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Indonesia's SBY Confronts a Subsidy Cut Crisis
Written by Our Correspondent
Friday, 23 March 2012
Angry workers
Government now faces a major test of its staying power over fuel subsidy
cuts
Indonesian President Susilo Bambang Yudhoyono’s government is facing a
major test of its staying power, with thousands of demonstrators across the
country protesting plans to modify fuel subsidies that cut the price of fuel
nearly in half.
Yudhoyono’s Democratic Party-led government already has been beset with a
long series of scandals that have sapped its popularity and cut into its
credibility. In the past, Indonesian governments have had a habit of caving in
to such protest. However, say political analysts in Jakarta, the decision to
cut the amount of the subsidy will likely prevail via a required vote in the
House of Representatives, although there are political considerations. The
feeling is that if Golkar, the second-biggest party in Yudhoyono’s ruling
coalition, remains solidly behind the plan, it will probably drop the subsidy.
There appears to be considerable horse-trading going on behind the
scenes, with the government seeking to use savings from the cut in the fuel
subsidy to finance cash payments to consumers to take the sting out of the cut
for a few months. Golkar leaders, however, want the savings to be applied to
the country’s woefully inadequate infrastructure, whose bottlenecks have got in
the way of economic progress as the economy grows. Cutting the subsidy, if it
occurs, is estimated to save as much as Rp41.2 trillion (US$4.5 billion) per
year.
“Golkar thinks the cash payments are a political trick by the Democrats,”
said one veteran political analyst. “They’re right.”
Authorities deployed 14,000 police across the country earlier this week
as protesters marched in several cities. Some 4,000 workers protested
“peacefully” in front of the state palace in the capital, Jakarta Police
spokesman Sr. Comr. Rikwanto told reporters Thursday.
“There was some pushing and shoving because so many people were packed
but the protest went without incident,” he said. However, in the North Sumatra
provincial capital of Medan, about 300 students pulled down an iron gate in
front of the provincial parliament building and threw rocks and motorcycle
helmets at police, according to Agence France Press.
Indonesian labor unions under the umbrella of the Indonesian Trade Union
Confederation (KSPI) have threatened to paralyze the economy, blockading
national ports and refineries as well as seeking to disable major arteries in
the country’s infrastructure including toll roads and airports. That would
presumably include as well trucks carrying fuel.
Motorists now pay Rp4,500 (50 US cents) per liter for subsidized Premium
fuel which actually costs Rp8,000. As of April 1, the government plans to price
Premium at Rp6,000 per liter, an increase 33 percent. That has brought the
protesters into the streets.
Governments across the world have long since learned that subsidizing
goods including food, gasoline and other items is a devil’s pact, and one that
is devilishly hard to get out of. In 2008, when Malaysian Prime Minister
Abdullah Ahmad Badawi attempted to remove fuel subsidies, the public protest
forced him to back down. The attempt, however, played a role in electoral
irritation that ultimately cost Badawi his job as prime minister after the
government’s disastrous showing in 2008 national elections. Other countries,
including Nigeria, Ghana and Guinea, have also been forced to back away from
reducing the subsidies.
But keeping them in place is hardly a solution. According to a World Bank
study, subsidies of various kinds now exceed the cost of Indonesia’s entire
social and education system budgets. Subsidies for fertilizer in Indonesia, for
instance, have been subject to fiscal instability, fraud and corruption,
leakage and uncertainty from external shocks, all of which “can undermine the
benefits of the program, according to the report.
It remains to be seen what effect the removal of the subsidy – if indeed
it is removed – will have on inflation. If the government carries the day, the
labor unions will undoubtedly bargain for higher nominal wages.
Bank Indonesia held the reference rate at 5.75 percent at its March 8
meeting after three successive interest rate cuts. However, Bank Governor
Darmin Nasution indicated Indonesia’s consumer price inflation, which had
dropped down to 3.5 percent annually by February, might rise back to the 2011
high near 6.8 percent if the cut is implemented.
It isn’t the first time Indonesia has faced a crisis over subsidies. In
2004-06, when world oil prices experienced great turbulence, the government
removed the subsidy, doubling the price of Premium. However no significant
violence actually materialized, with the government then as now suggesting
direct financial assistance to the poor.
However, since 2011, as the political situation has deteriorated in the
Middle East, with the Americans threatening Iran over its purported nuclear
weaponization program, the price of fuels has skyrocketed, even possibly
threatening US President Barack Obama’s re-election campaign. The price of fuel
has increased by 21 percent, 11 percent, and 10 percent in Australia, Italy and
Canada respectively.
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