The government is increasing the price of subsidized fuel by 30 percent. This wil solve the problem of budget deficit. Direct cash assistance program for the poor will be resumed.
Dahlan Iskan’s suspicion was almost accurate. The boss of the Jawa Pos Group had the “feeling” that the government would eventually increase the price of fuel. So he was not surprised, when the press was invited for lunch at the State Palace on May 5, President Susilo Bambang Yudhoyono hinted that the government will increase the price of fuel.
President Yudhoyono stated that, at the present time, the issue is no longer whether the government will raise the price of fuel or not. “However, if we do raise the price, by how much and which kinds will be affected? 20 percent, 25 percent or 30 percent? And how do come to that figure,”he explained to the chief editors, including Toriq Hadad, Chief Editor of Tempo magazine.
True enough. That same evening, Coordinating Minister for Economic Affairs Boediono announced the attendant policy on the fuel price. The decision was made in a restricted cabinet meeting led by the President and attended by Vice President Jusuf Kalla, Finance Minister Sri Mulyani Indrawati, Coordinating Minister for Social Welfare Aburizal Bakrie, dan State Minister for National Development Plan/National Development Planning Agency Chairman Paskah Suzetta.
According to Boediono, the schedule and the amount of price hike will be announced as soon as possible. The government will not delay the announcement because the increase in fuel subsidies caused by the rising price of crude oil may cause the country substantial financial losses. Sri Mulyani explained that the option to raise the price of fuel was chosen so that income and expenditures remain sustainable.
To a certain extent, the decision came as a surprise. For the first four months of this year, President Yudhoyono mentioned at least six times that there would be no increase in the price of fuel. In front of women leaders last April 18, for example, he promised that he would find other ways and he would not rush in raising prices.
In fact, when members of the Chamber of Commerce recommended adjustment of prices, the President did not budge from his position. He was definitive that raising fuel price would be a last resort. Yudhoyono preferred economizing on fuel and optimizing domestic production.
His position changed two weeks later. The dynamics of the continuing rise in the price of oil worldwide made the government nervous. The price of WTI (West Texas Intermediate) crude oil reached the level of US$121.84 per barrel on May 6. Last Friday, Bloomberg news agency reported that the price of oil reached a record high of US$125.84 per barrel.
Oil expert and observer Kurtubi estimates that the price of oil can go up to US$140 per barrel by the end of this year. The primary cause of the increase is supply and demand. Other factors include geopolitics as well as the value of the US dollar vis a vis other currencies.
Sri Mulyani has had to face the agony of dealing with the chaotic price increase of oil. When the proposed 2008 State Budget was submitted for the approval of the House of Representatives (DPR), it was calculated on the assumption that the price of crude oil remained at US$63 per barrel. A consensus was finally reached with DPR members and the Budget was approved with the price of oil at US$ 60 a barrel. The 2008 State Budget was barely ratified when the price of crude oil went up to US$80 per barrel. To make matters worse, when the budget was ready for implementation in January 2008, crude oil approached US$100 per barrel.
The economic team has reported to the President that it is no longer possible to implement the 2008 State Budget. “The deviation is very significant,”said Sri Mulyani during a media briefing on Tuesday last week. In February, a revised budget was swiftly submitted, using the assumption of US$90 per barrel. But unfortunately, by the time the price of US$95 per barrel was finally agreed on, the price of crude oil had already advanced toward US$100 per barrel.
Ultimately, the option of raising the price of fuel was unavoidable. Tempo’s source reported that the option of raising the price of gasoline was not decided hastily. The economic team was asked to undertake research every time the price of crude oil went up. According to the same source, the President agreed to raise the price after receiving the completed final study, which included analyses on political, economic and social impact.
The government became more transparent about the price increases of fuel during the national Development planning convention at Bidakara Hotel in Jakarta on May 6. The price increase was discussed at 20 percent, 25 percent and a maximum of 30 percent.
According to a special assistant to Coordinating Minister for Economic Affairs, M. Ikhsan, even with an increase of 30 percent, the government would still be paying out approximately 25 percent in subsidies. According to Ikhsan, at that level of increase the state budget would still be sustainable. In other words, the financing gap can be closed by taking into account a number of factors such as interest rate.
Chatib Basri, an economist at the Institute for Economic and Social Research at the University of Indonesia, said that the figure between 20-30 percent would be affordable for the people and adequate to fill budget deficit. If the increase is less, the impact on strengthening the rupiah, on lowering consumption and increasing income for the state budget would be thin. Hence, according to Chatib, it is important to find the most optimal price.
Tempo’s source claims that an increase of fuel price will save the state budget some Rp25 trillion. Part of the funds would be used for financing the special cash assistance program of Rp11.5 trillion, which will be disbursed to 19.1 poor families. Alternatively, without any price increase, fuel subsidy will jump to Rp31.5 trillion, in addition to a reserve of Rp8.25 trillion to cover the threat of increasing fuel price. The deficit would be 2.5 percent.
