Robert Go, Jakarta – Indonesia and the International Monetary Fund broke an impasse over the country's swelling budget deficit problem yesterday, but the obvious solution proposed by the international lender and other aid agencies – lifting generous fuel subsidies – could amount to political suicide for President Abdurrahman Wahid's government.
According to IMF Asia-Pacific Deputy Director Anoop Singh, Indonesia has agreed to keep its budget deficit this year at 3.7 per cent of GDP, a level that both the government and the agency targeted last year.
Advertisement "We have agreed that every effort must be made to bring down the deficit to what was agreed to in December," Mr Singh said.
The 2001 Budget planned for a deficit of 53 trillion rupiah, but analysts and government officials last month projected that the country would incur a shortfall closer to 75 trillion rupiah, or between 5 and 6 per cent of GDP.
It remains to be seen whether Indonesia can revise quickly its budget assumptions and spending targets, but both legislators and the administration have indicated that they will expedite an adjustment to the budget to reflect current macro-economic conditions.
An obvious solution pushed by the IMF and the World Bank, two major lenders to Indonesia, involves cuts to fuel subsidies, worth 60 trillion rupiah this year. The World Bank's Country Director for Indonesia, Mr Mark Baird, reiterated this prescription at the Indonesia Next business seminar yesterday.
He said: "Higher fuel prices have to be a part of any budget deficit package. Persistent efforts in this area will be needed to reduce subsidies to affordable levels." The IMF had also made subsidy removals a pre-condition of previous loans to Jakarta, but to the agency's ire, the current government only implemented one round of cuts, which took effect last April.
A senior government official referred to the mass rioting that took place after former President Suharto abruptly hiked fuel prices in 1998, shortly before his departure from office, to explain the government's reluctance.
Political observers have argued that the fuel riots, which included the participation of students and workers, contributed to the downfall of the Suharto regime.
Said the government source: "We still remember the immediate and unruly impact of that increase. How do we go ahead with price hikes, knowing the possible political consequences? "It is also difficult to proceed because of the potential impact on the poor." Mr Baird and several analysts, however, disagreed that fuel-price hikes hit at the poor, and instead asserted that the country could not afford to maintain current price levels.
"Very little of the fuel subsidies go to the poor. It benefits middle-class consumers with cars and people who want to smuggle fuel out of the country," Mr Baird said.