Indonesian economic team aims to cut controversial fuel subsidies

The amount of money Indonesia spends on the fuel subsidy is too big and must be cut back gradually, President-elect Joko Widodo said.

But he believes it is also important that the impact of any hike in fuel prices be cushioned by extending help to the poorest segment of society, who are often the hardest hit by any cut to fuel subsidies.

However, Mr Joko said he is less inclined to have direct cash transfers to the poor, and instead wants the help diverted to productive activity and workers such as farmers, fishermen and micro-entrepreneurs.

"Our economic team must make not only the economic calculations but also the social and political calculations. It's not easy," he told The Straits Times.

Fuel subsidies are a political lightning rod in Indonesia, where the price of the cheapest fuel is 6,500 rupiah (70 Singapore cents) per litre, almost half the price of the unsubsidised albeit higher-grade alternative.

Although the better-off have disproportionately benefited from these subsidies, reducing them has been difficult as the impact, especially on inflation, is hard on the poor. Political parties have also seen opposing price hikes as a way to gain support, forcing the outgoing government to scrap a planned subsidy cut in 2012.

Observers had hoped that an imminent subsidy cut would have been factored into the government budget for next year, which President Susilo Bambang Yudhoyono announced last Friday, but this did not materialise.

Mr Joko's economic advisers have said that they will raise the matter when the outgoing President's team starts talks on the handover in the coming weeks, with the possibility of a joint announcement by both sides on a fuel price hike before the change of government on Oct 20.

Otherwise, spending on fuel subsidies will rise from nearly 250 trillion rupiah this year to more than 290 trillion rupiah next year.

The savings will be channelled to Mr Joko's campaign pledges of an "Indonesia smart card" and an "Indonesia health-care card" that will guarantee poor families free basic education and health care.

"That's the basic human need," he said of why education and health will be key priorities.

Also at the top of his list is making the bureaucracy more efficient through online systems that will help tackle corruption among civil servants, and increase revenue.

He rejects the notion that corruption in Indonesia, like in other countries, is cultural or endemic, saying that managing the bureaucracy and constant checks are key to rooting it out.

This article was first published on August 22, 2014.
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