Indonesia is facing several weeks of economic uncertainty and a set of potentially damaging price increases to the president’s re-election campaign next year.
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Speakers: Fauzi Ichsan, Standard Chartered chief economist, Indonesia; Ari A. Perdana, Researcher, Department of Economics in Centre for Strategic and International Studies, Indonesia; Kurtubi, Director of Center for Petroleum and Energy Economics Studies, Indonesia
CONNORS: The Indonesian central bank raised interest rates Wednesday in an effort to kerb inflation, and an expected 20-to-30 per cent government-driven fuel price increase due in the coming weeks.
If fuel prices do rise, it’ll be a double-blow for Indonesia’s 235-million people, 38-million of which are living in poverty.
The government signalled early last month that it is bleeding money to fuel subsidies — where the government off-sets the higher price of world oil to keep domestic prices down in diesel, gasoline and kerosene.
The subsidies are huge — Indonesia nearly tripled its fuel subsidy spending in the last budget to 14-billion U-S dollars for 2008, about 12 per cent of total state expenditure.
But the world price keeps rising, and the government — breaking an election promise — has to act.
Ari Perdana is an economist from the Centre for Strategic and International Studies in Indonesia.
PERDANA: Just a few months ago when the world oil price has already been increasing they should have increased the price a few months ago. The government, especially the President has already stated that no we will not increase the fuel price anymore, that was after the big increase in 2005. I think that was a bit of a blunder from the President.
CONNORS: Do you think the people are sensitive to this issue, do they understand that the burden of the tax breaks that it’s time that the government has to do something?
PERDANA: Yes compared to two-three years ago more people are more reasonable about this idea. On the other hand it’s also important for the government to give the understanding that they will reallocate the money to support the poorest or the most marginalised part of the society.
CONNORS: Before raising fuel prices in October 2005, the Indonesian government put into place a cash transfer scheme targeting poor and near-poor households.
The transfers, quarterly payments of about 30 U-S dollars per household, continued for a year, and performed well.
Standard Chartered’s chief Indonesia economist, Fauzi Ichsan, says the poor may be well protected again by a similar scheme.
ICHSAN: We had experienced last time in 2005 in the crisis and then actually the implementation of compensation program, especially the so-called cash transfer to the poor households run not as bad as we expected.
CONNORS: While domestic economist and families tally the cost of such huge fuel price rises, President Susilo Bambang Yudhoyono is also having to reconsider the country’s role as a member of the OPEC oil cartel.
While it enjoys the status of being the only OPEC member in Southeast Asia, its oil earmarked for export has declined so much over the past few years that it couldn’t even support its own domestic needs… if called on to do so.
The director of Indonesia’s Center for Petroleum and Energy Economics Studies, Kurtubi, explains.
KURTUBI: 2007 for example our crude oil production was only 910-thousand barrels a day. At the same time this country needs crude oil for domestic use, around one-point-four million barrels a day. I would say that this country is becoming a net oil importer. Some people think that Indonesia still produces a huge amount of crude oil, so why the government should increase fuel price, why the government pull-out from OPEC? But the fact is our crude oil products is very, very low.
CONNORS: Ari Perdana from the Centre for Strategic and International Studies agrees.
PERDANA: Indonesia used to be an oil producing country but for the past two or three years we have been a net importer. Some people do not realise this so regardless of whether Indonesia still on OPEC or not I don’t think that’s the big issue.
CONNORS: There really are more pressing matters than OPEC, these economists agree, and that’s the ever-growing 12-billion dollar hole in Indonesia’s budget.
Standard Chartered’s Ichsan believes they can revisit their membership later.
ICHSAN: Once of course I think Indonesia can produce more oil and the production is higher than their consumption I think we can start thinking about joining OPEC again.
