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Subsidy cut to fuel the fire JAKARTA - In the wake of a two-month "mini crisis" that saw the rupiah hit a four-year low of 11,750 per dollar on August 30, Jakarta has finally announced an imminent and substantial reduction in fuel subsidies. The exact date and the level of cuts have yet to be announced, though there is widespread speculation over both. Vice President Jusuf Kalla has said fuel prices may rise as early as October 1 while National Development Planning Minister Sri Mulyani Indrawati has said an increase in November would be too late to help reduce subsidies to the level of Rp89.2 trillion. She said fuel prices might increase by at least 50% in October.

The authoritative Bisnis Indonesia newspaper, in a piece earlier this month headlined, "President, Vice President given different proposals on fuel prices hikes", made the startling revelation that the economic team has proposed an average increase in fuel prices of 30-35% to President Susilo Bambang Yudhoyono but in a separate proposal to Kalla, proposed an increase averaging 95%.

The proposal made to Kalla, the paper said, is part of a document titled "Fiscal Policy Follow-up Measures as Part of Government's Policies Packages in Recovering Trust and Creating Certainty". According to the document, the highest percentage increase is for kerosene for household consumption, by a massive 142.86%, to Rp1,700. Nonetheless, the consensus of opinion gleaned from leaked ministerial comments elsewhere suggests ministers will submit a proposal to Yudhoyono to slash subsidies by an average of 40% by the end of this year and phase in additional fuel subsidy cuts throughout next year to align local prices closer to global levels.

Local fuel prices are still only around 30% of world levels, which means that even if the government raises domestic prices by another 60%, domestic fuel prices would still be less than half of world prices. Fuel prices in Indonesia have always been a potentially explosive issue. A modest price hike in 1998 contributed to the downfall of President Suharto. During the Megawati Sukarnoputri administration, prices were raised but only two weeks later were rescinded amid fears that the ensuing demonstrations and protests threatened her presidency.

Yudhoyono boldly slashed fuel subsidies in March, resulting in an average 29% hike in fuel prices that spurred inflation to a 26-month high of 8.8% for the month. Bank Indonesia Governor Burhanuddin Abdullah said inflation might hit 9% in 2005, outpacing the official target of 7.5%. Ramadan is the wild card. Expected to begin on October 5 (the exact day depends on sighting of the full moon), it is traditionally a period of high prices and labor unrest, making it an inopportune time to risk rioting or widespread demonstrations.

Economy badly hit

Although Southeast Asia's largest economy grew 5.1% in 2004, it has faced turbulence this year with fluctuating exchange rates and the soaring subsidies that threaten the budget deficit target. The government has been forced to sell rupiah for dollars to pay for oil imports, depressing the local currency as world oil prices soared.

Bank Indonesia, the central bank, raised its benchmark interest rate three times, by a total of 1.5 percentage points, to support the currency. The measures helped bring the rupiah briefly back below Rp10,000 to the dollar for the first time in weeks. It has now settled slightly weaker and on Friday closed at 10,056 to the dollar. The rupiah, however, remains among the worst performing currencies in Asia. It has lost 7% against the dollar this year, after losing around 9% last year.

"Although Indonesia is reeling under an oil crisis, it is stable and its fundamentals are strong," says Bantarto Bandoro of the Center for Strategic and International Crisis in Jakarta. Yet with oil prices at $65 a barrel, fuel prices at the pumps are less than half the import costs. The cost of subsidies has now swelled to over a quarter of the state budget for 2005. As recently as June, the government budgeted for a deficit of Rp20.3 trillion rupiah, or 0.8% of GDP, estimating that the cost of fuel subsidies would rise to Rp76.5 trillion rupiah this year. By the end of August, the government announced it would cap the deficit at Rp25.1 trillion rupiah, around 0.9% of the GDP, though the fuel subsidies bill is still expected to cost Rp138.6 trillion (US$13.8 billion) this year alone.

Robbing the rich to help the poor

This time round, Yudhoyono has committed to slash subsidies only after compensation programs for the poor are in place. Welfare subsidies, which will cost Rp4.8 trillion ($48 million), will help support the government's case that funds saved as a direct result of the subsidy cuts are being distributed to the needy. To ward off the worst of the heat expected when fuel prices are actually raised, an initial three-month payment of cash compensation of Rp100,000 ($10) per month will be disbursed to 15.5 million families, equal to around 62 million people, or 30% of the population who earn less than Rp175,000 a month.

But he still faces an unpredictable response by the public, made especially difficult after his promise that the March jump in fuel prices would be the last this year. There were widespread protests at the time, though there was little violence. Compensation promised in March has yet to be fully disbursed, and demonstrations against the latest planned increases have already started.

