The fuel price dilemma

The fuel price dilemma

Unable to resist the pressures at home but forced to yield to
the International Monetary Fund's demand for an end to its fuel
subsidies, the government has resorted to the half-measure of a
two-tiered fuel tariff system.

Under the system announced on Monday, the price of fuel used
for industries, international shipping and general mining will be
raised by between 50 percent and 100 percent, effective next
month. Exempted from the increase are kerosene, premium gasoline
and automotive diesel fuel -- in short, those fuels that are
widely used on a day-to-day basis by the population and have in
effect become basic necessities for most Indonesians.

As Minister of Energy and Mineral Resources Purnomo
Yusgiantoro explained, the government considered it wise to
postpone raising the price of these fuels until Oct. 1 in order
to prevent the already fragile political and social situation
from worsening.

On first impression it may appear the Cabinet, which made the
decision on Monday, has chosen a wise way out of the dilemma
facing the government. Raising fuel prices at a time when
pressure is mounting on President Abdurrahman Wahid to step down
would certainly provide added ammunition to his opponents. On the
other hand, not raising prices -- which is tantamount to ignoring
the IMF's demand that Indonesia stop handing out subsidies to
this vital sector -- would antagonize the international
institution and further jeopardize the country's economic
recovery.

According to the state budget, the government is obliged to
raise fuel prices for all consumers by an average of 20 percent
by April 1 to lessen its subsidy burden by some Rp 4.3 trillion
-- or about US$409 million -- to Rp 41.3 trillion this fiscal
year. Apparently, the government has deemed it wise to raise
industrial fuel prices higher than expected in order to lessen
the social impact of the price increase.

Foreign mining and petroleum investors and foreign-flagged
ships, according to the minister, account for a mere 0.3 percent
of the country's annual fuel consumption, which totaled 51
million kiloliters last year. Industrial customers account for
about 23 percent of the nation's total fuel consumption, while
the remaining 77 percent is consumed by households and
transportation companies.

As the minister explained, the policy to maintain fuel prices
at gas stations is aimed at making cheap fuel available to
transportation companies that serve the public. However, since
the government obviously cannot prevent affluent car owners from
buying fuel at gas stations, the authorities are considering
slapping some additional taxes on luxury car owners to compensate
for the subsidies they enjoy at gas stations.

Through these measures, the government hopes to meet its
target of reducing its subsidy burden by Rp 4.3 trillion this
year -- something that not everyone sees as a probability.
Whether that target can be attained depends in part on how
effectively the scheme can be supervised in its implementation.
With the resourcefulness certain dishonest individuals have shown
in the past, the possibility exists that the cheaper fuel
intended for the public will somehow be siphoned off to benefit
industrial users.

Also, a respite of a mere six months for the general public
before they too will have to pay higher prices for their fuel
does not seem like much. Given that the prices of essential
commodities often take their cue from kerosene and gasoline, an
increase in the prices of these commodities should not be
discounted.

Let us hope, though, that this decision on fuel prices does
not lead to more trouble for the government and the country. It
will serve us well to understand that the government was left
with no other option. Since it cannot altogether please both the
public and the IMF, it seems the government is compelled to
travel the middle road where it can accommodate the wishes of
both, even if only halfway.