Should Indonesia raise fuel prices?

Thousands gather across the nation to protest against the proposed hike Police arrest a protester during clashes at a demonstration against the oil price increase

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Nationwide demonstrations. Clashes between police and protesters. Women in front of parliament banging pots and pans demanding that the government does not raise the cost of fuel.

The issue of whether or not to raise fuel prices in Indonesia even become a trending topic on Twitter this week - with "Turunkan harga BBM" (Cut fuel prices) becoming a Twitter meme, according to the Jakarta Globe.

Raising fuel prices is politically sensitive in Indonesia, where it's thought almost half the population lives on $2 a day.

But with international oil prices rising above $100 (£63; 75 euros) a barrel, the Indonesian government says it is not able to sustain subsidies for much longer.

It wants to raise the price of fuel by 33% from current prices of about $0.50 a litre (4,500 Indonesian rupiah) to $0.65 a litre (6,000 Indonesian rupiah).

Start Quote

The price of fuel at Indonesian petrol stations is lower than anywhere else in the Asean region”

End Quote Fauzi Ichsan Standard Chartered Bank

The issue is presently being debated in parliament, with a decision due before the end of this week.

It is thought that Indonesia spent $18bn (£11.3bn; 13.5bn) euro last year subsidising fuel.

Economists say that leaves the government handicapped to focus on other pressing matters.

"Without raising domestic fuel prices, the government's subsidy bill will continue to bloat," said Fauzi Ichsan, senior economist with Standard Chartered Bank in Jakarta.

"Currently the price of fuel at Indonesian petrol stations is lower than anywhere else in the Asean region - even lower than in India and Vietnam," he added.

"The bigger the gap between the fuel price in Indonesia and international oil prices - the bigger the likelihood is of people hoarding and smuggling fuel.

"Raising fuel prices is the right thing to do so that the government can use the savings created by such a hike to fund infrastructure development and help the poor."

International institutions have also given the government's proposal to raise fuel prices a nod.

"The economic benefits we feel are clear," said Jon D Lindborg, country director for Indonesia with the Asian Development Bank.

"I think, in general, people would agree that fuel subsidies aren't well targeted as they tend to benefit the better off.

"Our research shows that the top 50% of the households here, in terms of income, use 84% of the subsidised fuel."

"So the argument that removing the subsidies will hurt the poor the most is not particularly compelling," he added.

Cash allowance

But it has largely been the urban poor, labour unions, students and supporters of opposition parties that have been demonstrating around the country against the proposed hike.

Indonesian students protest against planned fuel price hikes The government plans to increase the price of subsidised fuel by 33%

They say that any increase in the price of fuel will push up the cost of food, transport and other essential items.

Indonesian President Susilo Bambang Yudhoyono's coalition government has faced a heated political battle over this in parliament.

He has proposed handing out a cash allowance to low-income families, to help them overcome the challenges they may face from rising prices.

But opposition parties say this will be used for political mileage by his ruling Democrat Party, to help secure voter support ahead of the 2014 general elections.

Kwik Kian Gie, an economist who is also a member of the Indonesian opposition Indonesia Democratic Party of Struggle (PDIP), which has been extremely vocal about its criticism of the fuel hike proposal, says the government does not need to raise fuel prices at all - in fact, it is using this opportunity to hoodwink the masses.

"It's very misleading, it's not true that the government needs to raise fuel prices," he told me.

"More than 50% of the oil that Indonesians use come from this country - we produce it - so no money is needed to subsidise that oil, except for when we do the refining and transporting of the fuel.

"That's just $10 a barrel so the government really doesn't need to do this," he added.

Growing scepticism

These sorts of opinions have added to the already growing scepticism that many Indonesians have about their government's handling of the economy.

They are increasingly frustrated with the levels of corruption among their elected officials.

Anger about the government's inability to rid its own members of corruption has been as much a part of the demonstrations as has the opposition to fuel price hikes.

"Many [Indonesians] have called for the government to - instead of raising the fuel price - fix its own dysfunctional behaviour by first cracking down on government corruption and waste, that drain the treasury on a much larger scale than the fuel subsidies," said Yohanes Sulaiman, a lecturer at the Indonesian Defence University, in a recent editorial in the Jakarta Globe.

Protesters tear the poster of the Indonesian President Indonesia President Susilo Bambang Yudhoyono has raised fuel prices in 2005 and 2008

Mr Sulaiman also points out that for many Indonesian motorists, the argument that they should use less fuel so as to save on costs does not make sense: "There aren't any reliable methods of transportation, aside from gas-guzzling personal vehicles, due to the lack of investment in a functioning public transportation system. Could the public be blamed then for questioning the wisdom of this increase of fuel price?"

President Yudhoyono's government has raised fuel prices before - in 2005 and 2008 - but in the past has managed to appeal to its citizens and convince them of the merits of its plans.

Ahead of the presidential election in July 2009, fuel prices were also cut back - a move many opposition parties said was an outright attempt to bribe voters.

This time though, the Indonesian leader has a tough task on his hands.

Many say he is fast losing the trust of the very people who elected him for a second time into office, mainly on the back of his promises to clamp down on corruption.

Without that trust, no matter how sound the economic rationale may be to raise fuel prices, it is unlikely to be palatable with the Indonesian public who say they are fed up with their president's inability to keep his word.

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