Jokowi's first battle: Cutting fuel subsidies

Jokowi's first battle: Cutting fuel subsidies
Residents of Malang city in East Java waiting at a petrol station to fill up their containers with subsidised fuel last Friday, despite a sign stating that the station has run out of the product.

He has not officially assumed office, but President-elect Joko Widodo is already waging his first major political battle as allies and some members of his own party baulk at an unpopular plan to reduce fuel subsidies.

Over the weekend, Mr Joko said he would raise the price of subsidised fuel when in office, after outgoing President Susilo Bambang Yudhoyono rebuffed his suggestion to do so before the power transition in October, when the two men met last week.

But board members of his Indonesian Democratic Party-Struggle (PDI-P) Puan Maharani and Maruarar Sirait said fuel prices should be raised only as a last resort.

How Mr Joko handles the issue could be an early test of his leadership, but observers are not surprised that he has taken the difficult decision to lower fuel subsidies, given his track record of pushing through unpopular policies as Jakarta governor.

But political opponents are criticising him for exerting himself so visibly on this issue before Dr Yudhoyono steps down on Oct 20.

"The Budget's not going to run out at year-end, there're always unspent funds," said Democratic Party politician and economist Ikhsan Modjo, rebutting concerns that not reducing subsidies will affect the state's finances badly.

Undaunted, Mr Joko's team has started a campaign to raise awareness of the trade-offs of not cutting subsidies.

Over the weekend, his supporters began circulating messages on BlackBerry Messenger and WhatsApp messaging service highlighting how a 2,000 rupiah (S$0.22) increase in the price per litre of lowest grade subsidised petrol could save the government up to 193 trillion rupiah, which could be used to build 5,500 community hospitals, or 48,000 new schools, or add 39,000 new railway carriages.

A litre of subsidised petrol, called Premium, currently costs 6,500 rupiah - some 60 per cent of the unsubsidised alternative priced at 11,000 rupiah.

Fuel subsidies are tipped to cost some 250 trillion rupiah this year, and if not reduced, some 290 trillion rupiah next year.

Mr Joko said his team was studying various options for a price hike, which aides estimate could be around 1,500 rupiah to 3,000 rupiah per litre, possibly in two stages.

Fuel price hikes have been politically unpopular, and the last hike in June last year saw strong protests, including from PDI-P MPs who were then in opposition to the government.

But Mr Joko is now keen to fix the ballooning subsidy bill, widely seen by observers and investors as a drain on the economy.

Said economist Aldian Taloputra: "The funds saved could be spent on more productive things like infrastructure, health care and education."

He cited how a 30 per cent to 50 per cent increase in fuel price could save the country 90 trillion to 140 trillion rupiah a year. "Just as a comparison, it costs 9 trillion rupiah to double-track the railway line between Jakarta and Surabaya," he noted, citing the nearly completed 700km project to speed up train travel between the country's two largest cities.

Dr Yudhoyono has taken to YouTube to explain why he does not see a need to raise fuel prices just yet, unless global oil prices surge in the next seven weeks.

"Many of our brothers are still poor, their purchasing power is low, and we are not wrong in having the subsidy to help the people, provided it is not excessive and targeted," he said in a video.

Although many of the poorest citizens do not benefit directly from fuel subsidies, any hike in prices affects them as it drives up the cost of food and transport.

But observers believe Mr Joko will go ahead with raising fuel prices soon after he takes over, given his focus on the issue now.

Economist Pandu Sjahrir feels a 1,500 rupiah hike soon is appropriate, with another 1,500 rupiah increase next year.

He said: "In the very short term, we will face inflationary pressures and slower economic growth. However, as long as the government communicates it well, the market and people will react positively."

This article was first published on September 01, 2014.
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