Editorial: Raise fuel prices!

Mon, 05/05/2008 11:26 AM  |  Opinion

Instead of further wasting its time and resources mulling over other options, the government should focus on containing the impact of higher fuel prices, minimizing a panicked reaction and improving the distribution of income-support for the poor.

Since the average Indonesian crude oil price has been exceeding US$100/barrel over the past few weeks -- the threshold approved by parliament for the government to increase fuel prices -- the ball is now in President Susilo Bambang Yudhoyono's court.

But the market -- meaning investors, creditors and consumers -- will not accept as credible any measures short of a bold move to bring domestic fuel prices closer to international market levels.

Reducing the huge disparity between domestic and international fuel prices is the best, though rather painful, choice.

By bringing domestic fuel prices closer to international levels, the government will, in one stroke, reduce incentives for export smuggling, encourage fuel efficiency and conservation and provide the right market signal for investment in new sources of energy, such as geothermal, coal, solar and wind power and biofuels.

Reducing fuel consumption by severely restricting private car owners' access to subsidized gasoline -- one of the options being mulled over by the government -- would be doomed to fail because of its technical complexities, which would create several loopholes. Nor would it deter export smuggling and misuse of subsidized fuel by industrial users.

Even more damaging is that such an ad hoc measure would not provide the right market signal for fuel conservation, efficiency and investment in alternative energy sources.

It would be grossly misguided for the energy reform measures being considered by the government to place too much emphasis on slashing fuel subsidies. Curbing and eventually removing fuel subsidies, once and for all, should only be the intermediate objective of the fuel reform policy.

Of more importance are the medium and long-term goals of encouraging fuel efficiency, conservation and diversification away from fossil fuels, through investment in alternative, renewable energy sources.

Further postponing the drastic measures needed to halt ballooning fuel subsidies would only increase uncertainty in the financial market, and could even prompt concerned investors to start dumping government bonds on the market because of the risks of a runaway budget deficit.

Even now there has been great concern that without a significant reduction in its sovereign risks it would be extremely difficult for the government to raise the almost Rp 118 trillion in rupiah and international bonds it needs this year to help plug its budget hole.

However, the larger the fuel subsidies are -- and they are about to explode to over $20 billion, more than 20 percent of total government spending this year -- the larger the sovereign risks investors and creditors will put on the government, and the higher the cost of government borrowing.

What is needed now is to improve the mechanism for distributing income-support (cash transfers) for the poorest segment of the people, to offset the impact of higher fuel prices and for gearing up public transportation and trucking companies to weather costlier gasoline.

The government has comprehensive data on poor households, through geographical poverty mapping conducted for the social-safety net programs during the height of the economic crisis from 1998 to 2000.

The government has also built up experience in managing the distribution of cash transfers and other aids, such as subsidized rice to poor people from 2005 to 2007. This could cushion poor households against the inflationary impact of higher fuel prices. Moreover, the savings generated by the fuel-price increase will enable the government to provide more aid for the poor.

On top of the social safety net programs, the government has also allocated almost Rp 55 trillion (US$6 billion) this year for an enhanced poverty alleviation program being implemented with assistance from the World Bank.

The program, launched in 2006, aims to empower the chronic poor and transient poor people to lift themselves above the poverty line through participation in creating programs and transparent rules in the budget, processes and procedures.

So all in all, broad, well-targeted programs are already in place to protect the poor and the near-poor from the inflationary impact of costlier fuel.

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