Fuel price debate puts Yudhoyono under the pump

The coalition backing Indonesian president Susilo Bambang Yudhoyono is looking increasingly shaky after key partners defied the government to defeat a proposal to limit government spending on subsidised fuel.

The decision by the Golkar Party and the Prosperous Justice Party (PKS) to deny its support for the policy late last week, thereby sinking it on the floor of the House of Representatives, followed a week of nationwide protests against the subsidy cut that occasionally turned violent and carried echoes of the 1998 demonstrations, also in part on fuel prices, that led to the ousting of strongman president Suharto.

Yudhoyono, seemingly spooked by the vehemence of the protests and the rebellion of a supposed coalition ally, cancelled his visit to Phnom Penh for an Association of Southeast Asian Nations summit, scheduled for Tuesday and Wednesday.

The failure to proceed with the policy, which had been welcomed by economists and international organisations but had little popular support, deals a blow to hopes that Yudhoyono would use his final two years in office to deliver the structural reforms that often carry short-term political pain but are necessary for the country’s long-term development.

Yudhonoyo was directly elected and so can only be removed from office by impeachment, for which there do not seem to be grounds at this point. But he and his Democratic Party have prided themselves on being the leader of a six-party coalition, an arrangement that has up to this point helped ease the passage of legislation through the national parliament. The weakening of the coalition therefore hampers his ability to get his way with the legislature, but perhaps more significantly challenges the authority of his presidency.

In many ways, the government’s failure on the fuel price issue is a product of an underwhelming effort to sell the policy to the public rather than inherent flaws in the policy itself.

What the government proposed was a sensible response to the rising global oil price. At present, the price of low-octane fuel is fixed at 4500 rupiah (about 47 Australian cents) per litre, with state subsidies covering the gap between that price and the global oil price, said to equate to about 8000 rupiah a litre.

The policy was having a crippling effect on state finances, with the cost of the subsidy ballooning as the oil price rose, threatening to substantially increase the size of the government deficit given 9% of the $161 billion national budget is spent on fuel subsidies. It also meant that Indonesian consumers were shielded from the rising cost of fuel, and so had little incentive to develop or utilise more fuel-efficient means of transport.

The government proposed from April 1 to increase the price to 6000 rupiah per litre, a price that would still leave Indonesians with some of the cheapest fuel in the world but would curb runaway state subsidy spending.

Acknowledging the impact the policy would have on the poor, for whom fuel spending constitutes a significant part of their spending, the government had planned for short-term adjustment spending, in which about two-thirds of the savings — $A4.2 billion of the $A6 billion total saving in 2012  —  would be returned to the poor in the form of targeted cash handouts.

No price rise is an easy sell, but the government’s botching of the effort was spectacular. The sales effort was minimal. Yudhoyono and his ministers rarely spoke about the policy or explained it to the public, instead relying on the president’s personal popularity to reassure people that it was necessary despite the pain. When the public mood proved unfavourable, the government attempted a series of ham-fisted distractions, hoping to change the topic of debate: a new task force headed by the Religious Affairs Minister to enforce the 2009 anti-p-rnography law and a new law to limit the positions foreigners could hold in Indonesian companies among them.

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Categories: Asia-Pacific

One Response

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  1. Great article. I was always amazed at the low cost of fuel in Indonesia and the flow on effects on Jakartas traffic. Cutting fuel subsidies and spending the savings on transport infrastructure would be the logical step to take.
    Unfortunately, logic isn’t highly valued in Indonesian public policy.

    by mattsui on Apr 2, 2012 at 5:02 pm

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