Indonesia takes long road to reach critical decision on fuel

Protesters symbolise their poor living conditions during an anti-fuel price hike rally in Jakarta on June 19, 2013.

INDONESIA - Typically, Indonesian President Susilo Bambang Yudhoyono had only one instruction when his ministers gathered at Bogor's hillside Cipanas Palace in mid-April to consider how to reduce a fuel subsidy bill threatening to blow out the Budget and drag down the high-flying economy.

Give me, he said, the safest option. For him, at least, that turned out to be dual-pricing, where public transport operators and motorcyclists would continue to pay 4,500 rupiah (59 Singapore cents) a litre for subsidised fuel, while private car owners fork out 2,000 rupiah more.

No one else except for chief economic minister Hatta Rajasa thought it would work. So after lengthy dithering, the President scrapped that idea and settled on a different two-tiered price structure of 6,500 rupiah for petrol and 5,500 rupiah for diesel, representing 37 trillion rupiah in potential savings.

By going for an across- the-board cut that would affect all households equally, Indonesia has to come up with a more generous package to compensate the poor so they can cope with price increases. But it reduces the opportunity for arbitrage that is inherent in any system that allows some to benefit from subsidies and not others.

On Monday, Parliament approved a revised 2013 Budget that included a subsidy bill of 299.6 trillion rupiah - an optimistic 199.9 trillion rupiah for fuel and an additional 99.7 trillion rupiah for electricity.

Apart from the fuel price increase, which did not need their endorsement, lawmakers also signed off on a controversial 9.3 trillion rupiah in cash handouts that Dr Yudhoyono insisted on to cushion the impact on more than 15 million poor households.

An additional 17.6 trillion rupiah in safety net spending, much of it already included in the original 2013 Budget, will go towards school aid, subsidised rice and mostly agriculture infrastructure spending.

Past experience has shown that inflationary pressures last about two months and then subside. But the prolonged decision-making now means the increase will feed into the annual price spike that occurs during Ramadan, this year in July.

The revised Budget is based on an assumption of an increase in the world oil price from US$100 to a more realistic US$108, and a reduction in domestic oil production from 900,000 to 840,000 barrels a day.

Golkar chairman and presidential candidate Aburizal Bakrie, who sabotaged a fuel price rise on the eve of a parliamentary vote last year, was quick to give the green light to the all-important handout.

For all of the cultural compulsion for consensus, Mr Bakrie's support was key this time round. Because Golkar and Dr Yudhoyono's Democrat Party control 254 of the 560 seats, they needed only Mr Rajasa's compliant National Mandate Party to win a majority.

Internal forecasts had shown that if the world oil price remained the same and fuel consumption continued on its upward trajectory, the Budget deficit would hit 327 trillion rupiah, or 3.54 per cent of gross domestic product - well above the legally allowed limit.

The subsidy issue should have been resolved in April, but the bickering dragged on for eight more weeks because Dr Yudhoyono was worried his graft-ridden party would suffer an even worse battering at next year's polls than is already being predicted.

The April 13 Bogor meeting failed to agree on a firm course of action. Nor did another limited Cabinet session on April 22 where, in the absence of the President, Mr Rajasa was the only minister behind the dual pricing plan that was eventually scrapped.

"Everyone in the room said it would be impossible to enforce, that there would be just too many problems," says one insider, noting that 48 of the country's 442 districts have only a single fuel station that could not be designated solely for subsidised fuel.

Cabinet sceptics reportedly wanted to know what would stop a public mini-bus driver from filling up at one station, selling the fuel at a higher price and then buying more at another station.

Not surprisingly, therefore, the Cabinet opted for a clean cut.

Apart from fearing public unrest, Dr Yudhoyono's big concern was the effect an across-the- board increase would have on inflation and whether it would add to the 11 per cent of the population currently living below the poverty line.

But something had to be done to avoid a contagion effect on the current account deficit and the rupiah. As it was, the currency crossed the sacred 10,000 rupiah to the dollar mark in recent trading before the central bank intervened to rein it in.

Last year's fourth quarter saw the current account deficit widen to an alarming 3.6 per cent, much of it due to swelling oil imports needed to keep up with a surge in the wasteful consumption of subsidised fuel - as much as 20 per cent to 30 per cent of it from smuggling due to the low prices in Indonesia.

The slow, agonising journey it has taken to get to this point on the fuel subsidy cut is another telling example of how the risk-averse Dr Yudhoyono finds it so difficult to make critical decisions, even in the dying days of his presidency when, for him, little is at stake.