat milling plant.

"I think Bogasari must import wheat, otherwise it will not be able to continue operation," Didik said.

PT Bogasari Flour Mills, owned by the giant Salim Group, held the right to mill wheat imported by Bulog for 25 years.

The company is controlled by former president Soeharto's crony Liem Sioe Liong. (das/gis)