Uncertainty over fuel subsidy continues in Indonesia

By Satria Sambijantoro | Source: ANN
Despite the intense impact of the ballooning fuel subsidies on the economy, the Indonesian government has not yet offered a clear prescription on how to handle the politically sensitive issue.

Discussions between President Susilo Bambang Yudhoyono and several top ministers over the weekend in Cipanas, West Java, failed to reach a consensus.

“I cannot reveal anything about it, as there are still some issues that we need to address,” Finance Minister Agus Martowardojo told reporters in Jakarta on Monday, when asked about the meeting.

“I understand that the public needs information but, up until now, there is no information that can be shared. This will be finalised soon,” he added.

The absence of any clear result from the meeting marks yet more uncertainty in the government’s efforts to reduce fuel subsidies. The National Economic Committee (KEN) had previously stated that a new fuel policy would be announced on March 28.

Bank Indonesia (BI) Governor Darmin Nasution once said that delaying the adjustment of fuel subsidies for a single day “will cost the economy dearly”, adding that the burgeoning fuel subsidies would have a contagion effect upon other macroeconomic pillars.

“If no resolution is reached soon, then our current account deficit will worsen,” Darmin said in Jakarta on Monday, noting that the situation also put pressure on the rupiah.

In the fourth quarter last year, Indonesia’s current account deficit widened to 3.6 per cent, a figure that many analysts considered “alarming” due to the huge import of oil stemming from soaring consumption of subsidised fuel.

Darmin, the outgoing BI governor whose tenure will end on May 23, told reporters that the central bank had not been invited by the President to the Cipanas meeting.

Any prolonged delay in the decision over the fuel subsidy would build up inflationary pressures as well as encourage people to illegally hoard the commodity, a situation that could lead to possible scarcity of subsidised fuel in the market, said Asian Development Bank (ADB) economist Edimon Ginting.

“If the government decides to hike the price of subsidised fuel, then it is best implemented in April, when inflation is undergoing a downward trend, thanks to the harvest season,” Edimon said in a phone interview. “The government should not delay the decision again as inflation will be on an upward trend between June and July.”

Energy and Mineral Resources Minister Jero Wacik previously said the government would discuss the possibility of introducing two prices for subsidised Premium fuel.

Under the policy, Premium would be available for motorbikes and public transportation vehicles at its existing price, 4,500 rupiah (46 US cents) per litre, while a higher price would be applied to privately owned cars.

“The policy will create a two-tier market for a single commodity,” said Destry Damayanti, chief economist of state-owned Bank Mandiri. “There’s an ‘arbitrage risk’ between the two markets – given the price gap between the two; people could buy the fuel at the first [price], then make a profit by selling it at the second.”

Whatever decision was reached by the government, Destry said it should be implemented as soon as possible. She said the government should not procrastinate at a time when the state coffers were under heavy strain from the soaring oil and gas trade deficit that topped US$1.1 billion in February, a figure that, according to Destry, was “extremely high”.

*US$1=9,680.54 rupiah