The week in review : $25b for artificial stability
Vincent Lingga, The Jakarta Post | Sun, 04/01/2012 12:43 PM
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The government, with its popularity eroded by corruption scandals, succumbed on Friday to popular outrage against its planned fuel-price increase by raising the amount allotted for fuel and power subsidies this year by almost 35 percent to Rp 225 trillion (US$25 billion).
The political compromise will further weaken the lame duck presidency of Susilo Bambang Yudhoyono and debilitate the policy-making capability of his government during its remaining 30 months in office.
The development is worrisome. Many more reforms are needed to strengthen the foundations of the nation to sustain high economic growth rates over the long term.
The nation has been gripped by increasingly rowdy political and economic debates and protests over fuel prices over the last three months, some of which turned violent with dozens of police officers and demonstrators injured and state and private property damaged.
However, this costly exercise in democracy has served to only to strengthen the economy’s addiction to fossil fuels, thereby putting the state’s budget and its fiscal management as a whole at the mercy of highly volatile oil prices, which are entirely beyond our capacity to control.
This political decision will only create artificial stability at the expense of poverty alleviation, infrastructure development and renewable energy research.
The vigorous — yet pointless — debates and political bickering about the fuel-price issue miserably failed to enlighten the general public about the truth: Artificially low fuel prices will eventually lead us to a severe energy crisis through severe supply disruptions.
The issue is much broader than simply plugging the government’s deficit. There is a great concern about our deeper addiction to cheap fossil fuels that damage the environments and make the development of other renewable energy commercially unfeasible.
We do not understand why the politicians of the opposition parties in the House — the Indonesian Democratic Party of Struggle (PDI-P), the Great Indonesia Movement Party (Gerindra) and the People’s Conscience Party (Hanura) — stubbornly refuse to acknowledge the severity of the nation’s fuel-subsidy problem.
More appalling was the utter shamelessness shown by the leaders of the PDI-P as they provoked their supporters to join street demonstrations over the last three days, fearing that the party would be on the losing side when the House voted on the fuel subsidy.
It was a crass and pathetic politicking that marked a low for the nation’s developing democracy.
And even more flabbergasting were the number of economists and human right activists who, along with the PDI-P’s leaders, missed the point, alleging the fuel reform measure was only political grandstanding by the President.
The reality could not be more different. Yes, Yudhoyono could have appeased his critics and neutralized opposition by not adjusting the fuel subsidy and allowing the deficit to rise to an unmanageable level at the expense of economic stability.
However, the President’s conscience seemed to have forced him to stake his political legacy on proposing painful reforms for the long-term economic good.
Allowing the government’s deficit to exceed the ceiling of 3 percent of GDP set by law will increase Indonesia’s sovereign risks at a time when the government has been tapping the international bond market to finance the deficit.
Higher sovereign risks will increase the government’s borrowing costs. Worse still, the government might lose the investment-grade rating it only recently regained after a lapse of more than 14 years.
Yudhoyono’s biggest mistake — or rather his perpetual flaw — has been his indecisiveness and acute lack of courage to bite the political bullet, despite his term limits that will see him exit in 2014. He should have raised the fuel price last year, when he still had a strong political mandate and could have avoided bickering with the misguided lawmakers in the House.
The 2011 State Budget Law authorizes the President to adjust fuel prices whenever international oil prices rise by more than 10 percent over the average price assumed in the state budget.
Finance Minister Agus Martowardojo warned the public as early as last May that fuel subsidies had risen at an alarming rate along with the rising international oil price, urging the President to act immediately.
We simply cannot understand how the government could have been so ignorant as to allow a stipulation written into the 2012 State Budget Law that prohibits the government from raising fuel prices. The President and his economic ministers should have realized the continuing unpredictability and volatility of international oil prices.
In 2004, then president Megawati Soekarnoputri refused to raise fuel prices, despite steeply rising international prices — apparently in an attempt to gain more votes in that year’s presidential election.
Megawati was humiliatingly defeated by Yudhoyono, who was forced to raise fuel prices in March and again in 2005 to defuse the fiscal time bomb left behind by Megawati.
