JAKARTA — Joko Widodo will tread carefully in cutting Indonesia’s expensive fuel subsidies after his Oct. 20 inauguration as the country’s next president, according to a leading member of his transition team.
“We will calculate in detail the political aspect and the social aspect before reallocating the subsidy,” Hasto Kristiyanto told the Nikkei Asian Review at his office in central Jakarta. “The decision to raise the fuel price has not been decided yet,” Kristyanto added on Friday afternoon, after fresh reports emerged saying Widodo would move quickly to raise fuel prices after taking office.
Outgoing Finance Minister Chatib Basri estimated that the Widodo government could save $1.7 billion a year if it lifted fuel costs by 3,000 rupiah ($0.25) per liter, a move signalled by other Widodo advisers, including Luhut Pandjaitan, a former industry minister. Widodo himself has said that he aims to phase out the subsidy during his five-year presidential term.
Adding 3,000 rupiah to the street price of subsidized gasoline, currently 6,500 rupiah per liter, would raise the cost to the consumer by almost half. In a country that has a history of street protests when living costs go up, such a large fuel price hike would be a politically precarious move so early in Widodo’s presidency.
Kristiyanto said the amount by which prices would rise had not been set and cautioned that the president-elect, universally referred to as Jokowi, had not decided on the timing of the move. “The question is when is the right time to take this decision and we will recalculate it based on the time,” he told NAR.
“A socialization of the program will have to be implemented first,” Kristiyanto said. “Jokowi will first send a strong message to the people that he is committed to them. We can build kilometers of irrigation to the farmers, we can provide a lot of social spending to the poor people,” he said, previewing Widodo’s likely tactics in pitching the fuel price hike to the Indonesian public.
Widodo’s transition team advisors have been working since the July 9 election on policy formulation and shortlisting names for the new president’s cabinet.
The president-elect is under strong pressure to cut the fuel subsidy to release funds for investment in infrastructure, health and education and to allow market prices to dampen demand for fuel.
Economic growth during the two terms in office of outgoing President Susilo Bambang Yudhoyono has created a middle class estimated at about 74 million, triggering a sharp rise in car ownership and gasoline demand. Indonesia became a net importer of oil a decade ago, in spite of having significant oil reserves.
The fuel subsidy is popular, but soaks up a fifth of government spending and mostly benefits better-off Indonesians with their own vehicles. It is of little help to the tens of millions of people among the country’s 252 million populace who live on less than $2 a day. But a sharp fuel price hike could push up inflation and prompt other price rises, which would disproportionately impact the less well-off.
Cutting the fuel subsidy does not require a vote in parliament, but Widodo’s cautious approach to the issue signals that the president-elect is wary of Prabowo Subianto, his defeated rival for the presidency, who is a son-in-law of Suharto, Indonesia’s late dictator.
Subianto heads a coalition that controls 63% of parliamentary seats and holds almost all key leadership positions in the legislature. In September, in one of the last acts of the outgoing parliament, Subianto’s supporters voted to end direct elections for regional governors, a move that could prevent the rise of another political outsider like Widodo, who sold furniture before being elected mayor of Solo in 2005.
Even if Subianto is unable to block a fuel price hike in parliament, he could nevertheless mobilize supporters to protest against what would be a contentious move.
Widodo and Subianto held a surprise meeting at the latter’s south Jakarta home on Friday morning, suggesting Subianto could be about to soften his opposition to his former opponent.
If Widodo delays a rise in fuel prices, he will have to find other ways of raising the cash needed to pay for new roads, rail links, and ports, as well as for increased social spending.
Kristiyanto said that Indonesia was losing out on billions of dollars in potential revenue because of tax evasion by the rich and by businesses.
His comments suggest that Widodo will try to increase government revenues by broadening the tax base. “In practice, only 8.5 million [people] pay [tax],” said Kristiyanto, a narrow revenue stream in the world’s fourth most populous country. “Many corporations and rich people are not paying.”
A more aggressive revenue collection system could prompt fresh opposition from the groups accused by Kristiyanto of dodging tax, while a root and branch tax reform would probably also lead to conflict with the legislature.
“The creation of an autonomous tax authority looks unlikely at the moment as this will require parliamentary approval,” said Dan Wilson, a Singapore-based economist with ANZ Research.
“However, there is still a lot that can be done on the revenue generating side, notably increasing tax compliance through simplification of processes, online tax collection, a more comprehensive and controlled database of payers, and intensified collection efforts. Jokowi would also be able to make minor changes to tax rates, and introduce tax incentives, without parliament’s approval.”
Indonesia needs to improve its infrastructure to attract investment outside the natural resources sector, which accounts for about 60% of exports, and to modernize its economy.
“[The] Indonesian manufacturing sector is behind, compared to China, Vietnam, India, Thailand, and even Bangladesh,” said the Jakarta think-tank Transformasi. “During [Yudhoyono’s] administration, there [was] almost no economic policy breakthrough that can induce growth.”
With around 2 million new job seekers entering the employment market each year, Indonesia needs to expand its economy by at least 7% per annum and attract investment in the manufacturing sector, which is a major employer in many developing countries.
Mohamed Iklas was among about 50 students demonstrating at a Jakarta traffic roundabout on Tuesday afternoon. [He said that the group wanted to know whether there would be jobs after they graduated. “We want the government – not just the Jokowi government — to change the system to help young people,” he said.
But if Indonesia is to pull in more big ticket, job-intensive manufacturing and services work, Widodo will need to do more than just generate more revenue and increase public spending.
“Legal certainty is central to investment; one problem is Indonesia’s overlapping and conflicting laws and regulations,” said Todung Mulya Lubis, Indonesian Bar Association head, speaking in Melbourne, Australia, in early October.
Widodo appears aware of the need to clean up Indonesia’s morass of red tape and hazy rules.
“I have to admit that our country is not agile in economic development, because we have too many rules. We are hoping to revise a number of regulations with the House of Representatives, even though my coalition is not the majority there,” the president-elect said in September.Show