The longer the Indonesian government waits before deciding to bring domestic fuel prices closer to international market levels, the more devastating will be the impact on the long-term foundation of the economy.
Waiting until Indonesian crude oil, which is usually US$7-$8 cheaper than international prices, exceeds $100 per barrel before the government increases fuel prices is only creating a big uncertainty because crude oil has fetched almost $120 in New York.
In fact, the average Indonesian crude price over the past three months has exceeded the $95 used to estimate the Rp 200 trillion (US$21.7 billion) budgetary appropriation for fuel and electricity subsidies for this year. Several analysts have estimated that even at current price levels, fuel and power subsidies would reach Rp 250 trillion and there are no signs of any price decline within the foreseeable future.
Uncertainty has been gripping the market and inflationary expectation is also on the rise as people increasingly believe that the government will sooner or later have to raise fuel prices.
It is not only economically unfeasible but also politically irresponsible to maintain such a huge sum of fuel subsidies, which are anyway enjoyed mostly by the middle and high-income groups of people.
It is likewise morally irresponsible for the government to allocate more than one fifth of the state budget for such wasteful spending, while not even half of that amount was appropriated for education, pubic housing and basic health services and food subsidies.
Yet more damaging is that capping fuel prices at artificially low levels will only prompt more export smuggling and misuse by industrial users and discourage energy efficiency, conservation and diversification.
It was not a surprise that the Downstream Oil and Gas Regulator reported Tuesday that subsidized-fuel sales in the first quarter had exceeded by almost 10 percent the earlier target even though fuel demand should have declined along with the lower estimate of economic growth this year.
The steady increase in the super-gasoline prices, which are floated on the international markets, may have prompted many car owners to shift to subsidized, lower-grade gasoline. But we shared the concern of many analysts that export smuggling had been mainly responsible for the higher demand for subsidized fuels.
As the World Bank Director for Indonesia Joachim Von Amsberg noted with great concern recently, "the multi-billion dollar fuel subsidy is a missed opportunity for investment, it's a missed opportunity for putting money into an education system that badly needs additional investment, it's a lost opportunity for public investment in infrastructure that is urgently needed."
It is mind-boggling to understand why the government has not yet learnt from past grave mistakes that maintaining prices through subsidies creates only artificial stability because such a measure addresses only the symptom of inflation, not the root cause. Government-fixed price curbs have always been a failure, because both producers and consumers get the wrong price signals and consequently the forces of supply and demand do not work normally.
Look at how investors have raised Indonesia's sovereign risks, as evidenced by the market demand for higher yields on government bonds. This means that the public sector's borrowing costs have increased.
The blunt fact is the longer this uncertainty over the fuel subsidy lasts, the more concerned will be foreign investors about the fiscal sustainability of the budget. This would consequently press down the rupiah exchange rate and increase imported inflation.
Inevitably, any fuel price rise will increase inflationary pressures but prices will eventually achieve their market equilibrium as the forces of supply and demand get the right price signals as what happened a few week after the 125 percent fuel-price hike in October 2005.
True, the President is now caught between a rock and a hard place because of the cascading impact of the steep hikes in food prices, the weakening global economy and uncertainty in the world financial market. But in so far as the fuel-subsidy trap is concerned, the blame should be put on the President and the House of Representatives. The longer "this time bomb" is left ticking, the more devastating will be its explosion.
The President should show his leadership. Deciding how to decide is as important as making the final decision.