To solve the deficit problem, Paskah and Sri Mulyani sought the support of donor organizations, such as the World Bank and the Asian Development Bank. At the World Bank-IMF spring meeting in Washington last April, they met with the management of the two institutions. But the results were negative. Both organizations could help Indonesia because of liquidity problems.
A similar proposal was previously submitted to the Islamic Development Bank. In February, Paskah went to Jeddah to attend a meeting of the Islamic financial institution. The result was also negative. The management would not give any guarantee of support.
According to Paskah, one of the reasons may be the trade imbalance between Indonesia and the Middle East. The government had high expectations of this financial institution, in view of its high liquidity gained from the jump in the price of crude oil. This year, the Islamic Development Bank is only providing US$100 million to support the state budget, much lower than Japan, which is providing US$300 million.
The decision to increase the price of fuel has now been made. But the government seems to lack confidence in its implementation. It is actively conducting lobbying key people. On May 3, the Finance Minister organized a meeting with DPR members, which included party faction leaders, commission chair people and leaders of the budget committee at the Grand Hyatt Hotel in Jakarta. The second lobbying activity was held on May 7, at the official home of the Secretary General of the Finance Ministry, Mulia Nasution at 8 Jalan Sanjaya Buntu, Kebayoran Baru, South Jakarta.
According to Ikhsan, these meetings represent normal political communications. “It’s like a courtesy call to the Parliament,” he said, even though the policy of raising fuel price does not require DPR approval. Article 14 of the Law on State Budget allows the government to cut spending, to raise the price of fuel or to decide on other fiscal policies if the price of oil surpasses US$100 per barrel.
The majority of the party factions, such as Golkar, Democrat and the United Development (PPP) faction, support the government’s decision. Even though they did not openly support the decision, they understood why the government had to make the decision. However, the factions for the National Mandate Party (PAN)and the Indonesian Democratic Party of Struggle (PDI-P) rejected the decision. According to Tjahjo Kumolo, head of the PDI-P faction, the reason for the rejection was because people’s lives were already so difficult.
Head of the PAN faction, Zulkifli Hasan, was more concrete. He claims that the state budget can be saved by applying taxes on commodities that are making profits, on economizing government expenditure, as well as cutting off brokers in the oil trade.
The Indonesia Recovery Team also rejected the plan; they claimed that the plan to increase fuel price was a “panic policy.” This is the result of the lack of credibility of the economic team’s predictions on the assumptions of the 2008 budget, including predictions on the price of oil. Ultimately, the result is costly to the country.
But Jusuf Kalla seemed calm as he faces the rejections. He did not seem worried about potential demonstrations. In 2005, he said, when gasoline prices went up 30 percent, there were demonstrations for two weeks. When prices were raised the second time by 120 percent in October 2005, demonstrations occurred for only a week.
Kalla gave the assurance that the poor would benefit from the increase of fuel price. Through the special cash assistance program, they will receive direct cash payment as well as assistance in the form of basic commodities. In other words, according to Kalla, those who demonstrate will confront the poor people. “We are using the Robin Hood system,” he said jokingly.
According to Anton Gunawan, an economist at Bank Danamon, the impact of the price increase of fuel will slow down growth. But it is estimated that next year growth will resume. The problem is that the world price of crude oil is expected to continue rising. This trend has the potential of creating even more chaos to the next State budget.
For this reason, Chatib Basri suggests that a more flexible system of fuel pricing should be created. For example, if fuel subsidy is set at 80 percent, then no matter how the price changes, the subsidy remains at 80 percent. The remainder should be left to market mechanism.
Price controls can also be done through price stretching mechanism, for instance by taking the average price over a period of six months. If the price is still within the span, then there is no problem. But if it is outside the span, then a price adjustment process is needed. Under this system, Chatib claims, the scenario of the second volume of price increase need not happen.
Chatib also added that the price increase of fuel is meaningless if it is not accompanied by a complete energy program. A program to save energy as well as to limit gasoline consumption must be initiated for the medium as well as for the long term. Without it, he said, we will have to repeat what happened in 2005.
Retno Sulistyowati, Anne L. Handayani, Muchamad Nafi
2008 ECONOMIC INDICATORS
| | State Budget Changes 2008 | Without Increase | With Increase
|
| Economic growth (%) | 6.4 | 5.8 | 6.0
|
| Inflation (%) | 6.5 | 13.2 | 11.1
|
| Exchange Rate (Rp/US$) | 9.100 | 9.600 | 9.000
|
| Deficit (%) | 2.1 | 2.5 | 1.9
|
| Price of oil (US$/barrel) | 95 | 110 | 110
|
| Lifting (thousand barrel/day) | 927 | 927 | 927
|
| Fuel Consumption (mill kiloliter) | 37.04 | 39 | 35.9
|
Scenario of Fuel Price Increase
| | Up 20% | Up 25% | Up 30%
|
| Premium | 5.400 | 5.625 | 5.850
|
| Diesel Solar | 5.160 | 5.376 | 5.540
|
| Kerosene | 2.400 | 2.500 | 2.600
|
.gif)