Indonesia backs off plans to hike price of gas after protests

But pressure continues to mount to increase prices from their current, government-subsidized $2 per gallon, as the subsidies sap resources from education, health care, and other programs.

After more than 80,000 Indonesians took to the streets last week in violent protests against raising the price of heavily subsidized fuel, the Indonesian government has revised its budget to prevent the price hike planned for Sunday from taking effect. But with world oil prices soaring and Indonesia faced with a ballooning budget deficit, the respite is unlikely to last long.

In recent weeks the government had been pushing for a 33 percent rise in the price of subsidized fuel to reduce the burden it puts on the country’s budget, which is based on an oil price assumption of $105 a barrel.

On March 31, lawmakers agreed to a price adjustment only if the Indonesian Crude Price exceeds that amount by an average of 15 percent for six continuous months. The current price averages below that, at around $116 a barrel.

The debate over the price hike has drawn attention to the government’s ability to push through much-needed reforms and wean the country off subsidies that most agree must go.

“Everybody knows the price of fuel must increase, because otherwise you don’t have enough money for education, health care, transportation, and whatever,” says Yohannes Sulaiman, a lecturer at Indonesia’s National Defense University.

Last year, the government spent 15 percent of its budget on oil and gas subsidies, more than it spent on social services and improvements to dilapidated ports, roads, and power plants.

But no party wants to be seen as the one that increased the price of fuel, said Mr. Sulaiman, particularly not with 2014 elections coming up.

A distorted economy

Indonesia was a member of the Organization of Petroleum Exporting Countries (OPEC) until 2008. It now depends on imports to meet domestic demand, but thanks to long-running subsidies, people pay around $2 a gallon for gas, the lowest price in all of Asia.

The government last raised fuel prices in 2008, though it dropped them again in the run up to elections the following year. The protests at that time were less dramatic because fuel price hikes had more support then, say analysts.The problem now is that people are being forced to sacrifice without a guarantee that politicians won’t use the savings to fill their own pockets.

“There were protests then, as always, but not like this,” says Chatib Basri, vice chairman of Indonesia’s National Economic Committee. “Political trust is low because of scandals related to the ruling party.”

Despite winning a landslide election in 2009 by promising to eradicate graft, President Susilo Bambang Yudhoyono has been battling widespread corruption allegations against his Democrat Party. Meanwhile, the country’s economy has been growing at an average of more than 6 percent, but a lack of infrastructure and bureaucratic bottlenecks still pose challenges to investors.

Mr. Basri said the government should have raised the price of fuel last year, when global prices first started rising.

Now the decision to delay the price hike could hurt the country’s ability to obtain a coveted credit boost from Standard & Poor’s, the last of the big three ratings agencies to return the country’s credit rating to investment grade for the first time since the 1998 Asian Financial Crisis.

Indonesia is not the only country grappling with petrol prices – Malaysia is also debating price hikes, while China has already implemented them.

But protests here set off alarm bells among politicians who remember how a cut to blanket subsidies in 1998 sparked riots that eventually forced former strongman Suharto from power.

Politics, not protests

The Indonesian government is still cleaning up after the March 30 protests, when more than 80,000 students, trade union members, and farmers took to the streets across the country, burning tires, blockading roads and pelting government offices with stones. The wall outside the parliament building now has a fresh coat of paint to cover crude graffiti from thousands of demonstrators who faced tear gas and water cannons operated by police.

As protests escalated, Golkar, Suharto’s former political vehicle and the second-largest party in the ruling coalition, turned against the planned increase. Sulaiman said it was likely politics, not protests, that led to the about face.

“Golkar is basically stabbing the Democrats in the back,” he says, explaining how the party’s rejection signals faltering support for a leader increasingly criticized of running the country on autopilot during his second term.

Activists say the decision reached on Saturday is not a solution, and they will continue to pressure the government to prevent an increase in the future.

“It’s important to keep up the momentum to make sure that the government is not engaging in party politics,” said Riza Damanik, a spokesman for the Popular Opposition Front, a civil society group that helped organize Friday’s protests.

Rather than scrap the subsidy, Basri said the country needs to “adjust” the fuel price to improve its long-term fiscal health. It also needs to ensure that the any subsidy benefits the poor at whom it is targeted.

Around half the population here survives on less than $2 a day, and many say they would be badly hurt by even the slightest increase in fuel – and the knock-on inflationary effects that would raise prices for food and other goods.

“The lives of the poor are still very bad here,” says Ketut Ceplok, who owns a small shop wedged between resorts in Bali and describes how rain used to come in through the bamboo-woven walls of her home. “My children do whatever they can to have a house where the water doesn’t come in, so they don’t have to search for food.”