http://www.nytimes.com/2013/05/03/business/global/03iht-subsidy03.html?ref=asia&pagewanted=all
Indonesia Struggles to End Fuel Subsidies Jalin/Agence France-Presse — Getty Images Demonstrators burned tires as thousands of Indonesians marched on the May 1 holiday to protest a proposed rise in fuel prices. By JOE COCHRANE Published: May 2, 2013 JAKARTA, Indonesia — The fruit and vegetables that slowly gather flies in the morning heat at the Bendungan Hilir market in central Jakarta include both imported and Indonesian produce, but according to local sellers, origin does not matter: Everything is expensive. Indonesians are accustomed to the pain of rising food prices in a country where about 100 million people live on $2 a day or less. But both patrons and vendors at the market think things will get worse: The low fuel prices they count on, kept among the cheapest in the world by aggressive subsidies, may soon skyrocket, too. The national government has announced it wants to increase the price of gasoline, because state subsidies that keep it well below the international market rate are burning a hole in the budget. The country’s Finance Ministry says spending on fuel subsidies could reach $23 billion in 2013, compared with about $20 billion last year. Total subsidies for electricity and fuel could end up costing about $32 billion, or 20 percent of the 2013 budget. The Indonesian government’s statistics show that it spends more on fuel subsidies annually than it does on social programs and capital expenditures combined. On Tuesday, PresidentSusilo Bambang Yudhoyonosaid he would submit a revised 2013 budget to the House of Representatives in May that would include a fuel price increase, but would also revive a cash compensation program for poor families to cushion the blow. “Usually when the price of gasoline goes up, all other prices go up,” said Therasa Natalia, 22, who runs a noodle stall in the market. “It pushes up transportation costs, and everything from food to clothes is higher. Even if it’s only private cars paying more, everything will go up. It’s always like that.” Last month, Mr. Yudhoyono’s government floated the idea of a two-tier gasoline pricing plan meant to shield Indonesia’s poor and lower classes from higher costs. People who drive motorcycles and public transportation vehicles would continue to pay 4,500 rupiah per liter, or about $1.74 per gallon, while owners of private vehicle and commercial vehicles like delivery trucks and company cars would pay 6,000 rupiah, a 33 percent increase. However, cabinet ministers and aides to Mr. Yudhoyono said this week that under the new plan, fuel prices would probably increase for everyone to 6,500 rupiah per liter. On Wednesday, tens of thousands of people from labor unions and groups representing women, students and environmentalists protested that proposal during street marches to observe Labor Day. Although Indonesia has a plenty of oil production fields and is among the top 25 oil-producing nations in the world, it is a net importer of petroleum. Gasoline is so heavily subsidized that at the end of 2012, the country had the lowest fuel prices of any net oil-consuming nation in the world, according to the World Bank. The second-lowest was the United States, where a gallon sold for $3.29 on Dec. 31 — nearly twice as much as in Indonesia. The Indonesian Finance Ministry has estimated that the country will exceed the 2013 budget quota of 46 trillion liters, or 12 trillion gallons, of subsidized fuel by at least 15 percent or more. Savings from eliminating or reducing a fuel subsidy could go to crucial public social programs including health care, as well as much-needed infrastructure investment, according to analysts. Ms. Natalia said she would be willing to endure higher gasoline prices — and the accompanying increases in the prices of food, clothing and other items — if the government would spend every penny of the money it saved on social and national development programs. But even then, she had doubts. Ms. Natalia predicted that unscrupulous traders would start hoarding staple foods like rice before a fuel price increase to drive prices up even further, perhaps setting off a crime wave in Jakarta. “It’s the ordinary people who are victimized,” she said. Fuel subsidies are a highly political and emotional issue in Indonesia. Some of the unrest that led to the ouster of the authoritarian PresidentSuharto, who died in 2008, was rooted in fuel prices. Mr. Yudhoyono drew theatrical, albeit minor, protests when he raised gasoline prices in 2005 and 2008, mainly because he gave poorer Indonesians cash handouts to ease the blow. But he then lowered fuel prices before his landslide re-election in 2009, while keeping the handouts in effect, angering his political rivals. In March 2012, Mr. Yudhoyono proposed raising fuel prices again, but even