Fuel price’s dilemma in Indonesia: mass strikes will happen in several next month

JI-Jakarta. The government recently increased fuel prices to prevent an excessive burden on the state budget from subsidies aimed at keeping domestic fuel prices low despite high oil prices. However, some may wonder why even supposedly unsubsidized gasoline in Indonesia is still priced far below global standards. And it has a lot to do with definitions. The, the government decided in the face of ballooning energy subsidies to increase the price of fuels, including the unsubsidized Pertamax gasoline, so as to close the gap between retail prices and the economic prices and thereby alleviate the pressure on state coffers.

President Jokowi has said the country needs to look at “all of the options” as it considers joining other Asian economies including India and China in buying Russian oil to offset soaring energy costs.

Indonesia has not imported significant amounts of oil from Russia for years, but Jokowi’s government is under increasing pressure to curb rising costs after being forced to increase some fuel prices by up to 30 per cent this month.

Any move to buy Russian oil at a price above a cap being set by G7 countries could leave Indonesia vulnerable to US sanctions as it prepares to host a G20 summit in Bali in November.

Finance Minister Sri Mulyani Indrawati said that global oil prices remain fluctuating despite the recent decrease and the government’s decision to increase fuel prices by an average of 30 percent is the right step, considering the increase of global fuel prices by up to $100 per barrel. She said that increasing fuel prices helps in maintaining the state budget, which will suffer more if fuel subsidies continue.

The Indonesian government’s policy of providing subsidies to shield the public from the effects of global energy price hikes will burden the state budget. It’s also potentially insufficient to protect the poor. To reduce the impact of global price hikes, the government decided to more than double its energy subsidies to help people pay for fuel and electricity. It is also planning on disbursing a total of Rp 24.17 trillion (US$1.63 billion) of social assistance, which includes wage subsidies for those earning Rp 3.5 million a month (US$235.65) or less. At the same time, the government is mulling an increase in fuel prices, which, without careful deliberation, might disproportionately affect the poor.

Meanwhile, higher costs are expected to hit Indonesia’s tourism sector after the government raised the price of subsidised fuel by about 30 per cent earlier this month. Tourism operators in the archipelago are now racking their brains under the circumstances.

Protests by students, workers, and online motorbike taxi drivers against the hike in fuel prices took place across Indonesia following President Jokowi’s announcement. Protests have been held in several large cities by students, workers, farmers, fishermen, and teachers. Workers are planning more rallies and considering a national strike unless the increase is rescinded. Labors and students demonstrated such as Indonesian Islamic Student Movement (PMII), People’s Alliance Movement (Arak), National Association of University Student Executive Bodies (BEM SI), Labor party, The National Movement of People’s Defenders (GNPR), which consists of the National Movement to Safeguard the Ulema Fatwa (GNPF), the 212 Alumni Brotherhood (PA 212), the Islamic Brotherhood Front (FPI), East Kalimantan Community Alliance (AMKM), Confederation of All-Indonesian Workers’ Unions (KSPSI), the Confederation of Indonesian Trade Unions, the Makassar Islamic Student Association (HMI). They were held mass strikes against the hike of fuel prices. Mass strikes had come in the Presidential Palace, in front of Jakarta City Hall, in front of the Southeast Sulawesi Regional Legislative Council building in Kendari, East Kalimantan Regional Legislative, in front of the state-owned company Pertamina Sulawesi office, in front of North Sumatra Governor’s office in Medan, the Yogyakarta Regional Legislative Council office, in West Aceh Regency and others place. Presidential Staff Office official Yohanes Joko said President Jokowi listened to students and appreciated their peaceful protests.

Democratic Party official Kamhar Lakumani said his party strongly opposed the hike in fuel prices and called on the party’s cadres and council members to voice the rejection.

He said the party allowed their members to join the demonstrations against the fuel price increase. However, he warned the party members not to “make drama” like what the Indonesian Democratic Party of Struggle (PDIP) members did President Susilo Bambang Yudhoyono administration.

Attempts by his predecessor to cut fuel subsidies were stymied by violent protests but with a commanding approval rating and a broad coalition supporting him, Jokowi is set to ride out the uproar relatively unscathed, and even position himself as a kingmaker for a 2024 election, executive director at pollster Saiful Mujani Research and Consulting Sirojudin Abbas recently said.

Many economic pundits have predicted that the government’s decision to raise the prices of subsidized fuels on Saturday might put the country at risk of stagflation, The government’s decision as coming at the “wrong time,” considering that consumers were facing soaring inflation just as they had recovered from the impacts of the COVID-19 pandemic.

Separately, Financial Services Authority (OJK) Board of Commissioners Chair Mahendra Siregar predicted that the Indonesian economy would increase by more than five percent this year despite rising fuel prices. Rising fuel prices, he said, indicate that increased demands in Indonesia could be met by increased investment, impacting the production and supply of a range of needed goods and services.

Finance Minister Sri Mulyani said the ministry will project oil prices using data from reliable and authoritative oil sector institutions. On the other hand, the volatility of oil prices was also caused by geopolitical factors, such as the use of fuel oil as a weapon of war.

The Editor’s underlined

The Editor has underlined that the government made a compelling argument that the huge sum it was spending to keep gasoline cheap was morally indefensible because the lion’s share of the money went to people who drove cars.

This line of argument has been used by every president since Soeharto in situations where the gap with world oil prices had widened to such an extent that the burden of the subsidies threatened the government’s finances and had to be relieved.

By exposing the immorality of the subsidies, the government has tried to deflect some of the public anger directed at its decision. The rich make a convenient scapegoat when there is an economic crisis, even when the real problem is with the government’s policy of keeping gasoline cheap.

Nothing that Finance Minister Sri Mulyani revealed about the fuel subsidy costs is new. It has always been the case that the rich get more than the poor out of the arrangement. The difference this time is that the size of the subsidy, which is simply huge, has become indefensible, both economically and politically.

It was feared the decision by President Jokowi’s administration to raise fuel prices may trigger political turbulence, with labor groups clamoring over the knock-on effect the unpopular policy will have on low-income Indonesians.

Certainly, Indonesia’s headline inflation year-on-year, which declined to 4.46 percent in August from 4.94 percent in July, may rise to 6 or even 7 percent by the end of the year. But that is not the end of the world and is still below the 8-10 percent inflation range in many advanced economies.

Despite the additional social assistance, we still expect some degree of social turbulence and political noise. But given the multiple benefits of fuel reform for the long-term foundations of the economy, the government and members of the House of Representatives should work together to build public support for the painful measure.