Vincent Lingga , The Jakarta Post , Jakarta Fri, 01/15/2010 9:20 AM Headlines
That was strangely a very bad move from a government which just got a strong mandate from the people and whose coalition is supposed to control more than 70 percent of the parliament.
The government launched a strategic energy policy last January by floating domestic fuel prices on international market quotations after crude oil prices fell steeply from their peak of US$147 a barrel in July 2008 to as low as $40.
That was the right momentum for the wise policy because domestic fuel prices at that time — Rp 4,500 a liter (45 US cents) after three successive price cuts in six weeks — were only slightly lower than international prices in Singapore.
The January 2009 fuel-price floatation also was then seen as realistic because the government, in order to prevent a sudden shock to the economy, decided to anchor the floatation initially on fixed-price bands which capped gasoline prices at a maximum of Rp 6,000 per liter and automotive diesel oil at Rp 5,500.
The wise policy that allowed monthly adjustments for fuel prices would provide policy predictability for businesses and investors in energy development, protect the economy from shocking inflationary pressures and spare the government the wasteful political bickering with the parliament any time international oil prices fluctuated widely.
That measure also was rightly designed to free the government from being hostage to the wildly volatile oil market and to remove the fuel-subsidy “time bomb” from fiscal management.
Past experience showed any time the government moved to raise fuel prices, irrespective of its size, there was always political turbulence with the House of Representatives, not to mention street demonstrations and a shocking impact on general price levels.
But President Susilo Bambang Yudhoyono, fresh from a landslide victory in the July 2009 presidential election after winning almost 61 percent of the votes, simply abandoned that sound energy policy at the expense of the long-term good of the economy.
The Cabinet decided Tuesday to increase budget appropriations for energy subsidies to Rp 150 trillion ($15 billion) for this year as international oil prices have now risen to around $80, higher than the average $65 assumed for the 2010 fiscal year.
Had the government consistently implemented the fuel-price floatation policy last year with gradual monthly price adjustments, the government should not have to resort to such a policy flip-flop that is inimical not only to the credibility of the government’s policy-execution ability but also to future investment in energy conservation and diversification programs.
The government should have been fully aware that fuel subsidies do by no means benefit the poor segment of the population but mostly motor vehicle owners.
Subsidies for the poor are better distributed through specifically targeted programs.
And, given our vast, porous coastal areas, the wide fuel-price differences with our neighboring countries such as Singapore and Malaysia, which are only 30 minutes away by boat, are highly vulnerable to abuse by smugglers.
Yet more damaging is that the generous subsidy policy will deepen our dependence on fossil fuels, adversely affect the energy diversification program to promote renewable energy such as biofuel and discourages energy conservation and efficiency.
If the government does have such financial resources to spare, it would have been better to allocate much larger subsidies for micro-credits or biofuel, a wholly local product. Subsidies for biofuel will at least stay in the domestic economy, but those for fossil fuels will flow out of the country as we import more than one third of our consumption.
Also saddening to note, most of the appropriations for the energy subsidies, which are tragically larger than the combined budget allocations for education and health sectors, will be burnt by motorists into carbon dioxide.
Given the strong political mandate the Yudhoyono government just received from the people, we cannot help but get the impression that such a strangely bad policy could have been made only by a beleaguered administration with a weak leadership.
As the current parliamentary inquiry into the controversial bailout of Bank Century in November, 2008, is moving like a loose cannon that could hit the political and economic stability, the government should indeed feel embattled.
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By deciding to increase budget allocations for energy subsidies by 50 percent to Rp 150 trillion (US$15 billion) this year, the government threw out a sound fuel policy launched early last year to gradually reduce dependence on fossil fuels.
That was strangely a very bad move from a government which just got a strong mandate from the people and whose coalition is supposed to control more than 70 percent of the parliament.
The government launched a strategic energy policy last January by floating domestic fuel prices on international market quotations after crude oil prices fell steeply from their peak of US$147 a barrel in July 2008 to as low as $40.
That was the right momentum for the wise policy because domestic fuel prices at that time — Rp 4,500 a liter (45 US cents) after three successive price cuts in six weeks — were only slightly lower than international prices in Singapore.
The January 2009 fuel-price floatation also was then seen as realistic because the government, in order to prevent a sudden shock to the economy, decided to anchor the floatation initially on fixed-price bands which capped gasoline prices at a maximum of Rp 6,000 per liter and automotive diesel oil at Rp 5,500.
The wise policy that allowed monthly adjustments for fuel prices would provide policy predictability for businesses and investors in energy development, protect the economy from shocking inflationary pressures and spare the government the wasteful political bickering with the parliament any time international oil prices fluctuated widely.
That measure also was rightly designed to free the government from being hostage to the wildly volatile oil market and to remove the fuel-subsidy “time bomb” from fiscal management.
Past experience showed any time the government moved to raise fuel prices, irrespective of its size, there was always political turbulence with the House of Representatives, not to mention street demonstrations and a shocking impact on general price levels.
But President Susilo Bambang Yudhoyono, fresh from a landslide victory in the July 2009 presidential election after winning almost 61 percent of the votes, simply abandoned that sound energy policy at the expense of the long-term good of the economy.
The Cabinet decided Tuesday to increase budget appropriations for energy subsidies to Rp 150 trillion ($15 billion) for this year as international oil prices have now risen to around $80, higher than the average $65 assumed for the 2010 fiscal year.
Had the government consistently implemented the fuel-price floatation policy last year with gradual monthly price adjustments, the government should not have to resort to such a policy flip-flop that is inimical not only to the credibility of the government’s policy-execution ability but also to future investment in energy conservation and diversification programs.
The government should have been fully aware that fuel subsidies do by no means benefit the poor segment of the population but mostly motor vehicle owners.
Subsidies for the poor are better distributed through specifically targeted programs.
And, given our vast, porous coastal areas, the wide fuel-price differences with our neighboring countries such as Singapore and Malaysia, which are only 30 minutes away by boat, are highly vulnerable to abuse by smugglers.
Yet more damaging is that the generous subsidy policy will deepen our dependence on fossil fuels, adversely affect the energy diversification program to promote renewable energy such as biofuel and discourages energy conservation and efficiency.
If the government does have such financial resources to spare, it would have been better to allocate much larger subsidies for micro-credits or biofuel, a wholly local product. Subsidies for biofuel will at least stay in the domestic economy, but those for fossil fuels will flow out of the country as we import more than one third of our consumption.
Also saddening to note, most of the appropriations for the energy subsidies, which are tragically larger than the combined budget allocations for education and health sectors, will be burnt by motorists into carbon dioxide.
Given the strong political mandate the Yudhoyono government just received from the people, we cannot help but get the impression that such a strangely bad policy could have been made only by a beleaguered administration with a weak leadership.
As the current parliamentary inquiry into the controversial bailout of Bank Century in November, 2008, is moving like a loose cannon that could hit the political and economic stability, the government should indeed feel embattled.
