Bill Guerin, Jakarta – Fuel subsidies cost the Indonesian government 16 percent of its overalll expenditures in 2001. A total of US$5.3 billion (53.774 trillion rupiah) went down the drain. A large part of the money was siphoned off into the pockets of those who for ages here have manipulated a system that subsidizes the relatively well-off classes in the community rather than lower-income groups. The substantial price difference between domestic prices and those in neighboring countries has cost Indonesia dearly.
This year, as part of a deal with the International Monetary Fund (IMF), subsidies will be cut almost in half to 30.377 trillion rupiah, roughly 8 percent of the state's total budget. And since keeping the lid on a potentially explosive social conflict should be a major priority of an administration that governs a country so adversely affected by crisis, President Megawati Sukarnoputri does seem to be demonstrating nerves of steel. She gave the green light for last Wednesday's fuel price hike to both industrial and public users. In spite of last October's average increase of 12 percent, petrol was increased by a further 15 percent, diesel by 9 percent, and the crucial minyak tanah (kerosene), widely used for cooking and lighting poorer homes, soared by 50 percent – 6 cents per liter for domestic and small businesses, and double that for industrial purposes.
Meanwhile, the price of diesel for public transport and industry went up to 1,150 rupiah per liter from 900. With the other fuel increases and the recent 15 percent hike in electricity and telephone rates, this price hike will add to the burden on the poor, the jobless, and the underprivileged.
A special agency, empowered to intervene and re-introduce subsidies in specific instances, is tasked with monitoring market prices and their effect on the community. However, these new prices, except for household kerosene, apply only until the end of February. Thereafter, state energy company Pertamina will promulgate a new price list at the beginning of each month.
This is in line with Article 28 of the recent oil and gas law that stipulates that fuel and gas prices be open to fair and healthy market competition.
The new monthly prices may rise or fall in line with the Mid Oil Platt Singapore (MOPS) price. Premium petrol is now at the equivalent of the MOPS price, and the prices of automotive diesel, industrial diesel, fuel oil, and kerosene have been set at 75 percent of the respective MOPS level. Domestic kerosene is now at 75 percent of international levels while petrol, at the new level of 1,550 rupiah (15 cents a liter), compares with the average price in the US of around 30 cents a liter (but still less than a third of the price in Europe).
Coordinating Minister for the Economy, Professor Dorodjatun Kuntjoro-Jakti, forecasts healthy growth this year fired by the agriculture sector because of the subsidy cuts. However, he didn't explain where sector support would come from in the budget straitjacket. The cost of the subsidies, albeit reduced, means less capability for subsidizing the labor-intensive agriculture sector, the nation's prime asset. Fuel-subsidy savings have long been meant to develop infrastructure in villages and urban slums through rural financing institutions that then relay the money as revolving credit to small businesses.
Subsidies will be gradually lifted until prices at the pump reach global market levels by the year 2005, when, says the professor, the government will be able to raise development funds. But if he had taken just a short straw poll outside his office, he would have seen that many Indonesians can hardly believe that the day may come when they pay the world market price for fuel.
As far back as 1997 when the Suharto administration approached the IMF with a bailout plea, all future loans were granted on the condition that the government reduce subsidies. The gradual lifting of fuel subsidies was, from then on, cast in stone in the frequently revamped "Letters of Intent" signed with the IMF, which promised Jakarta $5 billion in financial aid.
The IMF stance is that subsidy cuts will also help increase competitiveness in the industrial sector, as indiscriminate support prevents companies from having to improve efficiency and cut costs in order to compete. There is no mention of the poor, except for this week's glib acknowledgement by IMF spokesman David Hawley that "It is widely recognized in Indonesia that fuel subsidies are poorly targeted and do not primarily benefit the poor."
