Subsidy cut to fuel the fire in
Indonesia By Bill Guerin
JAKARTA - In the wake of a two-month "mini
crisis" that saw the rupiah hit a four-year low of
11,750 per dollar on August 30, Jakarta has
finally announced an imminent and substantial
reduction in fuel subsidies. The exact date and
the level of cuts have yet to be announced, though
there is widespread speculation over both. Vice
President Jusuf Kalla has said fuel prices may
rise as early as October 1 while National
Development Planning Minister Sri Mulyani
Indrawati has said an increase in November would
be too late to help reduce subsidies to the level
of Rp89.2 trillion. She said fuel prices might
increase by at least 50% in October.
The
authoritative Bisnis Indonesia newspaper, in a
piece earlier this month headlined, "President,
Vice President given different proposals on fuel
prices hikes", made the startling revelation that
the
economic team has proposed an average increase in
fuel prices of 30-35% to President Susilo Bambang
Yudhoyono but in a separate proposal to Kalla,
proposed an increase averaging 95%.
The
proposal made to Kalla, the paper said, is part of
a document titled "Fiscal Policy Follow-up
Measures as Part of Government's Policies Packages
in Recovering Trust and Creating Certainty".
According to the document, the highest percentage
increase is for kerosene for household
consumption, by a massive 142.86%, to Rp1,700.
Nonetheless, the consensus of opinion gleaned from
leaked ministerial comments elsewhere suggests
ministers will submit a proposal to Yudhoyono to
slash subsidies by an average of 40% by the end of
this year and phase in additional fuel subsidy
cuts throughout next year to align local prices
closer to global levels.
Local fuel prices
are still only around 30% of world levels, which
means that even if the government raises domestic
prices by another 60%, domestic fuel prices would
still be less than half of world prices. Fuel
prices in Indonesia have always been a potentially
explosive issue. A modest price hike in 1998
contributed to the downfall of President Suharto.
During the Megawati Sukarnoputri administration,
prices were raised but only two weeks later were
rescinded amid fears that the ensuing
demonstrations and protests threatened her
presidency.
Yudhoyono boldly slashed fuel
subsidies in March, resulting in an average 29%
hike in fuel prices that spurred inflation to a
26-month high of 8.8% for the month. Bank
Indonesia Governor Burhanuddin Abdullah said
inflation might hit 9% in 2005, outpacing the
official target of 7.5%. Ramadan is the wild card.
Expected to begin on October 5 (the exact day
depends on sighting of the full moon), it is
traditionally a period of high prices and labor
unrest, making it an inopportune time to risk
rioting or widespread demonstrations.
Economy badly hit Although
Southeast Asia's largest economy grew 5.1% in
2004, it has faced turbulence this year with
fluctuating exchange rates and the soaring
subsidies that threaten the budget deficit target.
The government has been forced to sell rupiah for
dollars to pay for oil imports, depressing the
local currency as world oil prices soared.
Bank Indonesia, the central bank, raised
its benchmark interest rate three times, by a
total of 1.5 percentage points, to support the
currency. The measures helped bring the rupiah
briefly back below Rp10,000 to the dollar for the
first time in weeks. It has now settled slightly
weaker and on Friday closed at 10,056 to the
dollar. The rupiah, however, remains among the
worst performing currencies in Asia. It has lost
7% against the dollar this year, after losing
around 9% last year.
"Although Indonesia
is reeling under an oil crisis, it is stable and
its fundamentals are strong," says Bantarto
Bandoro of the Center for Strategic and
International Crisis in Jakarta. Yet with oil
prices at $65 a barrel, fuel prices at the pumps
are less than half the import costs. The cost of
subsidies has now swelled to over a quarter of the
state budget for 2005. As recently as June, the
government budgeted for a deficit of Rp20.3
trillion rupiah, or 0.8% of GDP, estimating that
the cost of fuel subsidies would rise to Rp76.5
trillion rupiah this year. By the end of August,
the government announced it would cap the deficit
at Rp25.1 trillion rupiah, around 0.9% of the GDP,
though the fuel subsidies bill is still expected
to cost Rp138.6 trillion (US$13.8 billion) this
year alone.
Robbing the rich to help
the poor This time round, Yudhoyono has
committed to slash subsidies only after
compensation programs for the poor are in place.
Welfare subsidies, which will cost Rp4.8 trillion
($48 million), will help support the government's
case that funds saved as a direct result of the
subsidy cuts are being distributed to the needy.
To ward off the worst of the heat expected when
fuel prices are actually raised, an initial
three-month payment of cash compensation of
Rp100,000 ($10) per month will be disbursed to
15.5 million families, equal to around 62 million
people, or 30% of the population who earn less
than Rp175,000 a month.
But he still faces
an unpredictable response by the public, made
especially difficult after his promise that the
March jump in fuel prices would be the last this
year. There were widespread protests at the time,
though there was little violence. Compensation
promised in March has yet to be fully disbursed,
and demonstrations against the latest planned
increases have already started.