Yudhoyono, however, has apparently failed to learn from the political turbulence and massive protests he encountered when he raised fuel prices in 2005 and 2008.
The political compromise will further weaken the lame duck presidency of Susilo Bambang Yudhoyono and debilitate the policy-making capability of his government during its remaining 30 months in office.
The development is worrisome. Many more reforms are needed to strengthen the foundations of the nation to sustain high economic growth rates over the long term.
The nation has been gripped by increasingly rowdy political and economic debates and protests over fuel prices over the last three months, some of which turned violent with dozens of police officers and demonstrators injured and state and private property damaged.
However, this costly exercise in democracy has served to only to strengthen the economy’s addiction to fossil fuels, thereby putting the state’s budget and its fiscal management as a whole at the mercy of highly volatile oil prices, which are entirely beyond our capacity to control.
This political decision will only create artificial stability at the expense of poverty alleviation, infrastructure development and renewable energy research.
The vigorous — yet pointless — debates and political bickering about the fuel-price issue miserably failed to enlighten the general public about the truth: Artificially low fuel prices will eventually lead us to a severe energy crisis through severe supply disruptions.
The issue is much broader than simply plugging the government’s deficit. There is a great concern about our deeper addiction to cheap fossil fuels that damage the environments and make the development of other renewable energy commercially unfeasible.
We do not understand why the politicians of the opposition parties in the House — the Indonesian Democratic Party of Struggle (PDI-P), the Great Indonesia Movement Party (Gerindra) and the People’s Conscience Party (Hanura) — stubbornly refuse to acknowledge the severity of the nation’s fuel-subsidy problem.
More appalling was the utter shamelessness shown by the leaders of the PDI-P as they provoked their supporters to join street demonstrations over the last three days, fearing that the party would be on the losing side when the House voted on the fuel subsidy.
It was a crass and pathetic politicking that marked a low for the nation’s developing democracy.
And even more flabbergasting were the number of economists and human right activists who, along with the PDI-P’s leaders, missed the point, alleging the fuel reform measure was only political grandstanding by the President.
The reality could not be more different. Yes, Yudhoyono could have appeased his critics and neutralized opposition by not adjusting the fuel subsidy and allowing the deficit to rise to an unmanageable level at the expense of economic stability.
However, the President’s conscience seemed to have forced him to stake his political legacy on proposing painful reforms for the long-term economic good.
Allowing the government’s deficit to exceed the ceiling of 3 percent of GDP set by law will increase Indonesia’s sovereign risks at a time when the government has been tapping the international bond market to finance the deficit.
Higher sovereign risks will increase the government’s borrowing costs. Worse still, the government might lose the investment-grade rating it only recently regained after a lapse of more than 14 years.
Yudhoyono’s biggest mistake — or rather his perpetual flaw — has been his indecisiveness and acute lack of courage to bite the political bullet, despite his term limits that will see him exit in 2014. He should have raised the fuel price last year, when he still had a strong political mandate and could have avoided bickering with the misguided lawmakers in the House.
The 2011 State Budget Law authorizes the President to adjust fuel prices whenever international oil prices rise by more than 10 percent over the average price assumed in the state budget.
Finance Minister Agus Martowardojo warned the public as early as last May that fuel subsidies had risen at an alarming rate along with the rising international oil price, urging the President to act immediately.
We simply cannot understand how the government could have been so ignorant as to allow a stipulation written into the 2012 State Budget Law that prohibits the government from raising fuel prices. The President and his economic ministers should have realized the continuing unpredictability and volatility of international oil prices.
In 2004, then president Megawati Soekarnoputri refused to raise fuel prices, despite steeply rising international prices — apparently in an attempt to gain more votes in that year’s presidential election.
Megawati was humiliatingly defeated by Yudhoyono, who was forced to raise fuel prices in March and again in 2005 to defuse the fiscal time bomb left behind by Megawati.
Yudhoyono, however, has apparently failed to learn from the political turbulence and massive protests he encountered when he raised fuel prices in 2005 and 2008.
