Emerging Asia struggles to cut soaring fuel subsidies

JAKARTA, Indonesia – Weeks of protests across Indonesia have thwarted a government plan for an immediate fuel price hike, the latest failure of an Asian administration to wean its country off costly subsidies.

Emerging nations in Asia such as Indonesia and Malaysia have struggled to keep fuel prices low as they watch their spending on subsidies balloon in line with global oil prices soaring above $100 a barrel.

Indonesia’s parliament was widely expected on Friday to approve the hike — from Rp 4,500 (49 cents) a litre to Rp 6,000. But after weeks of protests, sometimes violent, parliament rejected any price rises “in the near future”.

President Susilo Bambang Yudhoyono had hoped to implement the rise Sunday, but parliament instead agreed to a watered-down law that would allow hikes in the longer term if global prices rose significantly higher.

Analysts said that low fuel costs, which also keep down the price of everyday needs, are one of few financial breaks awarded to the lower and middle classes in emerging Asian nations.

Wahid Institute director Ahmad Suaedy said Indonesians, the majority of whom live on less than $2 a day, were fed up with a corrupt government that spends its budget irresponsibly.

“I think Indonesians would be open to the price rise if they were assured the government was going to spend the money on something constructive, like infrastructure and education,” Suaedy told AFP.

Fuel subsidies ate up around $14 billion, or 11%, of Indonesia’s state budget last year — more than what the government spent on education and health combined, which stood at $9 billion and $1.4 billion respectively.

Governments around the region, including India, Sri Lanka and the Philippines, have all experienced public pressure to maintain high subsidies.

In 1998, a fuel price rise in Indonesia helped trigger student riots that toppled the 32-year Suharto dictatorship.

Ten years later, the government hiked the fuel price by a third but cut it back again in 2009 ahead of a presidential election.

In Malaysia, street protests were brutally quashed in 2008 following an oil subsidy cut, after which the coalition lost a third of parliamentary seats and control of five states to a resurgent opposition.

Malaysia’s domestic trade, cooperatives and consumerism ministry reaffirmed recently the government would not hike the subsidized fuel price, despite sharply increasing oil prices.

The Malaysian government spent around 20 billion ringgit ($6.5 billion) on fuel and cooking gas subsidies last year, almost double what it spent in 2010.

Malaysia subsidizes 0.93 ringgit ($0.30) per liter of petrol, with the last increase in December pushing pump prices to 1.90 ringgit.

Malaysia is the second-cheapest Asian nation for fuel, and 10th cheapest globally, according to Australia-based statistics site NationMaster.com, while Indonesia is Asia’s cheapest and the world’s fifth-cheapest, after Turkmenistan, Iraq, Iran and Venezuela.

Subsidies have long been seen as a drag on emerging economies, with the International Monetary Fund describing them as “costly, inequitable and rising”, and the G20 nations calling for a complete phase-out.

Indonesia’s government estimated paying fuel subsidies to keep up with global oil prices would widen the deficit gap to 3.4% of GDP, above the three percent cap allowed by law. The current deficit is less than 2%.

Since 2011, global oil prices have risen around 20%, with Brent crude oil hovering above $120 a barrel this week.

“As global prices increase, it increases the burden on the budget. The Indonesian government should have raised the price last year when prices started to creep up,” Standard Chartered economist Fauzi Ichsan told AFP.

“The subsidy is also wrongly targeted. Around 90% of the fuel subsidy goes to the middle class, which is a massive misuse of resources.” – Agence France-Presse