After all the loud
commotion — street protests and heated political exchanges — last week, the
bill to raise the price of subsidized fuel was knocked back. Legislators
instead adopted a revised state budget law that set conditions in which prices
could be changed in the future.
As much as it was celebrated by some opposition parties in the House of
Representatives, we may still see possible increases in the price of Premium
fuel as early as next month.
Most people agree that there are two sides to this debate — the one
that stresses the need to balance the central government’s budget and the one
that focuses on the impact rising fuel prices may have on the daily expenses of
lower-income groups.
But there is a third dimension that should not be overlooked: the
possible effect of fuel policies on the wider economy, and the automotive
industry in particular.
Because of rising international oil prices the government is having
difficulties in balancing the state budget. High demand for oil — especially
among emerging economies like China and India — has put major pressure on
international oil prices. The escalating tension in the Middle East, in which
Iran threatens to curtail activities in the Strait of Hormuz, further
exacerbates the situation. Moreover, conflict between Israel and Iran over the
latter’s nuclear program adds another variable to the uncertainty.
Given Indonesia is no longer a net oil exporter, we will continue to
pay a high price. The budget deficit keeps rising and the government bears the
cost.
The second side of the story is that pulling the plug on subsidies has
the potential to devastate livelihoods, especially of those from lower-income
groups. The cost of living continues to rise, yet proper counter-policies to
subdue the social impact are not yet in place. When prices start to become
unbearable — while jobs are also limited — resentment towards the government
and social unrest are the likeliest outcomes in most societies.
Both arguments are valid; budgets for national programs are
increasingly tight and give less room for the government to manoeuvre.
Oil prices are external factors and, therefore, its price variance can
hardly be influenced. And the people pouring onto the streets of Jakarta and
Makassar protesting against the government for mishandling the state budget and
failing to manage natural resources are not entirely unreasonable.
The debate thus is complex. But the fuel-price challenge must be faced
head-on. Scaling back the burden of subsidized fuel — 11 percent of the state
budget last year — deserves serious consideration. It is also worthwhile for
Indonesians to move toward alternative and cleaner energy sources. For that
reason, in order to maintain people’s standard of living, various social
policies should be introduced to balance household expenditure on education,
health care, and food since price variance in these fields is less volatile and
can be dealt with nationally.
It is important to note, though, that the impact of cutting subsidies
may well extend beyond issues of fairness. The issue is not just concerned with
balancing the state budget and the prevention of social problems — the fuel
subsidy cuts may hamper Indonesia’s efforts to accelerate its economic
momentum.
The price increase for Premium gasoline, from Rp 4,500 to Rp 6,000 (50
cents to 65 cents), will translate to decreased demand for fuel and may reduce
future sales and usage of motor vehicles in the country.
Over the past few months, Indonesia attracted new investments totaling
at least $1.8 billion in the automotive industry. Large automobile
manufacturers have publicly announced their intentions to invest in projects
such as assembly lines and parts and component manufacturing.
Suzuki is in for no less than $800 million; Nissan and Daihatsu for
$250 million each; Chrysler promised $100 million; BMW $12 million and General
Motors Indonesia has begun construction of a $150 million production plant.
But if a fuel price hike curtails growth prospects in the automotive
sector, some people may start changing their minds.
Then there is also the introduction of downpayment regulations for
consumer finance to purchase new cars: under new Bank Indonesia rules, at least
25 percent of a vehicle’s value has to be paid up front. In light of all this,
investors may well revise their expectations for the country as a potential hub
for automotive production plants. One consequence may be fewer jobs and
economic slowdown. Are we ready to compromise our growth momentum?
A concrete solution is needed to smoothen the effort to balance our
nation’s excessive expenditure. And one can only see positive change when a
substantial policy is adopted to support our long-term economic growth.
These options range from providing incentives for new investments,
primarily in oil refinery technology for domestic use, to job creation and
programs to improve our debilitating infrastructure and public transportation,
which would ease people’s living expenses.
Indonesia is at a critical crossroads. Cutting the subsidies that are
in place now will be a difficult decision.
But with smart choices and a well-designed strategy, we can all
progress with less pain.
Budi Akmal Djafar
The Jakarta Globe
Business & Investment Opportunities
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