Glitter or gold? Indonesia’s glowing economic outlook put to test after fuel price hikes

The move to slash fuel subsidies is an opportunity for the government to prove the glow of the country's economy is not skin-deep.

Adisti Sukma Sawitri

Adisti Sukma Sawitri

The Jakarta Post


A worker at a state-owned company Pertamina petrol station changes the fuel prices displayed after the announcement of a fuel price hike, in Bekasi, West Java, on the outskirts of Jakarta, on Sept. 3. (Reuters/Ajeng Dinar Ulfiana)

September 6, 2022

JAKARTA – The government finally bites the bullet. After months of hesitation to raise subsidized fuel prices to adjust to the rising global oil prices, President Joko “Jokowi” Widodo announced the increase on Saturday, the first time since the COVID-19 pandemic.

The Jokowi administration has been very protective of the economic-recovery momentum this year. The fuel subsidy has tripled in size, amounting to Rp 502 trillion (US$34 billion) or about 16 percent of the state budget, as the government maintained the prices until last month amid skyrocketing oil rates after Russia invaded Ukraine.

The commitment is well rewarded. The country has booked trade surplus and steady economic growth, making it look like Indonesia has attained a golden moment in macroeconomic policy.

Nevertheless, considering the global uncertainty due to supply chain disruptions during the pandemic and food and energy crisis stemming from the Russia-Ukraine war, the real test of the national economy’s resilience has only just begun. The strong macroeconomic figures may soon decline if the government fails to address the repercussions of higher inflation that will follow the fuel price hikes.

Riding on recovering domestic spending and export revenue, Indonesia recorded 5.44 percent in GDP growth in the second quarter of the year, the highest uptick in the last four quarters, while the annual inflation was recorded at 4.69 percent in August, among the lowest in the world.

Indonesia has also maintained a trade surplus for 27 consecutive months as of July, strengthening the rupiah position even after the United States Federal Reserves’ aggressive rate policy that has made the greenback invincible.

While other countries, especially advanced economies like the US and the European Union, are struggling to fight hyperinflation, Indonesia has received a glowing outlook, including from the International Monetary Fund and Asian Development Bank.

Skepticism, or cautious optimism at best, has always lingered throughout the positive reports, which makes sense given the country’s chaotic response to the pandemic early on. The government kicked off nationwide vaccination late, making cases and deaths in the country among the highest in the world during the first year of the pandemic. Consumer spending remained low despite large government stimuli.

Things started to pick up in the second quarter of last year when the country recorded its first GDP growth at 7.07 percent. Vaccination accelerated and new cases began to drop. Flagship commodities like palm oil and coal contributed to large export revenue as international prices attained record highs.

Another reason for the caution is that Indonesia has had bad experiences with global economic shocks. The worst came in the 1997 Asian financial crisis, which debunked Indonesia’s “strong economic fundamentals”.

The crisis only showed Indonesian banks’ vulnerability and companies’ overreliance on foreign debts. The crisis exacerbated into political turmoil and nationwide unrest that led to the fall of Soeharto. Some economists later blamed the dictator’s persistence in keeping fuel prices at a fixed rate with large amounts of fuel subsidies to atone for the weak economic fundamentals.

Therefore, presidents post-Soeharto era have always considered the fuel price hikes or subsidy cuts as “the last resort”, as Jokowi did, for the sake of political stability.

Former president Susilo Bambang Yudhoyono increased the fuel prices twice in the first year as president in 2005. The global financial crisis in 2008 drove up oil prices to historic highs, forcing him to increase fuel prices for a third time.

After implementing the drastic price increase that dealt a severe blow to his popularity, SBY lowered the price while he was campaigning for his second term in 2009. And regardless of the fluctuating crude oil prices in the following years, he maintained the prices until 2013.

Last weekend’s hike marked the fourth time that Jokowi raised subsidized fuel prices during eight years of his tenure. As a populist, he complemented the hikes by decreasing prices several times.

Jokowi raised the fuel prices for the first time in 2014, barely a month after he took office. Conscious of his approval rating and scant political support in the House of Representatives, he lowered the fuel prices a few months later in 2015 and in 2016.

Jokowi raised the fuel prices again in 2018, but then cut the rates in early 2019, ahead of his reelection campaign, which proved a success.

With the solid foundation the country’s economy has demonstrated this year, there are strong grounds for optimism. The government also looks confident this time around as it disburses Rp 24.17 trillion for three social-aid programs — cash transfer for over 20 million poor households, wage subsidies for 16 million low-income workers and budget transfer to regions to subsidize public transportation, all to mitigate the impact of the fuel-price hikes.

Nothing should be taken for granted, however. More than just designing policies, the government should also safeguard implementation of the social-protection programs. After the announcement of the new prices of subsidized Pertalite gasoline and Solar diesel, the government should ensure that stocks are well distributed and managed.

It is also important to ensure unhindered distribution of food supplies, as disrupted supply chains cause prices to skyrocket, as in the case of the cooking oil crisis several months ago. The hiccups in palm oil stocks have shown that the government has poor control and oversight in distribution.

The same goes for social-aid disbursement. It is important to make sure it gets to those who really need it. Misuse of government aid for people affected by COVID-19 led former social affairs minister Juliari Batubara to prison.

The move to slash fuel subsidies is an opportunity for the government to prove the glow of the country’s economy is not skin-deep.

Statistics Indonesia reported in July that those in a low-income bracket account for 9.54 percent of the population, down from 10.19 percent in the first year of the pandemic. The rise or fall in the percentage of people in a low-income bracket in the following months will also indicate whether the government policies are working or not.

Maintaining people’s welfare and strengthening their purchasing power are the only real factors that indicate the economy is performing even better.

The writer is managing editor of The Jakarta Post.

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