[ppi] [ppiindia] Subsidy cut to fuel the fire in Indonesia

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**http://www.atimes.com/atimes/Southeast_Asia/GI28Ae02.html

Sep 28, 2005 

  

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rescinded amid fears that the ensuing demonstrations and protests threatened 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. 

(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us 
for information on sales, syndication and republishing .)

[Non-text portions of this message have been removed]



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