Wise compromise at last

Wise compromise at last

The House of Representatives finally came to its senses on
Monday and reached a wise compromise that provides more leeway
for deliberation of the contentious issue of fuel subsidies
within the broader context of proposed revisions to the 2005
state budget.

Eight of the ten factions in the House voted for two slightly
different stances but which essentially boil down to a
recommendation that the government review its March 1 oil-price
hikes with the relevant House commissions in the context of the
amendment of the 2005 budget.

The compromise agreement resolves three weeks of political
disputes among the House factions, which exploded into a shouting
match and general pandemonium during a plenary session last
Wednesday, and between the House and the government over the
political legitimacy of the new fuel price policy.

It was a win-win solution with neither of the two sides (for
and against the policy) losing face, except the Indonesian
Democratic Party of Struggle (PDI-P) and the National Awakening
Party (PKB) factions, which decided to walk out of Monday's
plenary session.

The House stopped short of demanding an outright reversal of
the March 1 fuel price policy, a stance which would have set off
protracted political debate and might even have led to deadlock
at the expense of political and macroeconomic stability.

But the solution agreed on through an open vote will still
allow the House to examine the new fuel price policy and the
mechanism for distributing compensatory benefits to the poor
through deliberations on the proposed amendments to the 2005
state budget.

The compromise will also facilitate earlier deliberation of
these amendments, which have become more urgent than ever as a
result of the significant changes to the basic assumptions used
for the budget. House debates on budget reviews usually take
place in July immediately after the first semester of
implementation.

For example, the average crude oil price assumption used in the
2005 budget was US$24 per barrel while the actual price since January
has been hovering mostly above $45 and will most likely stay
within the $45-50 range for the rest of the year. This single
change alone requires a revision of the revenue estimates, rupiah
exchange rate, interest rates, fuel subsidy spending and social-
safety net programs for the poor.

Minister of Finance Jusuf Anwar again warned on Monday of an
unsustainable fiscal deficit as government spending on fuel
subsidies over the past two months alone has gobbled up Rp 15
trillion of the Rp 19 trillion allocated for that expenditure
account for the whole year.

The reconstruction of Aceh after the Dec. 26 tsunami also
created an urgent need for huge additional funds for that
province, and it is fitting that this should be discussed with
the House.

The Paris Club of sovereign creditors agreed last week to
reschedule $2.6 billion (Rp 24.31 trillion) of government debt
maturing this year to help reduce the strains on the 2005 budget.

None of these changes can be accommodated in the 2005 state
budget without the prior approval of the House.

Hence, the review of the March 1 fuel price policy as part of
the deliberation of the overall amendments to the 2005 budget is
quite appropriate as both the House and the government will have
broader leeway for reassessing resource allocations, the
production and distribution costs of state oil monopoly Pertamina
and sorely needed fiscal measures such as improved tax efforts.

It was also quite a positive development that President Susilo
Bambang Yudhoyono convened a Cabinet meeting immediately after
the House voted on the compromise solution and ordered his
ministers to prepare proposed budget amendments for submission
to the House later this week. This quick, positive response will
help sweeten the mood during the upcoming deliberations.

But the protracted disputes over the last three weeks should
teach the government a good lesson on how to manage the
politically sensitive issue of fuel subsidies. Given the wild
volatility of international oil prices, the government should
seize the opportunity provided by the forthcoming deliberations
on the budget amendments so as to conduct a comprehensive review
of overall energy policy in order to reduce dependence on fuels
derived from oil.

A vital component of this policy should be the reintroduction
of the 2002 pricing mechanism whereby domestic fuel prices,
except kerosene, are floated on international market prices using
Mid Oil Platts Singapore (MOPS) quotations as the reference
price. This means that domestic fuel prices are adjustable every
month based on the MOPS quotations and the rupiah's exchange rate
-- something that provides policy predictability for the general
public, and the business community in particular.
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