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The government should bite the bullet to prevent fiscal time bomb
We have lived too long with artificially low inflation and our businesses have become too complacent with energy subsidies, which are not sustainable in the long term.
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An attendant walks across the forecourt of a gas station belonging to state-owned energy holding company Pertamina in Kuningan, South Jakarta, on Dec. 4, 2018. (JP/Seto Wardhana)
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he government is still considering the social and economic risks of cutting fuel subsidies and calculating the levels of fuel price rises and their impact on the economy in general. It has also allocated Rp 24.17 trillion (US$16.1 billion) for cash transfers under the social safety net programs to shield the most vulnerable families from the impact of the general price increase.
Certainly, Indonesia's headline inflation year-on-year, which declined to 4.46 percent in August from 4.94 percent in July, may rise to 6 or even 7 percent by the end of the year. But that is not the end of the world and is still below the 8-10 percent inflation range in many advanced economies.
Despite the additional social assistance, we still expect some degree of social turbulence and political noise. But given the multiple benefits of fuel reform for the long-term foundations of the economy, the government and members of the House of Representatives should work together to build public support for the painful measure.
But whatever other measures the government is preparing now, they will simply be contingency measures for the short term, which will not be able to address the long-term vulnerability of the economy to international oil price volatility.
We need a well-designed, permanent fuel reform policy that will gradually bring domestic fuel prices closer to their actual production costs, say within five years. Such a permanent reform, if consistently implemented, would improve the energy efficiency of the economy, strengthen fiscal balance, reduce carbon emissions and enhance the transition to renewable energy.
We have lived too long with artificially low inflation and our businesses have been too complacent with energy subsidies, which are not sustainable in the long term, especially in view of the escalating threats of climate change.
President Joko “Jokowi” Widodo, like his predecessors, still subscribes to the wrong perception that maintaining generous fuel subsidies will help maintain the purchasing power of the people, while all surveys have concluded that the bulk of the fuel subsidies have been enjoyed by middle- and higher-income consumers.
