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Abolish all fuel subsidies, Kadin tells government

Jakarta Globe - June 18, 2013

Tito Summa Siahaan – Economists and business leaders have urged the government to treat the decision to reduce fuel subsidies only as a first step in a pricing reform project, saying the job is not done until subsidies are phased out entirely.

Suryo Bambang Sulisto, chairman of the Indonesian Chamber of Commerce and Industry (Kadin), said on Tuesday that the fuel price increase is long overdue, urging the government to swiftly announce the timing for the price increase. "The waiting makes people anxious," he said.

Government officials said they would announce the timing of the fuel price increase by Friday, after the House of Representatives on Monday approved the 2013 revised budget. The budget contains social spending to reduce the impact of the fuel price increase on 15 million poor households.

The subsidized gasoline price will rise to Rp 6,500 a liter and subsidized diesel to Rp 5,500 a liter. Both are sold at Rp 4,500 (45 cents) a liter currently, less than half their market price.

Suryo maintained his previous view that the government should entirely phase out fuel subsidies as soon as possible. "The money for subsidies is better used for improving infrastructure," he said.

"Fuel subsidy is like a cancer; the longer we wait to treat it the sicker we become. The treatment will be painful but it will make us stronger and healthier," Suryo said.

David Sumual, chief economist at Bank Central Asia, agreed with the need to phase out the subsidy completely. "I think Indonesians can do it. Many countries with lower income per capita than Indonesia's have done it," he said.

But he doubted that the government would remove the subsidy completely anytime soon, saying politics played a big role in decision making. He said the government should revise its subsidy scheme by introducing a maximum level of spending every year.

"Let's say the subsidy is set at Rp 100 trillion, then after the spending has surpassed that level, the price of subsidized fuel will be adjusted," he proposed.

Dian Ayu Yustina, an economist at Bank Danamon, said: "I think Indonesians still need a fuel subsidy, but over the long-term it needs to phased out."

Dian and David said a decision in 2009 to cut the price of subsidized fuel to the current level ahead of a general election was politically motivated and warned future administrations not to take similar measures because it could send negative signals to investors.

Kadin's Suryo said the government must avoid any temptation to reduce the fuel price. "With the current crude price, it's only logical for the future government to raise it further," he said.