BackJoko Widodo seeks to defuse fuel protests with budget benefits
While subsidy cut was welcomed by investors, Indonesian president faces political attacks and risk of strikes
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Bangkok: Indonesian President Joko Widodo’s ability to weather opposition to higher fuel prices hinges on convincing the public that billions of dollars in savings will be spent to improve their lives.
Widodo, who announced the fuel price increase on Monday, campaigned on a pledge to scale back fuel subsidies, which cost the country more than $20 billion a year, to free up funds for infrastructure, education and health care in South-east Asia’s largest economy.
While the move has been welcomed by investors it will expose Widodo, commonly known as Jokowi, to political attacks and the risk of strikes and street protests less than two months after he took office.
“The public overwhelmingly disapproves of fuel price hikes, in part because the economics and fiscal aspects of the issue are very poorly understood," said Kevin O’Rourke, a political analyst and author of Reformasi: The Struggle for Power in Post-Soeharto Indonesia. “Past experience has shown that the public will grudgingly accept increases, but Widodo must be sure to deliver other meaningful benefits in the near term in order to sustain his popularity."
The previous subsidy cut last year triggered a week of rallies across the country. On Tuesday, police used tear gas to disburse protesters outside the energy ministry, with fumes entering the nearby grounds of Bank Indonesia where governor Agus Martowardojo and his board were meeting. The central bank raised its benchmark rate for the first time this year to guard against inflation after the fuel price rise.
Crude slump
The price of subsidized gasoline increased to 8,500 rupiah ($0.70) a litre from 6,500 rupiah, and diesel will climb to 7,500 rupiah a litre from 5,500 rupiah. Widodo was able to limit the size of the increase thanks to falling oil prices, with Brent crude having slumped 30% since the end of June.
So far the protests have been small in size. Several hundred people were expected to gather outside the presidential palace and Jakarta city hall on Thursday. About 200 rallied on Wednesday outside the palace, while the Land Transport Organization was stopping bus services nationwide, Kompas reported on its website, citing the organization’s chairman.
“Let’s wait one or two days. This is a normal reaction to a decision," Widodo told reporters on Wednesday in Jakarta. “Afterwards everyone will realize the benefit and its purpose, they will understand."
Angry, confused
Widodo’s message failed to resonate with Aji Suryono, a 35-year-old soup seller at a street stall in Jakarta’s business district. Suryono voted for Widodo in July’s presidential election, and now finds the cost of rice and sugar rising.
“I don’t know about the budget deficit or anything like that, but the government should control the price of food," Suryono said on Thursday. “I’m so confused, I’m so angry with him. Why after three weeks as president did he choose to raise the fuel price?"
Darsono, a 28-year-old working in a shoe company in Jakarta, said he is pushing for a higher salary to offset his transport costs. Unionized workers in the capital are seeking minimum wage rises of around 30% in annual negotiations, a level the main employer group said would spur job cuts.
“I don’t want to know about the government plan, I don’t know about subsidies too," said Darsono, who goes by one name. “But the government should give us cheap fuel. If our salary doesn’t rise, I want Jokowi to cancel this plan."
Market reaction
The benchmark Jakarta Composite Index fell 1.1%, the most in Asia as investors sold on the risk of higher fuel prices affecting corporate earnings, said Akbar Syarief, a fund manager at MNC Asset Management in Jakarta. The rupiah dropped 0.3% against the dollar.
“Hopefully, the decision to shift the subsidy to the productive sector will open the door for a budget that will be more beneficial for the Indonesian people," Widodo said in announcing the increase.
Part of the plan to soften the blow of higher fuel costs is to shift money into a government programme, kicked off on 3 November, that will give low-income families access to free health care, provide education for 160,000 children and extend cash grants. Suryono, the soup seller, said he had not received anything.
“About 15 million families will receive 200,000 rupiah per month, which is significantly larger than the impact, which will be around 150,000 rupiah per month," energy minister Sudirman Said told Bloomberg TV on Tuesday. The payments will be made for the next eight months, he said.
Indonesia has been subsidizing fuel since the 1970s and kept prices at less than $0.20 a litre until 2005, according to a World Bank report published in March.
Efforts to raise prices over the years have often been met by public outrage, forcing plans to be diluted or cancelled. Widodo had urged outgoing president Susilo Bambang Yudhoyono to lift prices before leaving office.
Suharto era
When former dictator Suharto raised fuel prices by more than 70% in 1998 amid the Asian financial crisis, Indonesians suffering from inflation and food shortages kicked off mass protests in Jakarta. Suharto resigned within weeks after three decades in power.
Since then world oil prices have climbed 10-fold and that coupled with a growing middle class buying more cars and motorbikes pushed Indonesia to become a net fuel importer, sending the subsidy bill skyrocketing and contributing to a persistent current-account deficit.
“Jokowi has always said that he needs to reduce the subsidies at the beginning of his term precisely because he can draw from much higher political capital during that period," said Marcus Mietzner, an associate professor at the Australian National University in Canberra and author of Money, Power and Ideology: Political Parties in Post-Authoritarian Indonesia. “It is safe to say that his popularity will decline somewhat."
Parliament response
Some members of parliament, which is dominated by opposition parties, said they opposed the price rise because it would make people’s lives unnecessarily difficult. Widodo did not require the approval of parliament to adjust fuel prices.
“The government must give more consideration to the domestic market, and not just think about the positive response from the global market," said Fadli Zon, the deputy speaker of the house and a member of Gerindra, the party led by losing presidential candidate Prabowo Subianto. “I don’t know the government’s reason for raising fuel prices when international prices have fallen."
On the campaign trail, Prabowo had said he would cut fuel subsidies in half or by two-thirds within three years and replace them with targeted subsidies to help the poor.
In addition to the protests at the energy ministry, a student association burned tires at a Jakarta intersection.
‘Bold move’
“I don’t think the issue has traction among the population at large, especially since the president is promising to direct the savings into programmes that will benefit the lower classes," said Ken Conboy, country manager at RMA Indonesia, a Jakarta-based risk management firm.
The Jakarta Globe hailed Widodo’s decision as “a bold move."
“Joko has shown that he means business in fostering the Indonesian economy," the paper said in an editorial on Tuesday. Bloomberg
Untung Sumarwan, Yoga Rusmana, Agus Suhana, Harry Suhartono, Herdaru Purnomo and Neil Chatterjee in Jakarta contributed to this story.
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