T

he hot stories and the main topic of heated debates during the week after the Aug. 21 constitutional confirmation of Joko '€œJokowi'€ Widodo as Indonesia'€™s new president beginning on Oct. 20 remain the complex and daunting economic challenges his government must immediately confront.

 Foremost among the tasks is the painful measure the new government has to immediately take to achieve fiscal sustainability, as it will be virtually impossible for Jokowi to deliver even a few of the promises he made to the poor segment of the population during his election campaign without slashing the huge fuel subsidy.

In fact, worries about the shortage of subsidized fuel have already hit many areas, prompting long lines of motorists at gasoline stations as the state oil and gas company Pertamina attempts to ensure that the use of subsidized fuel this year does not exceed its mandatory volume ceiling of 46 million kiloliters.   

The new government will indeed face a very austere budget. More than 85 percent of the 2015 state budget plan will be tied up by routine (operating) spending covering fixed expenditures mandated by specific laws on education, regional autonomy and health, as well as other inflexible expenditures for personnel, debt servicing and energy and non-energy subsidies.

Hence, Jokowi will either have to cut a portion of the Rp 364 trillion (US$31.14 billion) energy subsidy or step up tax collection to get more revenue to fund some of the top priority programs he promoted during the election campaign.

However, since economic growth in 2015 is expected to be stagnant at this year'€™s 5.3-5.5 percent range, it would be rather difficult to immediately increase tax revenues. Hence, cutting fuel subsidies could be the most feasible way of immediately generating savings to use for more productive programs.

When it comes to the huge, wasteful spending on fuel subsidies, Jokowi'€™s position is by and large similar to President Susilo Bambang Yudhoyono'€™s four months after his rise to power in October 2004, when his predecessor Megawati Soekarnoputri left behind a fuel-subsidy time bomb.

Consequently, Yudhoyono was forced to raise the price of subsidized fuel twice in early 2005 or face severe fiscal difficulties.

The dilemma is that the issue of fuel subsidies has always been socially and politically sensitive, causing street protests and political turbulence at the House of Representatives, despite it being public knowledge that more than 70 percent of the fuel subsidies are enjoyed by middle- and high-income citizens.

Yet more worrisome is the risk as to whether the new government will be able to gain House approval for a raise in subsidized fuel prices as the coalition of opposition parties still controls more than 52 percent of the seats at the House.

The biggest challenge in ushering in fuel-price reform (meaning raising prices) is related to how social safety net programs should be designed and structured to cushion the impact of the general price increase caused by higher fuel prices on low-income citizens, the most vulnerable members of society.

Even though the number of citizens living below the poverty line has decreased to less than 12 percent of the total population, the number of people living on the verge of the absolute poverty line has remained large. This highly vulnerable group could easily be plunged into dire poverty by even the slightest decline in the macroeconomic condition.

The other downside risk is that the commodity market will most likely remain weak next year due to the persistent decline in the economic growth of  China, Indonesia'€™s biggest trading partner. Meanwhile, Indonesia'€™s manufacturing sector is unable to offset the decrease in export earnings from natural resources because of an acute shortage in supply capacity and low competitiveness due to the high logistics costs caused by poor infrastructure.

Given these limitations, the new government should do its best to woo more inflows of portfolio capital to fill in the large current account deficit, as well as foreign direct capital to build new manufacturing plants and infrastructure.

The next top-priority initiative requires the incoming government to expedite negotiations with contractors in the general and oil and gas mining industries so that the pace of production and the speed of new investments can be immediately accelerated. The upstream oil industry needs a special boost because the large deficit in the international trade balance has been generated by oil imports that now account for more than 60 percent of national consumption.

The new government should go the extra mile to convince foreign investors that it is not influenced and misled by partisan resource nationalism, as the rhetoric during the past election campaign implied.

In view of the high expectations facing the new government and since bitter pills (painful measures) are included among the first action programs Jokowi must implement, it is of paramount importance for the new government to maintain the public trust by demonstrating high standards of governance and clean and efficient administration.

The first test for sustaining this confidence lies in Jokowi'€™s selection of the members of his Cabinet, especially his economic team. It would also help minimize the potential for protests if the new government channels the bulk of any savings from the fuel reform toward improving infrastructure in rural areas, rehabilitating wet (traditional) markets in urban centers and smoothing the distribution of goods to control the general price rise after the fuel reform.

'€” Vincent Lingga