The fuel price debate
The World Bank's suggestion to the Indonesian government to increase domestic fuel prices is only one of the fiscal tightening measures it recommended recently to reduce aggregate demand and the risk of economic overheating. But given the central role of fuel in all economic activities and since any rise in fuel prices has an immediate and direct impact on the whole population, the suggestion has naturally incited a most heated debate.
The government and politicians who are geared up for the general election next year obviously do not see any political viability in the suggestion which, given the country's economic condition, actually makes a lot of sense.
However the World Bank has apparently learnt from its experiences in monitoring Indonesia's policy-making environment in the past, in that it knows the government has overruled political considerations in taking bold, yet rational economic measures. For example, the government increased fuel prices by 17.7 percent and electricity tariffs by 20 percent in mid-July, 1991, only about 10 months before the 1992 general election. Fuel and electricity prices were raised again by a range of 10 to 27 percent in January, 1993, only two months before the Presidential election by the People's Consultative Assembly in mid-March.
There are, however, several reasons as to why the suggestion for a fuel price increase is not seen as critically urgent at the moment. Indonesia's current economic condition is not as bad as at the time of the price increases in 1991 and 1993. Moreover, domestic fuel prices are now, by and large, on par with those in neighboring countries. In fact, the government expects Rp 827.8 billion (US$355 million) in profits from domestic fuel sales in the current fiscal year. Even though domestic fuel sales in April required Rp 54.3 billion in price subsidies because the crude oil prices averaged $19.21/barrel in April, (much higher than the $16.50 estimated in the stage budget), the bottom line for the whole year may still be positive. The fact is that the higher- than-estimated oil prices will also increase government oil revenues and these additional receipts can fund any subsidies incurred.
But we also reckon that the government does not want to risk either any public upheaval in the run-up to the next general election or stronger inflationary pressures at a time when it is trying very hard to keep the inflation rate at the low range of the single-digit level.
These factors do not, however, reduce the essence and significance of the recommendation. Instead, the proposed fuel price increase should be seen in the broader context of the imperative need to reduce aggregate demand in order to prevent the current account deficit from exceeding the estimated $8.7 billion, or almost 4 percent of the gross domestic product. The recommended measures also include the reduction of public spending on telecommunications and power generation, raising forestry fees, imposing a moratorium on personnel, raising property assessments to increase receipts from the property tax, slowing down the growth of personnel spending and developing better sources of non-tax revenues, fees for services and user charges.
The strongest message behind the suggestion for tighter fiscal and monetary measures is that Indonesia now needs, more than ever, sufficient capital inflows to finance the big current account deficit. But foreign capital will keep flowing in only if the country is able to keep the deficit within a sustainable level. Any developments, such as higher-than-estimated imports growth, which will expand the deficit in excess of the tolerable level will not only discourage further capital inflows but may also trigger a wave of capital flight. This would have devastating repercussions.
The message, we think, is quite relevant especially in the run-up to the coming general election, a period in which many governments are often tempted to distribute political goodies at the expense of prudent macro-economic management.