The pointless debates

The pointless debates
JP/6/Ed16

Fuel for debate

The arguments made by several factions at the House of
Representatives to support their stubborn demands for the total
cancellation of the March 1 fuel price hikes not only miss the
whole point of good energy policy and prudent fiscal management
but also have little to do with what they claim to be the
interests of the people.

House members who have been campaigning for an outright
rollback of the new fuel-price policy could not have been so
ignorant of the strategic importance of gradually reducing fuel
subsidies for the long-term good of the economy and for
developing energy security, which is as vital as food security.

The current government could choose the easy way, taking the
populist measure by continuing the wasteful subsidy spending at
the risk of leading the economy into a much more devastating
crisis within two to three years.

A subsidy is a future tax and consequently burdens the economy
and a fuel-price subsidy is even more damaging because it causes
the misallocation of scarce resources. Instead of helping the
large poor segment of the population, such an across-the-board
subsidy benefits the middle and upper classes more -- those who
own motor vehicles.

The economic rationale of gradually bringing fuel prices to
their real economic cost has been so obvious that it has
intermittently been introduced since the 1980s. Between 1998 and
2004 alone, fuel prices have been raised 14 times.

Take for example, the development of alternative energy
resources. Our economy's increasingly heavy dependence on
subsidized fuel has hindered the development of geothermal and
natural gas for domestic use. The country has more than 150
trillion standard cubic feet of proven natural gas reserves, but
the development of domestic gas distribution networks has been
made commercially unfeasible by the abnormally cheap fuel.

Conveniently maintaining the domestic fuel prices at their
pre-March 1 levels would also cause a most devastating impact on
the fiscal sector in that the state budget deficit would explode
to an unmanageable level. This would breach the fiscal
guidelines the House has imposed on the government.

An unsustainable fiscal deficit would steeply increase the
country's sovereign risks, which in turn would sharply hike the
interest charges of the more than Rp 610 trillion (US$68 billion)
of bonds the government has issued to bail out the banking
sector. Higher sovereign risks would also adversely affect the
interest payments on the Rp 50 trillion worth of new rupiah and
international bonds the government plans to float this year to
plug the budget hole.

Yet a more damaging impact of perceived high sovereign risks
would be the dumping of government bonds in the secondary market
by jittery investors. This is not an exaggerated risk because the
oil price assumed for the estimated Rp 40 trillion in fuel
subsidies this year after the March 1 price increase is US$35 a
barrel, while the actual international crude oil prices, which
are now hovering at around $50 a barrel, will most likely average
$40 a barrel for the whole year

Protracted debates about the March 1 fuel price policy have
diverted the attention and resources of the government from the
much more urgent task of managing the distribution of a relief
package for the poor and ensuring the smooth distribution of
essential commodities to control the inflationary impact of the
policy.

We wonder what is the real agenda of the party that led the
oppposition to the fuel price hike, the Democratic Party of
Struggle (PDI-P). It was the PDI-P leader, the former president
Megawati Soekarnoputri, who should have bitten the bullet,
lifting the subsidies in early 2004.

If the PDI-P's motive is really to serve the interests of the
people, they should campaign for a more effective mechanism for
distributing the aid package and help scrutinize the government's
fuel distribution scheme to prevent speculation and smuggling.

If the fuel-price hike opponents truly want to prevent those
on the brink of absolute poverty from plunging into the abyss,
they should analyse and critique the government's pro-business
policies to create jobs, or come up with feasible alternatives of
their own.

"Harassing" the government with pointless arguments and
unfeasible alternative policy instruments to fuel-price hikes
could cause a prolonged political deadlock and continued street
demonstrations at the expense of social, political and economic
stability.

However, this stalemate should also prompt the government to
speed up an independent audit of the refining and distribution
costs of the state oil monopoly, Pertamina, to make its fuel
pricing more credible.

A credible pricing policy would make the political and
economic environment more conducive to floating fuel prices --
except kerosene for household use -- in line with those of our
neigbours, as was done in 2002. This would shield the government
from the political strife it must weather every time local prices
have to adjust to international ones.
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