06:20
Tieng Anh Vui
WHEN Joko Widodo, Indonesia’s president, who is generally known as Jokowi, announced that petrol and diesel prices would rise by 2,000 rupiah ($0.16) per litre on November 18th, Hajji Zaenal and the world’s financial markets had opposite reactions. Mr Zaenal, who fishes for tuna and bonefish off the coast of east Java, was glum and worried. Overnight the price of filling up his 1,000-litre tank had risen by 2m rupiah.
The markets, on the other hand, were elated. Indonesia’s fuel subsidies are wasteful, expensive and poorly targeted—benefits overwhelmingly accrue to the country’s middle and upper classes, rather than the car-less poor. Between 2009 and 2013 Indonesia spent more on fuel subsidies (over 714 trillion rupiah) than it did on infrastructure and social-welfare programmes combined. Subsidies threatened to eat up more than 10% of total government spending next year, imperilling the country’s ability to pay for the ambitious and necessary health-care, education and infrastructure programmes that Jokowi promised in his election campaign. The price rise, modest though it may be, is forecast to save the government roughly 120 trillion rupiah next year.
The day after Jokowi’s announcement Indonesian stocks rose, as did the rupiah against the dollar. Indonesian sovereign-bond yields tumbled. That was not just because of the budgetary impact of this decision, sizeable though it is. The increase also showed that Jokowi had the stomach to take politically risky but economically necessary decisions—an all-too-rare trait among Indonesian politicians, and a necessary one for a president with reformist ambitions.
Fuel subsidies are popular (seemingly free money usually is), and politicians cut them at their peril. Jokowi’s predecessor, Susilo Bambang Yudhoyono, raised fuel prices in 2013. He was greeted with street protests that were tumultuous enough that when Jokowi asked him to raise prices again as he was leaving office, he demurred.
Jokowi’s announcement also sparked anger—protests, largely peaceful, broke out in cities across Indonesia, and public-bus and minivan drivers threatened to strike—but was not a surprise. Trimming the subsidies was a campaign promise. Last week his energy minister said there would be an announcement soon after the new president returned from the G20 summit in Brisbane, which ended on November 16th (see next article). His finance minister, Bambang Brodjonegro, said in Brisbane that the rise would be no more than 3,000 rupiah per litre; pegging the increase at 2,000 may have removed some of the political sting. Subsidised petrol now costs 8,500 rupiah per litre—not far off the price of higher-octane, unsubsidised petrol which, thanks to low oil prices, is selling for as low as 10,200 rupiah per litre.
Another reason markets rejoiced was the swift action of Indonesia’s central bank. To limit the inflation likely to result from Jokowi’s action, the bank raised its policy rate to 7.75% on November 18th, the first such increase in more than a year. The bank said it expected inflation to reach 8% by the year’s end, well above today’s rate of 5%. Despite the protests, Indonesians seemed largely resigned to higher prices. Even Mr Zaenal said he understood why fuel had to cost more, though now he says that he wishes the government could set the market price of fish.
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