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. --------------