Indonesia's SBY Confronts a Subsidy Cut Crisis

Indonesian President Susilo Bambang Yudhoyono’s government is facing a major test of its staying power, with thousands of demonstrators across the country protesting plans to modify fuel subsidies that cut the price of fuel nearly in half.

Yudhoyono’s Democratic Party-led government already has been beset with a long series of scandals that have sapped its popularity and cut into its credibility. In the past, Indonesian governments have had a habit of caving in to such protest. However, say political analysts in Jakarta, the decision to cut the amount of the subsidy will likely prevail via a required vote in the House of Representatives, although there are political considerations. The feeling is that if Golkar, the second-biggest party in Yudhoyono’s ruling coalition, remains solidly behind the plan, the government will probably cut the subsidy.

There appears to be considerable horse-trading going on behind the scenes, with the government seeking to use savings from the cut in the fuel subsidy to finance cash payments to consumers to take the sting out of the cut for a few months. Golkar leaders, however, want the savings to be applied to the country’s woefully inadequate infrastructure, whose bottlenecks have got in the way of economic progress as the economy grows. Cutting the subsidy, if it occurs, is estimated to save as much as Rp41.2 trillion (US$4.5 billion) per year.

“Golkar thinks the cash payments are a political trick by the Democrats,” said one veteran political analyst. “They’re right.”

Authorities deployed 14,000 police across the country earlier this week as protesters marched in several cities. Some 4,000 workers protested “peacefully” in front of the state palace in the capital, Jakarta Police spokesman Sr. Comr. Rikwanto told reporters Thursday.

“There was some pushing and shoving because so many people were packed but the protest went without incident,” he said. However, in the North Sumatra provincial capital of Medan, about 300 students pulled down an iron gate in front of the provincial parliament building and threw rocks and motorcycle helmets at police, according to Agence France Press.

Indonesian labor unions under the umbrella of the Indonesian Trade Union Confederation (KSPI) have threatened to paralyze the economy, blockading national ports and refineries as well as seeking to disable major arteries in the country’s infrastructure including toll roads and airports. That would presumably include as well trucks carrying fuel.

Motorists now pay Rp4,500 (50 US cents) per liter for subsidized Premium fuel which actually costs Rp8,000. As of April 1, the government plans to price Premium at Rp6,000 per liter, an increase 33 percent. That has brought the protesters into the streets.

Governments across the world have long since learned that subsidizing goods including food, gasoline and other items is a devil’s pact, and one that is devilishly hard to get out of. In 2008, when Malaysian Prime Minister Abdullah Ahmad Badawi attempted to remove fuel subsidies, the public protest forced him to back down. The attempt, however, played a role in electoral irritation that ultimately cost Badawi his job as prime minister after the government’s disastrous showing in 2008 national elections. Other countries, including Nigeria, Ghana and Guinea, have also been forced to back away from reducing the subsidies.

But keeping them in place is hardly a solution. According to a World Bank study, subsidies of various kinds 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 the report.

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.

Bank Indonesia held the reference rate at 5.75 percent at its March 8 meeting after three successive interest rate cuts. However, Bank Governor Darmin Nasution indicated Indonesia’s consumer price inflation, which had dropped down to 3.5 percent annually by February, might rise back to the 2011 high near 6.8 percent if the cut is implemented.

It isn’t the first time Indonesia has faced a crisis over subsidies. In 2004-06, when world oil prices experienced great turbulence, the government removed the subsidy, doubling the price of Premium. However no significant violence actually materialized, with the government then as now suggesting direct financial assistance to the poor.

However, since 2011, as the political situation has deteriorated in the Middle East, with the Americans threatening Iran over its purported nuclear weaponization program, the price of fuels has skyrocketed, even possibly threatening US President Barack Obama’s re-election campaign. The price of fuel has increased by 21 percent, 11 percent, and 10 percent in Australia, Italy and Canada respectively.