Fuel in Indonesia: What you need to know about subsidies and price hikes

Indonesia has raised the price of subsidised petrol by nearly 31 per cent, in a sign of the new government’s commitment to reforming South-east Asia’s largest economy.

But raising fuel prices is a sensitive issue that typically sparks protests in the country and even contributed to the downfall of long-serving president Suharto in 1998. Here's what you should know about fuel subsidies and price hikes in Indonesia:

How does the price of subsidised fuel in Indonesia compare to prices elsewhere?

Most Indonesians buy the subsidised RON88 grade petrol, which is of a lower octane than what's available in most countries. A litre of it now costs 8500 rupiah (91 spore cents), up from 6,500 rupiah (69 spore cents). The new price is about 70 per cent of the unsubsidised RON95 petrol which costs 11,800 rupiah (S$1.26) per litre.

In Malaysia, Thailand and Vietnam where fuel prices are also subsidised, a litre of the widely used RON95 petrol costs RM2.30 (S$0.89), 31.88 baht (S$1.26) and 21,990 dong (S$1.31).

How much are Indonesia's fuel subsidies?

Fuel subsidies are tipped to cost some 250 trillion rupiah (S$27.5 billion) in 2014, about a fifth of Indonesia's budget. If not reduced, the subsidies will increase to some 290 trillion rupiah in 2015. The amount has put a strain on the budget and diverted funds away from areas such as health care and infrastructure.

What the subsidies could have been used for?

Mr Joko hopes to cut 193 trillion rupiah a year from the subsidies. Assuming the price of a litre of lowest grade Premium fuel goes up by 2,000 rupiah, from 6,500 rupiah to 8,500 rupiah, the funds saved could be invested in 5,500 new state hospitals, 48,000 new schools and 39,000 new railway carriages, according to government estimates.

Why is fuel price hike sensitive in Indonesia?

There is nothing more politically sensitive in Indonesia than raising the price of fuel. Price hikes have frequently sparked violent protests. Such protests brought an end to the rule of long-serving president Suharto on May 21, 1998, after he hiked fuel prices by up to 70 per cent on May 4 under pressure from the International Monetary Fund (IMF) as a condition of a US$43-billion bailout. Riots and looting broke out on the streets in Jakarta, resulting in some 1,200 deaths. In an attempt to mollify the angry public, the government subsequently revoked the hefty price increases and Mr Suharto resigned on May 21, 1998.

Subsidies on fuel began under the Sukarno era as a way to protect people from the effects of inflation. By 1965, fuel subsidies alone absorbed 20 per cent of the state‘s total revenue. Fuel subsidies have acted as a buffer against rising living costs in a country where tens of millions of people still live on less than US$1 (S$1.30) a day. The underlying rationale for subsidising fuel and other basic commodities was political. Mr Suharto believed that by ensuring price stability in basic necessities such as rice and kerosene, which is used for cooking by majority of Indonesians, he would achieve political stability. That system worked until the advent of the 1997 financial crisis when the collapse of the rupiah made it impossible for the government to sustain fuel subsidies. After Mr Suharto's attempt to raise fuel prices sparked widespread riots which led to his downfall, his successors have been cautious about broaching the fuel subsidy issue - although cutting subsidies has been a necessity and fuel prices have been raised several times over the past 15 years, attracting significant protests each time.

Although many of the poorest Indonesians do not benefit directly from fuel subsidies, any hike in prices affects them as it drives up the prices of all items, including basic necessities like food and clothing due to increased transport costs. The government has a longstanding fear that a price hike will push tens of millions of Indonesians below the poverty line. The number of people living below the national poverty line stood at 28.3 million, or 11.25 per cent of the total population, as of March 2014. They have a monthly income of below 300,000 rupiah (S$33) per month.

Furthermore, pro-poor advocate groups say the benefits of the government's proposed programmes using the funds saved from cut in fuel subsidies will only flow to the poor later. They claim that while the poverty alleviation programmes look good on paper, they have historically been badly implemented and subject to graft by government officers. Thus convincing the country's poor, who depend on the fuel subsidies to get by day-to-day, to take the hit now and to wait for benefits to materialise sometime in the future will be any president's toughest challenge. While the economic rationale for slashing fuel subsidies is sound, politically it remains a very hard sell.

An increase in the price of a litre of petrol to make it even fractionally closer to the international market level would have to be accompanied by cash handouts - similar to what Dr Susilo Bambang Yudhoyono's government gave in 2005 and 2008 - which were viewed as effective.

What happened in the past?

May 1998 - Under pressure from the IMF to cut subsidies, president Suharto hiked fuel prices by up to 71 per cent on May 4. This added to unrest which was already simmering over high inflation, food shortages and growing calls for Mr Suharto's ouster. That combustible mix exploded in Jakarta from May 12 to 13, when an estimated 1,200 people died in riots. Shopping centres were set on fire, shops and vehicles burnt, banks looted and automatic teller machines destroyed.  The unrest forced some foreign embassies to arrange charter flights to evacuate their nationals from the devastated city. Mr Suharto subsequently resigned on May 21 after 32 years as president.

March 2000 - President Abdurrahman Wahid delayed a fuel price hike of 12 per cent hours before it was due to take effect because of fears of mass unrest. The hike was part of an agreement with the IMF in exchange for much-needed loans.

Oct 2000 - President Abdurrahman raised fuel prices by an average 12 per cent, triggering protests. He later dropped plans for a further 20 per cent increase in April 2001 on fears of instability.

June 2001 - In a bid to convince the IMF and markets about his commitment to reform, President Wahid raised fuel prices by an average 30 per cent, triggering days of sporadic violent protests by students and strikes by transport workers.

Jan 2003 - President Megawati Sukarnoputri raised fuel prices by an average 22 per cent. Two weeks of nationwide protests followed, with clashes between students and police, prompting her to back down and partially roll back the hikes.

March 2005 - President Susilo Bambang Yudhoyono, after a lengthy campaign to prepare the public, raised fuel prices by an average 29 per cent. Protests hit a dozen cities but there was little violence and the demonstrations soon fizzled out.

Oct 2005 - The government more than doubled subsidised fuel prices, pushing inflation to around a six-year high and prompting the central bank to jack up its benchmark interest rate to a three-year high. The plan, which authorities tried to cushion with direct cash handouts to millions of poor families, again caused some protests.

Sept 2007 - Vice-President Jusuf Kalla said the government had no plans to increase subsidised fuel prices, despite a surge in global oil prices to more than US$80 from US$60-US$65 in early 2007.

May 2008 - The government raised fuel prices by nearly 30 per cent, causing widespread protests.

Apr 2009: Fuel prices were cut before the elections and this helped Dr Yudhoyono to a landslide victory.

Mar, 2012 - Thousands of Indonesians rallied nationwide against a planned fuel price hike which they said will cause great hardship. Parliament was expected on Mar 30 to approve raising the fuel price by a third.

June 2013 - The government cut a huge fuel subsidy after months of political haggling, causing petrol prices to rise by 44 per cent and diesel by 22 per cent.

SOURCE: REUTERS, NEW YORK TIMES, THE STRAITS TIMES ARCHIVES