Fueling Indonesia

Rising gas prices are a political headache everywhere, but especially in Indonesia. Fuel costs helped topple Suharto in 1998, and street protests erupted again when the government reduced subsidies in 2005. So kudos are due to President Susilo Bambang Yudhoyono’s government for pushing through fuel subsidy reform less than a year before voters head to the polls.

Subsidy cuts implemented overnight Friday effectively raise prices on kerosene, diesel and lower-grade gasoline by 25% to 33%. The government had little choice. Fuel subsidies were set to consume 13% of government spending and help push the fiscal deficit as high as 3% of GDP, from 1.3% last year.


Thanks to Friday’s reform, the projected deficit has fallen to a more manageable 1.8%-2% of GDP. The measures will also force consumers to rationalize consumption as global oil prices rise. Higher fuel prices may also reduce the profitability of smuggling the stuff out of the country.

Street protests erupted in a few cities over the weekend, but they weren’t as bad as in the late 1990s. Credit here goes to the Yudhoyono government’s education campaign, which reminded voters that fuel subsidies are actually a subsidy to the rich, who consume more fuel than the poor. Jakarta also rolled out an 18-month, $1.5 billion cash subsidy program to help low-income Indonesians cope with higher prices. Though all subsidies distort economic incentives, this at least makes the bigger subsidy cuts politically feasible.

WSJ