Mega gives in to price-hike protesters

Partial subsidies will be resumed, rolling back fuel and electricity prices, which could put Jakarta at odds with aid groups.

More than two weeks of protests across Indonesia succeeded in achieving what the Megawati government said it would never do: backtrack on price hikes for electricity and fuel that were a vital part of the economic reform process here.

The government’s decision yesterday, while likely to defuse tensions and stave off further demonstrations, has again thrown into doubt its commitment to pledges made to the International Monetary Fund (IMF) programme to cut state subsidies and narrow the massive budget deficit.

Well-placed government sources told The Straits Times that such painful reforms were being sidelined in the interests of ‘political survival’ after President Megawati Sukarnoputri and her security advisers were briefed by the national intelligence agency (BIN) last week.

Its report warned that the price hikes were being used as fodder by an ad hoc coalition of forces that included Islamic radicals and remnants of the Suharto era to ‘destabilise’ her 18-month-old administration.

In the face of continued protests over utility increases, the fear was that such demonstrations could worsen if the United States attacked Iraq.

It was against such a backdrop that Energy Minister Purnomo Yusgiantoro announced yesterday that the government would resume partial subsidies for fuel such as petrol and diesel amounting to one trillion rupiah (S$200 million).

The price hikes, which came into force at the beginning of the year, had included an increase of up to 22 per cent in diesel prices and a 6-per-cent rise per quarter for electricity.

Mr Purnomo said the Cabinet would meet to decide on the extent of the rollback in price hikes.

Windfall profits from oil and natural gas sales would be used to cover the resulting deficit.

The decision came less than week after Jakarta cancelled an increase in telephone rates.

Analysts said that while the move may go down well with the public, it could further undermine investor confidence and be
a major issue with international donors, who regard the subsidy cuts and price rises as a necessary remedy for the
sluggish economy.

The World Bank, which is leading negotiations for loans to Indonesia by a consortium of donors, warned Jakarta last week against resuming subsidies. The government is hoping to secure US$2.8 billion (S$5.1 billion) in aid pledges this year to plug the budget deficit.

The moves to roll back the price hikes are taking place at a time when senior IMF officials are reviewing the progress of reforms – an assessment tied to the next release of funds from the IMF’s almost US$5 billion loan programme.

Analysts say Ms Megawati’s dilemma is no different from that of her predecessors: implementing crucial reforms without stirring up a hornet’s nest on a sensitive issue.

While the decision may aid her party’s chances in 2004, her government’s credibility abroad has been dented.

Said Dr Kastorius Sinaga of the Asian Development Bank: ‘Price increases are crucial for economic recovery. The government did the right thing by raising prices but they mismanaged the whole affair because of Megawati’s poor public relations.

‘The government needs the political will to stick by a decision.

‘Now, by offering subsidies again, it looks like one step forward and two steps backwards.’