BUSINESSWEEK ONLINE: NOVEMBER 20, 2000 ISSUE

International -- Spotlight on Indonesia EDITED BY
HARRY MAURER

As Fuel Prices Heat Up...Social Tensions Could Boil Over (int'l edition)

Mrs. Tata keeps an eagle eye on the portions being doled out to travel-weary customers at her roadside restaurant in Jatiwangi, West Java. She says that ever since the government boosted the price of fuel an average of 12% on Oct. 1, it has been harder to make ends meet. Now, when she goes to the market, she finds the costs of food and supplies have gone up, too, as retailers pass on the increase to their customers. ''Almost all essentials are more expensive, like soybeans, instant noodles, palm oil,'' says the thirtysomething Tata. ''And it means suffering.''

But it will be Indonesia's economy that continues to suffer if the government does not roll back controversial fuel subsidies that hold down prices. Most economists say the move is necessary, given Indonesia's financial problems and its rock-bottom fuel costs. Under the new price scheme, gasoline rose 15%, to about 13 cents per liter, automotive diesel went up 9%, to 10 cents per liter, and kerosene, widely used for cooking and lighting homes, jumped 25%, to 4 cents per liter. Jakarta says nearly all the $90 million saved on subsidies will go toward building much-needed infrastructure projects, especially in the restive outlying provinces, and toward small-business loans, both aimed at helping the poor.

Analysts say the subsidy cuts will also help increase competitiveness in Indonesia's industrial sector, since the aid allows companies to remain inefficient. The International Monetary Fund made phasing out subsidies a key demand in its reform package, saying companies are the main beneficiaries--as well as smugglers who sneak fuel into Malaysia and Singapore.

Even the businesspeople are welcoming the move, despite the potential for higher overhead. ''We have expected this,'' says Sofjan Wanandi, head of the National Development Business Council under President Abdurrahman Wahid. ''The business community is O.K. with it.''

Part of the reason executives and economists alike hail the fuel hike is that global oil prices are soaring. While many Asian countries are feeling the pinch of higher fuel costs, Indonesia--the region's largest oil exporter--is reaping the benefits. Singapore brokerage G.K. Goh Holdings estimates that for every dollar increase in the price of oil, Indonesia reaps an extra $350 million in exports annually. That windfall will help close the government's budget deficit and keep interest rates down.

But while financial experts approve of the subsidy reduction, much of the public doesn't. Aid workers say the poorest of Indonesia's 210 million people will suffer the most from the rollback in subsidies. And things could get worse for them if Jakarta raises domestic fuel prices an additional 20% by April, cutting fuel subsidies from 4.4% of gross domestic product in 2000 to 2.6% next year. Mrs. Tata may have to make those portions even smaller.

Fuel-oil subsidies in Indonesia can be an explosive issue. After the government's October move, thousands of people in Jakarta and other cities took to the streets in protest. Although there was less violence than predicted, the protests raised the political temperature, already at the boiling point from ethnic and religious strife. In the past, the price of fuel has sparked massive upheaval. Two years ago, then-President Suharto, facing economic problems similar to today's as well as the debilitating Asian financial crisis, raised the price of kerosene by 25% and gasoline by 71%. The violent unrest that broke out ultimately led to his downfall.

Sensitive to the problem, President Wahid in April postponed a planned fuel-price increase amid concerns that the move could fan inflation and set off fresh demonstrations. Six months later, under IMF pressure, he went through with the hike. Qaisar Hasan, head of research at Jardine Fleming in Jakarta, says this fuel hike was relatively peaceful in part because the government realized that subsidy rollbacks cannot happen drastically: ''They are trying to pace it out and try to get some semblance of consistency with rising income levels.'' But he adds that Indonesia's notorious red tape makes him doubt that the proposed antipoverty programs will take the edge off anytime soon. So fuel prices could still set off the Indonesian tinderbox.



MAP: Indonesia






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As Fuel Prices Heat Up...Social Tensions Could Boil Over (int'l edition)

MAP: Indonesia

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