Commentary: Isn’t now the best time to raise fuel prices?

Listening to our officials, the Indonesian economy is doing great. They are not exaggerating. The gross domestic product is growing at 6 to 7 percent, inflation is under control, Indonesia is exporting more and the rupiah is still going strong. The best part is that poverty rates and unemployment figures are both falling.

Of course, there are exceptions to the rule and some people got left behind. The income gap between the wealthiest and poorest members of society has also widened. Generally speaking, however, people’s prosperity has been on the rise. All this happens against a backdrop of a weakened global economy.

Indonesia has done extremely well, not only relative to other countries but also to its own past. Foreign direct investment is booming and its sovereign rating has been awarded “investment grade” by Fitch Rating and Moody’s. Indonesia is now the 17th largest economy in the world and officials are talking about breaking into the top 10 by 2025.

But if Indonesia has never had it so good, at least not since the 1998 Asian financial crisis, then why is it so difficult for the government to increase fuel prices now and cut back on the huge fuel subsidy bill that is eating into state coffers?

In 2011, the government forked out no less than Rp 255.6 trillion (US$28.4 billion) to pay for the subsidy on gasoline consumption and electricity. That’s 38 percent over the budget, which was already high and a gross misallocation of precious resources, as it was. Finance Minister Agus Martowardojo, in making the case for the House of Representatives to allocate more money to pay for the subsidy bill, said the budget overshoot happened because of the higher than predicted consumption of gasoline and higher world prices of oil throughout the year.

The prospect for 2012 is for an even higher subsidy cost, as world oil prices are still on the rise with the threat to Iran’s oil exports. But for some unexplained reasons, raising the domestic fuel prices appears to be a political taboo that no one, whether it’s the government or the House, are willing to even discuss in the open. Both have, in fact, separately vowed not to increase fuel prices until 2014, a date conveniently chosen after their terms in office end, therefore leaving the politically unpopular decision for the next elected House and government to make.

Yet, they know that the subsidy cost has become not only unsupportable but also harder to justify since the lion’s share of taxpayers’ money has gone to those who use more gasoline and electricity. The fuel subsidy policy is effectively taking money from the poor and putting it in the pockets of the rich, courtesy of a reverse Robin Hood-like government.

In the last two years, the government and the House have been agonizing over ways of limiting the use of subsidized gasoline only for the poor and encouraging motorists to switch to natural gas. Both have recently agreed that this should be phased in during April, starting in Jakarta and then moving to the rest of Java and Bali, before spreading to the rest of the country.

Then came the unexpected bad news this week. Pertamina, whose job it is to supply subsidized fuels as well as most of the higher grade of unsubsidized fuel and compressed natural gas, said it was not ready for the April 1 implementation. The mechanisms were not in place to implement the new policy without opening it to abuse and the siphoning off of subsidized oil for other purposes.

The government is now saying that it will leave it to the House to decide whether to increase the fuel subsidy to plug the budget shortfall, or to allow it to increase prices. With the 2014 election already in the minds of the government and those in the House, don’t expect anyone to take the bold initiative to propose price increases.

We are back to square one, and the nation will likely once again squander large sums of taxpayers’ money on fuel subsidies destined mostly for the wealthy.

Raising fuel prices, although always a political minefield in Indonesia, has never been this difficult in the past. History has shown however that it is doable if the government chooses the right timing.

As recently as 2005, President Susilo Bambang Yudhoyono in his first term in office raised fuel prices twice with little upheaval. His then vice president, Jusuf Kalla, prepared the ground, launched a public services campaign and provided targeted-cash subsidies to cushion the poorest of the poor. In the second increase in October 2005, Kalla timed it with the start of Ramadhan and the rainy season, minimizing the likelihood of street protests. It worked.

Soeharto made the fatal decision to increase fuel prices in May 1998 that led to massive riots that eventually brought down his government. But in the preceding 30 years, he timed the increase in fuel prices when the economy was doing well. If he were still in charge today, he would know that this is the time to do it. People will be making noises for sure and there will be protests, but with the right preparation (just turn to the 2005 examples) most Indonesians should be able to weather the impact.

There may not be a better chance to increase fuel prices after this, especially as the nation faces a general election in 2014.