Indonesia Fuel Price Demonstrations Continue

The government of Indonesian President Susilo Bambang Yudhoyono remains under pressure from protests against a major fuel price rise, with traffic disruptions in Jakarta and reports that protesters intend to up their game as a vote nears in the House of Representatives.

There is enough anger to go around, some of it directed at the institutionalized corruption that has become a public albatross for Yudhoyono’s Democratic Party as much as over the projected fuel price rise. Over the past week, various organizations have held rallies across the country, some of which have turned ominous, with students looting a fuel pump in the South Sulawesi capital of Makassar and plundering a couple of trucks of soft drinks and LPG containers.

Only about 2,000 people turned out for a rally in Jakarta on Monday, far down from the 15,000 that rally organizers claimed would show up. Some 22,000 police were on reserve in case the rally turned violent. It remained peaceful, however.

The projected fuel increase is expected to drive the cost of subsidized premium fuel, the most popular grade, from Rp4,500 (49 US cents) a liter to Rp6,000, a 33.3 percent rise. The government has little choice, however. The price of internationally traded crude has risen over the past six months from a low of about US$75 per barrel to hover near US$110 as unrest in the Middle East and the threat of military action against Iran have driven prices upward.

Governments in Sri Lanka, Nepal, Thailand, Nigeria and other countries have been shaken by fuel price rises as well.

Although the fuel price crisis is a major test of the government’s staying power, most economists agree that it is necessary because of the distortions that subsidies build into the system, especially as crude prices have skyrocketed internationally, increasing the amount the government must put into the subsidy. Even at a 33.3 percent increase, the government will still be forced to subsidize a commodity that in reality costs around Rp8,000 for premium fuel.

Various subsidies for fuel, fertilizer, etc. now exceed the cost of Indonesia’s entire social and education system budgets. Subsidies for fertilizer in Indonesia, for instance, have been subject to fiscal instability, fraud and corruption, leakage and uncertainty from external shocks, all of which “can undermine the benefits of the program,” according to a World Bank report.

The House of Representatives is expected to vote on the fuel price increase later this week. It still appears that the government has got enough clout to pull it off, especially if Golkar, the second biggest political party, stays on board, and the indication is that it will – at least for now.

Nonetheless, union leaders under the umbrella of the Indonesian Trade Union Confederation (KSPI) are threatening to bring 15,000 demonstrators to the capital again. They called the Monday rally a “dress rehearsal” for a bigger one during the vote. In past days, the KSPI has threatened to blockade national ports and refineries as well as seek to disable major arteries in the country’s infrastructure including toll roads and airports. That would presumably include as well trucks carrying fuel.

The central government has reacted by threatening to call out the military to quell disturbances, something it is extremely reluctant to do because it calls up the bad old days of the rule of the strongman Suharto, who used the threat of military force to keep the country under his thumb during his 31-year reign, which began in 1967.

Reports in Jakarta say that significant numbers of protesters – although not all by far -- are paid by various groups with an interest in bringing down the government. The government has accused the opposition Indonesian Democratic Party of Struggle (PDI-P) of fomenting trouble for political gain. An estimated 5,000 PDI-P members and sympathizers joined rallies in Jakarta earlier this week, with others expected to join protests in the Central Java towns of Semarang and Solo, as well as the East Java town of Situbondo, according to local media.

It remains to be seen what effect the removal of the subsidy – if indeed it is removed – will have on inflation. If the government carries the day, the labor unions will undoubtedly bargain for higher nominal wages, thus raising the specter that companies facing higher costs will lay off workers. Officials have asked regional state officials across the sprawling island country to seek to persuade local businesses against discharging employees as their costs rise.

The Democrats appear to be trying to buy off protest through the distribution of direct cash assistance through post offices so they can give the impression to the beneficiaries that it is from the Democratic Party, while Golkar wants the funds distributed through provincial administrative agencies, which are largely controlled by its own party members, so that it will be seen as largesse from Golkar. The money comes from state funds, and doesn’t belong to any particular party, however. But the Jakarta gubernatorial election looms in July, along with the national elections in 2014. Thus both sides see the cash assistance as a political hobbyhorse to ride to victory, or at least one to hide behind if things get stickier.