The level
of kerosene prices, widely used for cooking and
lighting by the poor, is critical. Currently at
Rp700 a liter, they are heavily subsidized to a
level around 10% of international prices. The
assumption used in the welfare program is that a
family of five uses 4 liters of kerosene a month
per person. Wardah Hafid, coordinator of the
Indonesian anti-poverty group, the Urban Poor
Consortium, is singularly unimpressed, slamming
the plan as a populist policy. "It's very stupid
... It will only spread corruption," she said,
echoing sentiments expressed by others in local
media that the scheme could mean manna from heaven
for the corruption-ridden bureaucracy.
The
government is aware of the danger as well.
Information Minister Sofyan Djalil points out that
the plan to make the payments at post offices and
via branches of Bank Rakyat Indonesia rather than
through the bureaucracy would increase
transparency and accountability. The president is
also going after syndicates of thieves who,
collaborating with officials from Pertamina - the
sole supplier of such fuels - smuggle subsidized
fuel abroad, costing the state a conservatively
estimated $849.8 million each year. Failure to
bring the culprits to book would seriously hinder
Yudhoyono's ability to "socialize" the fuel price
hikes and fuel public resistance to being forced
to tighten their belts whilst the corrupt become
even richer at their expense.
Police have
arrested 58 suspects so far this month, including
18 Pertamina workers and five foreigners. Some 17
ships laden with 6,000 metric tons of diesel and
kerosene have also been seized. The suspects were
from two syndicates operating in East Kalimantan
and Riau provinces that also involve profiteers in
Singapore. The subsidized prices of Indonesian
gasoline, kerosene and diesel are around 60% below
the pump prices in Singapore and Malaysia.
National Police chief General Sutanto,
appointed by the president to hit back hard on
smuggling as well as corruption, said some of
those arrested were former shipmates from
Pertamina oil tankers who were well versed in
techniques for tapping crude oil by using large
underwater pipes. They were brazenly pumping crude
oil destined for Cilicap refineries directly from
Pertamina's floating storage facility off East
Kalimantan through a 7-mile long submarine
pipeline to small tankers they chartered, and
shipping the oil to buyers in Singapore. Late at
night they sucked oil from Lawe Lawe Port and
replaced it with seawater, in the meantime loading
3,000-tonne cargoes of oil onto small tankers. The
Riau operation allegedly accounted for as much as
70% of nationwide fuel smuggling.
The
government hopes higher prices will slow down
domestic demand, which remains persistently high.
Demand is currently predicted to reach 65.6
million kiloliters this year, 10% higher than the
initial forecast of 59.6 million kiloliters (kL),
according to Pertamina. From January to June,
Pertamina supplied 184,000 kL of fuel per day but
says the demand keeps increasing, so "long queues
(at gas stations) are not caused by a fuel supply
shortage."
Jakarta police have announced
that they have arrested 54 people for hoarding 317
tons of fuel in the past two months. Pertamina
also warns that people buy the subsidized kerosene
and diesel fuel from gasoline stations to sell to
industries, which pay the higher market prices for
the products. Pertamina boss Widya Purnama,
explaining some of the reasons for the fuel
scarcity, told incredulous reporters that only the
"little fish" had been caught in the
anti-smuggling operations. "I have a report that
in Samarinda, Pontianak, Jambi, Bangka Belitung,
and Kupang, drivers of public transport vehicles
have ceased carrying passengers. Instead, they
line up at SPBUs (gas stations), fill their tanks
with fuel and later sell it to traders. They do
that because of the wide disparity between the
subsidized and market prices," Purnama said.
Indonesia, the only member of OPEC that
imports more oil than it sells, will reduce crude
oil exports by 110,000 barrels a day in November
and that oil will be processed into petroleum
products for the domestic market, says Iin Arifin
Takhyan, director general of the Oil and Gas
Department at the Mines and Energy Ministry. The
amount of crude oil imported for processing into
petroleum products at the country's refineries
will also be reduced. In future, the types of fuel
oil produced will be reduced from five to three,
namely gasoline, kerosene, and automotive diesel
oil, while bunker oil and industrial diesel oil
would no longer be marketed.
Takhyar is
one of the three individuals rumored to be on a
secret shortlist of candidates to replace Purnama,
whom many observers believe is due for the chop
after the revelations of the scale of smuggling.
"Fuel theft and smuggling activities at Lawe Lawe
Port reflect the management's failure in its
internal monitoring system," State Minister of
State Enterprises Sugiharto said. He also said he
has sent a warning letter to Pertamina's board of
directors saying they should be held responsible
for setting up a monitoring system that failed to
prevent the crimes.
Bill Guerin,
a Jakarta correspondent for Asia Times Online
since 2000, has worked in Indonesia for 20 years
as a journalist. He has been published by the BBC
on East Timor and specializes in business/economic
and political analysis in Indonesia.
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