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Against
all expectations, there was no final decision on fuel price increases
after President Susilo Bambang Yudhoyono met with several Cabinet
ministers at Cipanas Presidential Palace on April 14. The meeting was slated to
discuss the fuel subsidy, but no decision was made, which is not
surprising.
The
meeting was preceded in the morning with a garden party in which SBY
entertained dozens of ambassadors and other foreign dignitaries and
served them nasi goreng SBY (fried rice cooked by the President).
Juggling dealing with the critical fuel subsidy issue and a garden party
was, of course, an
awkward mix.
Nevertheless
the government has unveiled a plan to increase subsidized fuel for
privately owned cars from the current Rp 4,500 (46 US cents) per liter to
between Rp 6,500 and Rp 7,000, while the price for public vehicles and
motorcycles will stand. The dual pricing policy is being touted to save
at least Rp 21 trillion by the end of the year, according to Energy and
Mineral Resources Minister Jero Wacik.
The reason
why no decision was made regarding the fuel subsidy was because, as one
official put it, of a
“lack of consensus”.
But why did
the President need a consensus from his Cabinet ministers in the first
place? The President has the authority to raise the fuel price.
Unlike in the
2012 budget, where the government was required to secure approval from
the House of Representatives before adjusting subsidized fuel prices, the
2013 budget gives the government discretionary power in adjusting the
prices, without approval from the House, albeit with certain conditions.
So the issue
of reducing the fuel subsidy remains uncertain. SBY should realize
that the longer he is indecisive on this issue, the more costly it will
be, not only for the budget, but also for the entire economy.
He should
realize that maintaining the unnecessarily low fuel prices imposes a high
opportunity cost, creates uncertainty in the fiscal outlook,
disproportionately enriches the rich further, crowds out social spending
and public investment, impedes the efficient use of energy, discourages
the development of alternative energy and worsens the quality of spending
of public money.
Behind the
government’s efforts to keep dragging out the fuel subsidy issue, one can
sense SBY’s fear and anxiety that raising subsidized fuel prices
could trigger social unrest, which if not controlled properly could
plunge the country into chaos and anarchy. Increasing fuel prices has
always been a messy affair in many countries. No country has been able to
implement this policy smoothly. The decision is risky and costly.
As inflation
would rise from a fuel price increase, poverty would also rise, because
the value of the poverty index would go up. Although there are officially
29 million Indonesians living below the poverty line, according to the
World Bank, there are 94 million Indonesians who are vulnerable to
economic shocks. It is this group of people that would slip into poverty
if SBY decided to raise subsidized fuel prices. How many of them falling
into poverty would depend on the extent of the price hike.
According to
the World Bank, for each Rp 1,500 fuel price increase, the poverty rate
would go up by 0.7
percent.
SBY should
not be concerned with this effect. Indonesia has experience of how to
dampen the effects of rising fuel prices on poverty. In 2005, when world
oil prices hit the historic record of $140 per barrel, the government was
forced to raise fuel prices by 114 percent. It was a dramatic increase,
and the effect was painful for the poor, but then the government
initiated a direct cash transfer program (BLT) to around 19 million poor
households for about three months.
Despite the
shortcomings of the programs, it was effective in moderating the effect
on the poor. The number of the poor rose by four million to 39 million in
2006, but the number fell back to 35 million in 2008.
SBY could
initiate the same safety net program should he decide to raise subsidized
fuel prices. The effect on poverty should be moderate this time, because
the size of the price increase would be much smaller than in 2005.
But the
President also has to remember that after the huge fuel price increase in
2005, Indonesian economic growth dipped slightly to 5.5 percent from 5.6
percent. As the macroeconomic foundation grew stronger from the reduction
in the fuel subsidy, the economy achieved robust growth of above 6
percent from 2007 onward.
Despite the
robust growth in recent years, the Indonesian economy is facing several
issues that need to be addressed if high growth is to be sustained. The
most complex and critical of these issues is the fuel subsidy.
For SBY, the
current fuel subsidy issue is the last critical issue to deal with before
his term ends next year. Obviously, he should use this most important
decision to mark his legacy in terms of the future of Indonesian economic
development.
SBY should
not repeat what happened in 2005, when protests broke out throughout the
country after the government decided to impose huge fuel price increases.
In these tense and critical times, when people were angry and uncertain,
they hardly heard any words from their President.
It was then
vice president Jusuf Kalla who faced hostile crowds in several cities,
and who bravely argued with the crowds that the government should reduce
the fuel subsidy to save itself from bankruptcy. It should have
been the President who faced the public to defend his decision, not
Kalla, nor Cabinet ministers.
Now it
depends on SBY in terms of what kind of legacy he wants leave the nation.
Surely he would like to be remembered as a President who successfully
laid the solid foundation for the Indonesian economy to grow stronger,
wouldn’t he?
But this
requires strong leadership. The nation needs a leader who is ready to
stand up in the face of challenges and adversity. The people will watch
and see whether, at the end of his term, SBY demonstrates his leadership
and decisiveness. ●
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