Indonesia takes long road to reach critical decision on fuel

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.

Indonesia takes long road to reach critical decision on fuel