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President-elect Joko seeks help of outgoing president on fuel subsidies, to no end
JAKARTA – It must have been tense encounter, with Indonesia’s President-elect Joko Widodo asking the man he will succeed to reduce a mammoth fuel subsidy before he leaves office and thus share the burden of what could prove an unpopular move.
President Susilo Bambang Yudhoyono will complete a decade in office – or two terms – in October, before handing over to Joko, who won the July 9 presidential vote. One of the outgoing president’s last acts was to propose a draft budget that will push energy subsidies to a projected US$30 billion in 2015 –almost 20 per cent of government spending.
Joko has said he aims to cut the fuel subsidy gradually – but Yudhoyono refused to give him a head start before he takes office, saying, in Joko’s version of their Aug. 29 meeting, that “current conditions are not appropriate” for a hike in fuel prices.
The subsidy keeps the cost of running a car down, but mostly benefits those better-off Indonesians who can afford to buy a vehicle. The subsidy means little to most, if not all, of the 40 per cent of Indonesians who live on less than US$2 per day.
“The ones who get the benefit, it is really the middle and the upper class. The poor people’s link to the gasoline is just the public transport,” said Finance Minister Chatib Basri in a recent interview at his office.
The subsidy is an inheritance going back to former dictator and President Suharto, whose three decades in office saw substantial economic growth prompted by liberalising reforms aimed at attracting foreign investment. Suharto’s era was marred, however, by the sort of cronyism and monopolisation of economic concessions that allowed connected elites, including the dictator’s own clan, to build up huge business empires.
Joko said he is prepared to jeopardise his popularity by cutting the fuel subsidies, a risky move given that he won office after a closer-than-expected election that saw contender Prabowo Subianto cut back a double-digit lead by Joko in opinion polls just months before the election.
Prabowo is now presumably seething after the Constitutional Court rejected his appeal to have the election overturned. With over 60 per cent of the country’s incoming members of parliament aligned with him –f or now, anyway –he could try to capitalise on any anger at Joko over fuel prices.
Fuel price increases in 1998 helped spur the unrest that saw Suharto’s ouster and the start of Indonesia’s now 16-year-old democracy. In 2012, Yudhoyono’s government cancelled plans to cut the fuel subsidy after tens of thousands of people protested.
“In the short term, I think if the lifting of the subsidy is not accompanied by measures to assist those affected, especially poorer people, then it will affect the approval level of the government,” said Djayadi Hanan, a researcher with Saiful Mujani Research and Consulting (SMRC), speaking to The Edge Review after launching a recent report on voter perceptions of the recent presidential elections.
Finance Minister Chatib, a technorat appointed to government in 2013, said that he himself risked the wrath of MPs and colleagues in government by proposing that the subsidy, along with other government spending, be reduced. “This was something really unpopular to say to politicians, just months before the elections,” he said.
Cutting the subsidy and letting fuel prices rise will, however, threaten rising inflation, which could in turn hit poor Indonesians.
“My answer as a technocrat is that you need to do some adjustment,” said Chatib, discussing the subsidy. “Can you adjust the fuel price for the next government? If you adjust the price and the inflation goes up, there will be an impact on the poor people.”
But the subsidy needs to be cut, according to independent economists, rating agencies and international lending agencies, because it isn’t sustainable and takes away money that could be used on education, healthcare and on upgrading Indonesia’s poor infrastructure. Capital Economics, a London-based think-tank, wrote in July that “although the finances of Indonesia’s government are relatively healthy, with the fiscal deficit in 2013 coming in at just over 2 per cent of GDP and public debt standing at just 20 per cent of the economy, the large subsidy bill crowds out other public spending.”
Indonesia’s growth rate has been declining since 2009, with the World Bank and the International Monetary Fund (IMF) foreseeing, respectively, 5.6 per cent and 5.8 per cent growth for 2015. Joko has said he hopes to spur the economic growth rate to 7 per cent a year before the end of his five-year term, with even 6 per cent a year too low to create jobs for the 2 million plus Indonesians entering the job market each year.
Indonesia’s economy, which is largely driven by household consumption, nevertheless remains heavily reliant on commodities and energy – which make up 65 per cent of Indonesia’s exports. That needs to change, according to the current finance minister, because commodities prices have dropped in recent years, slowing Indonesia’s growth.
“It is about time for us to rethink the strategy of development. For me, the resource boom is over,” said Chatib, who added that though Indonesia will continue to rely on its natural resources – such as coffee, cocoa, oil, gas, palm oil, copper and more – it needs to engage in more value-added activities such as processing resources inside the country, rather than just exporting raw materials.
Compared with its neighbours such as Thailand and Malaysia, manufacturing makes up a small share of the country’s GDP and exports – another pointer to just how important exports of energy and other resources are to Southeast Asia’s biggest economy.
Better infrastructure, meanwhile, is essential if Indonesia is to develop a competitive manufacturing sector and to achieve the sort of growth to which Joko aspires.
“One thing that prevents us from achieving higher growth of more than 7 per cent is the supply constraint, the inadequate infrastructure,” conceded Chatib, who said he was expecting to meet with the president-elect’s economic advisors in the coming days.