members of his own governing coalition revolted to embarrass him, quashing his plan at a raucous House of Representatives session as student and labor groups outside clashed with riot police officers on live national television. Mr. Yudhoyono was twice elected to office on a platform sympathetic to the country’s poor, and even with national elections scheduled for 2014 and his governing Democratic Party lagging in the polls, he has few viable alternatives but to raise gasoline prices in some fashion, according to analysts. Indonesian law prevents Mr. Yudhoyono’s government from running a budget deficit higher than 3 percent, and the Finance Ministry estimates that raising gasoline prices would keep the deficit below the legal threshold. “It’s better than nothing,” said Ndiame Diop, lead economist at the World Bank in Jakarta. “It sends the signal that the government is doing something.” However, Mr. Diop said any incremental price increase should be viewed as a stopgap measure. The Indonesian private sector, the World Bank and others have long appealed to the Indonesian government to get rid of subsidies altogether, mainly because studies have shown that the country’s rich benefit from them far more than its poor do. Still, Mr. Diop said, an increase in the price of a liter of gasoline to make it even fractionally closer to the international market level would have to be accompanied by the same compensation program for the poor that Mr. Yudhoyono’s government had in 2005 and 2008, which was viewed as effective. “Our key point is compensation — the need to compensate the poor from the spike in inflation following a fuel subsidy reform,” he said. About 29 million Indonesians live below the country’s national poverty line — 250,000 rupiah per person per month or 1,250,000 rupiah per family per month, and in urban areas, 350,000 rupiah per person per month or 1,500,000 rupiah per family per month. A further 70 million, categorized as near poor, live just above that line. Didik Rachbini, a prominent economist and member of Mr. Yudhoyono’s National Economic Council, which comprises economists and leading businessmen and advises the president on economic policy, said the government had a longstanding fear that increasing the price of fuel would push tens of millions of near-poor Indonesians below the poverty line. “If we increase fuel prices for everyone, the price of 15 to 20 basic goods will also increase, such as rice,” he said. “It would reduce the purchasing power of the poor.” Indonesia has one of the world’s strongest emerging-market economies, with growth of better than 6 percent for the past three years. It also has a higher rate of foreign direct investment as a percentage of gross domestic product, at 2.75 percent, than countries like Brazil (2.69 percent), India (1.4 percent) or China (1.36 percent), according to BBVA Research in Hong Kong. Despite the country’s economic boom, Mr. Rachbini said, income among Indonesia’s poor and near poor rose 2 percent in 2012, compared with a nationwide average of 4.8 percent and between 7 percent and 8 percent for more affluent Indonesians. Hence, Mr. Rachbini said, quasi- socialist policies like low-cost gasoline are needed to maintain stability, given Indonesia’s high levels of poverty. “Our budget policy is almost like a socialist country,” Mr. Rachbini said, jokingly. “It’s like Venezuela. But in my view, it brings the stability that gives a chance for foreign investment to come and for us to build our economy.” Yet Mr. Yudhoyono must balance Indonesia’s status as a hot investment destination against deficits in its budget and its current account balance, a measure of foreign trade and investment, which have political, social and even security consequences. He has repeatedly wavered — and has been accused of being weak — on reducing fuel subsidies since being re-elected in 2009 and is highly sensitive to street demonstrations like those on Wednesday, according to analysts. Mr. Yudhoyono again hedged his bets Tuesday by throwing the political hot potato back into the House, saying fuel prices would be raised “when the poverty funding is ready” from lawmakers when they debate his 2013 budget revision. Some lawmakers were on record last month as being against cash compensation because it could give Mr. Yudhoyono’s Democratic Party a lift before the legislative elections next year. Average Indonesians are anxiously considering their budget and transportation options. Kamela, a 55-year-old homemaker who shops regularly at the Bendungan Hilir market, said she would have to stop driving her Toyota Yaris and take public buses if the government raised the price of gasoline by even 1,500 rupiah. “I can’t just switch to a motorcycle, because I am scared to drive on the streets — it’s dangerous,” she said. [Non-text portions of this message have been removed]
