The government and the House of Representatives finally showed some common sense, agreeing Tuesday on the fuel reform policy which will restrict the sales of subsidized gasoline to public transport vehicles, motorbikes and small-capacity fishing boats only.
The three months allotted for logistics preparations in Jakarta and its surrounding towns where the program will start in April seem adequate. The government gave itself six months to prepare to implement the policy in the rest of Java, and one year for other major islands. This will minimize the risks of supply and distribution.
Fuel subsidies are not only a matter of misallocation of scarce resources. The wasteful spending of tens of billions of dollars is also an insult to justice as more than 55 percent of the subsidies have been enjoyed by private-car owners or better-off families at the expense of low-income and poor people.
Policy-wise, the move will provide a positive signal to the market which has increasingly been concerned with Indonesia’s fiscal sustainability due to the steep increase in fuel subsidies along with the steady rise in international oil prices.
The new policy will become a great positive factor for credit rating agencies which plan to upgrade Indonesia’s sovereign rating to investment grade, a score which could cut Indonesia’s borrowing costs by up to 300 basis points and make the country more attractive to longer-term investment funds.
Even though the measure may cause some noise among a number of consumers, it will gain strong public opinion support. When people are made to believe that the era of cheap fuel has stopped, they will begin to reorganize their lives accordingly and businesses will prefer using fuel-efficient machinery and invest in fuel-conservation programs.
Floating gasoline for private cars on international market prices will also spare the government the wasteful political bickering with the House when subsidies will have to be increased anytime international oil prices rise steeply.
Also greatly beneficial is that restricting subsidized fuel to public transport vehicles, motorbikes and small-tonnage fishing boats only will free the government from the hostage of the wildly volatile international oil market and removes the “fuel-subsidy” time bomb from its fiscal management.
Certainly inflation may rise slightly next year. But because the policy will cut subsidies only gradually, there will not likely be shocking inflationary pressures.