Pain At The Pump For Indonesia

And that’s no Joko.

Indonesia’s new president, Joko Widodo,  who is commonly known as Jokowi, looks set to raise the price of fuel in Indonesia as early as October in a bold move that pitches the archipelago nation’s love of cheap fuel against the need to free up State funds for investing into South East Asia’s largest economy. In the past, Indonesia was a net exporter of oil products and a member of OPEC, but the production rates have dropped and consumption increased to a level that now the country needs to import crude and refined products. The current subsidy system sees the once proud member of OPEC importing crude and ready refined products at a cost of about US$1 per litre, but sells it for about 55 cents at the pumps - the same place where it will cost you about eighty five cents to buy a bottle of water.

The subsidies cost the government about US$16.5 billion last year or about 20% of the State budget. These subsidies have been a perennial dilemma for Indonesia’s leaders and Jokowi was hoping that the outgoing president, Susilo Bambung Yudhoyono, who raised prices at the pumps by 44% in June of 2013 would help him out and cut subsidies before he left office. Unfortunately for Jokowi, this didn’t happen, with the outgoing President claiming that any such move would be an anti-poor move.

The problem Jokowi has is that Indonesians are used to some of the cheapest fuel prices in the world and any attempt to raise the prices are usually met with street protests, as happened in 1998 when then President (and Dictator) Suharto cut subsidies as part of an IMF bail-out; the subsequent rioting led to the end of grip on power. Jokowi is almost certain to face similar opposition even from within his own party, with one lawmaker from the Indonesian Democratic Party, Maruarar Sirait, saying, “I personally do not agree with the plan to raise the price of fuel before the government has tried to overcome the deficit by making other sectors more efficient.”

In a land where it is still common to see petrol for sale in plastic bottles by the roadside, the news sparked panic buying even though no official announcement about the timing nor the size of the hike was made. Although, this was in part due to a botched attempt by national oil company, Pertamina, to limit supply after fears that the subsidised fuel quota for the year was running down too quickly. As news of this spreads, cars and motorcycles rushed to fill up, with queues stretching for many kilometres forming at most petrol stations.

Jokowi, who won the election easily after a campaign that highlighted his ‘man-of-the-people’ roots after having been a successful governor of Jakarta, has promised to reduce the subsidy bill. Initially, he was leaning to do this in stages so as to ease the ‘pain’, but now it appears that the Indonesian economy is slowing down and there is a need for an immediate programme of infrastructure investment. And so a short, sharp shock seems to be in store for Indonesian car owners.

Any increase in fuel prices will not endear Jokowi to the electorate but this doesn’t seem to worry him; "I am ready to be unpopular," Jokowi said last week. "We will reduce the fuel subsidies and divert the money to fund more productive projects, seeds for farmers, pesticides, and diesel fuel for fishermen and others sector that need subsidies more. We have to begin to change."

Subsidies keep the cost of public transportation and basic foodstuff low, which is essential in a nation where about half the population, 120 million people, survive on less than USD2 per day; but cheap fuel can also be seen to encourage consumption and weaken the nation’s balance of payment. In the coming weeks, this is a story that we shall be revisiting as Indonesia attempts to “escape the myth of the need for subsidised fuel,” as Jokowi wrote in a recent blog post.