Just weeks before Indonesian Ppresident-elect Joko Widodo takes office, a ham-fisted attempt by the state energy firm to tackle huge fuel subsidies has sparked panic buying and highlighted the most pressing economic issue confronting the next president.
The subsidies are a perennial dilemma for Indonesian leaders — economists have long decried the expensive payouts as unsustainable, yet cutting them is hugely unpopular, and has in the past sparked violent protests.
However, with economic growth slowing, observers say Indonesia can little afford to keep pouring about a fifth of the annual budget into keeping fuel prices artificially low, a program that diverts money from much-needed reforms and has long caused concern among investors.
Indonesian President Susilo Bambang Yudhoyono has made some increases to the price of gasoline and diesel during a decade in power, including a hike that averaged more than 30 percent last year, but has been criticized for not going far enough.
Politicians spent months this year gearing up for pivotal presidential elections and put the subsidy issue on the back burner, but it has come back into sharp focus as Widodo, governor of Jakarta, prepares to take office on Oct. 20.
He has made slashing the payouts a priority and wants to redirect the money to other programs, from overhauling creaking infrastructure to helping the country’s poorest people.
“I am prepared to be unpopular,” Widodo said last week, adding that money from subsidies could be redirected to “villages, small and medium enterprises ... farmers ... fishermen and their boats.”
On the election campaign trail, Widodo said he would gradually reduce the subsidies over several years. However, recent events have underscored the huge challenge facing him.
As fears grew that the subsidized fuel quota for the year was running down too quickly, state energy company Pertamina, which manages the program, started limiting supplies.
However, as news spread at the start of last week, cars and motorcycles rushed to fill up, with hours-long lines forming at gasoline stations across the country, particularly on the main island of Java, with supplies at some kiosks running out entirely.
With the lines showing no sign of letting up after several days, Pertamina backtracked on Tuesday and stopped rationing fuel.
Some economists saw this as yet another botched half-measure from a government that has failed to tackle the issue of fuel subsidies head-on. Other recent steps include banning the sale of subsidized fuel on toll roads and in parts of Jakarta.
Wellian Wiranto, a Singapore-based economist with OCBC Bank, said the long lines were “a rather visual reminder that the outgoing government’s attempt at ‘quantitative tightening’ is simply not working.”
Widodo has sought to take action even before being sworn in as president, and last week appealed to Yudhoyono to share the burden by starting to cut the subsidies before he leaves office. However, the request was rejected.
Indonesian Minister of the Economy Chairul Tanjung said afterward that “people are already shouldering a heavy burden, so the government has decided not to add to this.”
Analysts say this means no honeymoon for Widodo, who is to soon step down as Jakarta governor, as he will have to grasp the nettle of subsidy reform from day one, risking an immediate public backlash.