Can Indonesians be weaned off subsidised fuel?

AUGUST 31 — The latest trending topic among Indonesian Twitterati is about a young woman who badmouthed on social media the much beloved cultural city of Yogyakarta, because she was prevented from cutting queue at a petrol station where dozens of motorcyclists and motorists had waited for hours.

There’s no need of course to get drawn into the noisy debates over social media decorum and its consequences (the woman’s viral posting provoked the ire of many people, including residents of Yogyakarta who let her know she’s no longer welcome there as a student!).

Indeed, the more important issue here is the mini fuel crisis in Indonesia early this week that provided the context for this little incident.

The government began a restriction on the sale of subsidised fuel earlier this month to control the rapid consumption that is eating into the state coffers. As a result, state-owned oil and gas company Pertamina had to ration the subsidised premium fuel and diesel to avoid exceeding the 46 million kiloliters quota this year.

This led to panic buying and long queues at gas stations nationwide, including in Jakarta, and, in turn, caused a real fuel shortage. In more remote coastal villages, fisher folks could not go out to the sea, having failed to secure diesel for their boats.

A PT Pertamina fuel station worker fills a container with subsidised fuel, as people wait in a line at the Mauk district fuel station in Tangerang, Banten province August 27, 2014. — Reuters pic
A PT Pertamina fuel station worker fills a container with subsidised fuel, as people wait in a line at the Mauk district fuel station in Tangerang, Banten province August 27, 2014. — Reuters pic

The shortage made people turn to non-subsidised fuel. Some Shell petrol stations, for example, had to close down because they ran out of supplies, showing that people will buy more expensive fuel if they have to. The move was eventually reversed a few days later, with Pertamina returning its supply back to normal.

But the mini crisis shows the uphill battle faced by the upcoming government of president-elect Joko Widodo and his deputy Jusuf Kalla when it comes to stopping Indonesia’s addiction to cheap fuel. 

A draft budget for 2015 proposed two weeks ago by outgoing President Susilo Bambang Yudhoyono threatens to leave Jokowi’s administration with little money to carry out his programmes because of the high proportion of fuel subsidies.

On Thursday night, Jokowi held a much-anticipated private meeting with Yudhoyono in Bali, after which they emerged to show the public that a new tradition of courteous power handover had begun.

In the joint press briefing after the meeting, Yudhoyono promised to help his successor as much as he can during the transitional period. But he did not address the one question that every one was waiting for: will he reduce fuel subsidy before his term ends to lighten the next government’s fiscal load? 

On Friday, senior economic minister Chairul Tanjung confirmed that the government would not raise the price of subsidised fuel, because it did not want to further burden people’s lives after an increase in electricity tariffs.

That Yudhoyono refuses to increase the price of subsidised fuel towards the end of his term is characteristic of his aversion to politically risky moves, but it’s not as if has not done it in the past.

In the last nine years his administration has reduced fuel subsidies four times — the last time in June 2013 — and each time the government compensated with various populist policies, including giving cheap rice and cash assistance to poor families.

However, this has not succeeded in weaning Indonesia off subsidised fuel, whose consumers are made up of over 70 per cent of middle class Indonesians who own motorbikes and cars.

Worse still, Indonesia’s fiscal deficit this year, projected by the World Bank at 2.8 per cent of GDP, is vulnerable to both rising oil prices and declining exchange rate.

A fuel price hike is much better than a fuel shortage caused by rationing subsidised fuel. The extra money can fund a lot of good things, like Jokowi’s plan to build a national social safety system that will cover 40 per cent of Indonesia’s poorest, and to construct 2,000 new public health clinics. It can be used to assist his plan to expand the coverage of free education from nine years to 12 years.

An increase of Rp 500 (RM0.13) per liter of subsidised fuel can give an extra Rp 24 trillion to the budget. A rise of Rp 2,000 per liter means Rp 96 trillion additional cash for the government’s coffers.

Fortunately, Jokowi and Kalla have stressed that they would raise the fuel prices when they take office.

“I’m ready to not be popular,” Jokowi has said.

And Vice President Jusuf Kalla asked a rhetorical question to journalists: “Which would you rather have: bad roads, and hospitals and farmlands that are not developed? Or would you rather burn the subsidy money in cars’ exhaust pipes?”

As in any addiction, the first step towards recovery is to acknowledge the problem. The second step is to make some painful changes.

Jokowi will face a rocky start with a decision as unpopular as raising fuel prices, but it will attest to the strength of his leadership, that he’s more than just a man of the people.

* This is the personal opinion of the columnist.

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