The level of kerosene prices, widely used for cooking and lighting by the poor, is critical. Currently at Rp700 a liter, they are heavily subsidized to a level around 10% of international prices. The assumption used in the welfare program is that a family of five uses 4 liters of kerosene a month per person. Wardah Hafid, coordinator of the Indonesian anti-poverty group, the Urban Poor Consortium, is singularly unimpressed, slamming the plan as a populist policy. "It's very stupid ... It will only spread corruption," she said, echoing sentiments expressed by others in local media that the scheme could mean manna from heaven for the corruption-ridden bureaucracy.

The government is aware of the danger as well. Information Minister Sofyan Djalil points out that the plan to make the payments at post offices and via branches of Bank Rakyat Indonesia rather than through the bureaucracy would increase transparency and accountability. The president is also going after syndicates of thieves who, collaborating with officials from Pertamina - the sole supplier of such fuels - smuggle subsidized fuel abroad, costing the state a conservatively estimated $849.8 million each year. Failure to bring the culprits to book would seriously hinder Yudhoyono's ability to "socialize" the fuel price hikes and fuel public resistance to being forced to tighten their belts whilst the corrupt become even richer at their expense.

Police have arrested 58 suspects so far this month, including 18 Pertamina workers and five foreigners. Some 17 ships laden with 6,000 metric tons of diesel and kerosene have also been seized. The suspects were from two syndicates operating in East Kalimantan and Riau provinces that also involve profiteers in Singapore. The subsidized prices of Indonesian gasoline, kerosene and diesel are around 60% below the pump prices in Singapore and Malaysia.

National Police chief General Sutanto, appointed by the president to hit back hard on smuggling as well as corruption, said some of those arrested were former shipmates from Pertamina oil tankers who were well versed in techniques for tapping crude oil by using large underwater pipes. They were brazenly pumping crude oil destined for Cilicap refineries directly from Pertamina's floating storage facility off East Kalimantan through a 7-mile long submarine pipeline to small tankers they chartered, and shipping the oil to buyers in Singapore. Late at night they sucked oil from Lawe Lawe Port and replaced it with seawater, in the meantime loading 3,000-tonne cargoes of oil onto small tankers. The Riau operation allegedly accounted for as much as 70% of nationwide fuel smuggling.

The government hopes higher prices will slow down domestic demand, which remains persistently high. Demand is currently predicted to reach 65.6 million kiloliters this year, 10% higher than the initial forecast of 59.6 million kiloliters (kL), according to Pertamina. From January to June, Pertamina supplied 184,000 kL of fuel per day but says the demand keeps increasing, so "long queues (at gas stations) are not caused by a fuel supply shortage."

Jakarta police have announced that they have arrested 54 people for hoarding 317 tons of fuel in the past two months. Pertamina also warns that people buy the subsidized kerosene and diesel fuel from gasoline stations to sell to industries, which pay the higher market prices for the products. Pertamina boss Widya Purnama, explaining some of the reasons for the fuel scarcity, told incredulous reporters that only the "little fish" had been caught in the anti-smuggling operations. "I have a report that in Samarinda, Pontianak, Jambi, Bangka Belitung, and Kupang, drivers of public transport vehicles have ceased carrying passengers. Instead, they line up at SPBUs (gas stations), fill their tanks with fuel and later sell it to traders. They do that because of the wide disparity between the subsidized and market prices," Purnama said.

Indonesia, the only member of OPEC that imports more oil than it sells, will reduce crude oil exports by 110,000 barrels a day in November and that oil will be processed into petroleum products for the domestic market, says Iin Arifin Takhyan, director general of the Oil and Gas Department at the Mines and Energy Ministry. The amount of crude oil imported for processing into petroleum products at the country's refineries will also be reduced. In future, the types of fuel oil produced will be reduced from five to three, namely gasoline, kerosene, and automotive diesel oil, while bunker oil and industrial diesel oil would no longer be marketed.

Takhyar is one of the three individuals rumored to be on a secret shortlist of candidates to replace Purnama, whom many observers believe is due for the chop after the revelations of the scale of smuggling. "Fuel theft and smuggling activities at Lawe Lawe Port reflect the management's failure in its internal monitoring system," State Minister of State Enterprises Sugiharto said. He also said he has sent a warning letter to Pertamina's board of directors saying they should be held responsible for setting up a monitoring system that failed to prevent the crimes.

Posted in General @ 27 September 2005 by Jeroen · 'Blog' RSS feed · permalink

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