Perhaps there really is no going back, whatever the cost and the dangers. On June 16 of last year, parliament finally approved the package that was written into the IMF's "Letter of Intent" two months later, when the government committed to raising fuel prices for non-industrial users by just over 30 percent. By contrast, Abdurrahman Wahid's administration had it much easier, as decision time for them coincided with high global oil prices and revenues were buffered by an extra $350 million per year in oil exports for every dollar increase in the price of oil. An OPEC member, Indonesia contributes 6 percent of the world's oil supply, and enjoyed a windfall of billions of desperately needed dollars following OPEC's agreement three years ago to hold down production. Conversely, of course, Wahid's government had to shell out even more to maintain the subsidies when the oil price rose. But there is no such windfall now – international fuel prices have been hovering at rates below the $22 a barrel assumed in the state budget.
The students are on the march again over the subsidy cuts. Across Indonesia, they have been on the streets in the last two days. The common theme on banners and in speeches is that, "Instead of reducing the subsidy, the government should make serious efforts to combat corruption, collusion and nepotism, to save money". They could have added smugglers to the list of criminals they want sorted out. Fraudulent practices are widespread from the permanent leaks seen in traffic queues in Jakarta when jerricans of fuel are filled from tankers with the driver's knowledge, to the massive fraud perpetrated by those who re-export the subsidized fuel, mainly to Singapore and Malaysia.
Forged documents are a way of life in Indonesia, and the smuggling of paraffin and diesel out of the country commands massive profits, which can easily cover the expense of paying off officials or others who could jeopardize the theft industry. Foreign flagged tankers are detained, caught in the act of illegally transporting the subsidized fuel out of Indonesia, part of the estimated total of 7 kiloliters carried by these vessels. Even a small ship load (500 tons) of diesel costs Rp6 trillion in revenue losses.
The protesters say the government's reasons for the price increases are not "proportionate" to the huge salaries, allowances, and free use of state facilities enjoyed by so many of the political elite. The student body as a whole wants Megawati to "confiscate the many ill-gotten gains of big-time corrupt politicians and others via private and public entities before resorting to raising fuel prices".
Fuel subsidies have long been an explosive and politically sensitive issue and these street protests will raise the stakes in the political arena, where the ex-ruling party Golkar is already lining up a war of attrition against Megawati and her majority PDI Party over the impending doom facing Akbar Tanjung, the Golkar leader. These widespread, almost permanent, economic and political crises have become mutually reinforcing, producing a downward spiral of instability, rising poverty and unrest and highlighting underlying social tensions previously obscured by the relative economic stability enjoyed under Suharto.
The World Bank estimates that at least 30 million Indonesians live below the poverty line. The National Family Planning Coordinating Board breaks this down to around 14.7 million poor families to be supported and aided, but the government, trying to cushion the burden on the poor by earmarking 2.85 trillion rupiah for various benefits, says its "rice for the poor" program, for example, will only reach around 9.79 million needy people this year.
Drastically reduced employment prospects for university graduates and high school dropouts have resulted in increased disillusionment with the government. With the fastest growing inflation rate in Asia, prices increased by more than 12 percent last year. As a result, the government is going to have to tackle the problem of the poor head on.
One of the main reasons former president Suharto quit when he did was because of the social unrest sparked by fuel price hike protests. The higher fuel prices were to be implemented by January 1, and the two-week postponement allowed the fuel black market even more opportunity to flourish. This sparked off widespread shortages because of hoarding. Wahid deferred fuel price hikes twice, and in doing so also brought on multiple inflation surges in the months preceding the planned hike.
The Alliance for New Indonesia, a group of widely respected economic and political analysts, warned last week of a possible "social revolution" if the government failed to immediately address the searing issues gripping the country. Its chairman, Sjahri, said that "Aside from the fuel black market, other black markets are the black market of justice and the black market of power politics."
The huge specter of unemployment continues to cast a giant shadow over the social fabric and the "rich get richer and poorer get poorer" reality of life in Indonesia, along with perceptions that no one cares about the poor and underprivileged. These factors are all building up a head of steam in a pot that will seriously threaten stability.