Max Lane
Over the last few weeks, the Indonesian rupiah has lost more than 10% of its value. It has "stabilised" at around 10,500 to the US dollar compared to 9500 before August. The stock market has also suffered similar declines, losing 17% of its value at one point. In late August, the rupiah weakened to almost 11,000 to the dollar, sparking talk of another 1997 economic collapse.
The Bank of Indonesia has been buying rupiah to hold up the currency's value and has now increased interest rates to entice people not to sell off their rupiah accounts.
The decline was sparked by the increasing world price of oil. Although Indonesia is a major oil producer, it is also now a net oil importer. Moreover, since the Suharto era, the price that consumers — including industry — pay for oil, petrol and kerosene has been kept low through a system of government subsidies. As oil prices have risen, the government has had to budget billions of dollars more to provide these subsidies. According to government estimates, the 2005 budget for fuel subsidies will rise from just under US$10 billion to $14 billion as a result of the oil price rises (based on current world oil prices).
The oil price rises and consequent increase in the cost of maintaining the fuel subsidies has been seized upon by the supporters of a hardline neoliberal policy stance to call for the government to reduce or even end the subsidies. President Bambang Susilo Yudhoyono has now committed the government to substantially reduce the subsidies some time after October. It is not clear how much of the $14 billion will be passed on to the public, as Yudhoyono is avoiding giving any details of the exact timing of price increases.
Increasing fuel prices is one of the most sensitive policy decisions that Indonesian governments make and it is always met by protests, usually initiated by students and public transport drivers. In 2001, such protests threatened to escalate into a new political movement. The government of then-president Abdurrahman Wahid was forced to withdraw the reduction in subsidies that his government had introduced.
Crises undermine government
The sudden weakness in the rupiah has come in the wake of other crises that have been undermining the credibility of the Yudhoyono government. In July there were massive failures in the electricity supply system. The whole of the Jakarta metropolitan area suffered blackouts and then the whole of Java and Bali were switched off. At one point, the national electricity company, PLN, called on consumers in the Jakarta area, including industry, to reduce consumption by 30%. Just prior to this, the country was shaken by a sudden shortage of petrol and Yudhoyono had to announce that the country only had fuel stocks to last 19 days. In both these cases, the government's emergency measures have — so far — brought the situation under control, but there remains major nervousness that the problems will recur. Some fuel products remain very scarce in several parts of the country.
Not surprisingly, this series of events has triggered the first serious political crisis for the Yudhoyono government. Over the last month there have been persistent calls from economists, public figures, some political groups and the media for the president to sack all his key economic ministers. This is a major blow to Yudhoyono's prestige, but also an extremely sensitive issue within the ruling coalition of parties backing Yudhoyono. The key economic ministers, especially the coordinating minister for economic affairs, Aburizal Bakrie, were appointments thought to have been forced upon Yudhoyono by his vice-president, Jusuf Kalla. Like Bakrie, Kalla is a business tycoon accused of corruption and is also head of the largest party in the parliament, Golkar (Suharto's old party). Yudhoyono's party, Partai Demokrat, is one of the smallest in the parliament. Kalla has been resisting any talk of a cabinet reshuffle — it would weaken his and his cronies' hold over the business sector.
Both Yudhoyono and Kalla also know that increasing fuel prices when fuel products are already hard to get and expensive will be a politically dangerous move, and will spark another wave of demonstrations. Social protest continues to occur almost every day in most cities on a wide range of issues, indicating the underlying discontent among the population. A galvanised wave of protests in an atmosphere where there are already demands for a cabinet reshuffle could be a major problem for the government.
On September 7, Yudhoyono held a meeting with the governors of Indonesia's 33 provinces. According to the governor of Jakarta, former Suharto-era general Sutiyoso, the governors had been asked to "anticipate protests by certain groups" when the price rises were introduced some time after October. He stated that these protests would be "tolerated as long as they remained within a certain corridor and obeyed regulations". He said that they were also asked to anticipate the impact of price rises and possible "rises in the cost of public transport and the sacking of workers".
The Indonesian media has been reporting the dire effects the current situation is already having on some sectors. There are regular reports of towns where petrol, diesel and kerosene have become scarce, pushing up prices. Fishers, of which there are about 4 million in Indonesia's archipelago, supporting about 15 million family members, have been the first seriously hit. In some areas along Java's north coast, newspapers report that tens of thousands of fishers have not been able to take their boats out because they can no longer afford to buy petrol. Most do not own their own boats but must still pay for the petrol they use, as well as surrender a major part of their harvest to the boat owners. Many fishers are queuing for days, yet are still not able to afford to buy the fuel they need. This situation will worsen after October.
Controlling Indonesia's oil
Underlying the struggle over fuel subsidies is a deeper problem relating to the deregulation of the oil sector. Indonesia is an oil producing country and a member of OPEC, however it is the only OPEC country whose earnings from oil exports are in decline. During the Suharto period, the oil sector, in particular the state oil company Pertamina, were used as milk cows and very little investment went into developing infrastructure and technologies. Pertamina only controls 10% of oil wells in the country. It also has no capacity to refine any of this oil and must export it to be refined overseas. Those refineries that have been built in Indonesia refine imported oil from the Middle East. None of the oil exploited by the major foreign oil corporations is refined or used in Indonesia.
Now, with the International Monetary Fund the dominant force in economic policy making in Jakarta, there have been further blows to the country's capacity to explore and refine oil. A new law has been passed taking away Pertamina's control over licensing in the oil sector. Now Pertamina must compete against the major multinational oil companies for the right to exploit oil resources in the country and to refine and sell oil in both the international and domestic market. This is the real reason for the pressure to end the fuel subsidies and allow market prices to apply, rather than any inability of the government to absorb the increased cost of the subsidies. The subsidies are part of a package that sets a quota for fuel that must be sold in the domestic market. There will also be pressure to end this system so that the international oil companies can sell their oil wherever they can get the best price.
There is growing unease among the younger generation of oil professionals and managers in Pertamina, and among nationalist-minded economists, that the company — and Indonesia's capacity to exploit and refine its own oil — is being destroyed. An assumption underlying any movement in that direction is that other Indonesian industry — what little is left now — will have no protection from the international market place. This will mean that the current trends towards de-industrialisation will accelerate. In these circumstances, it is not surprising that for the first time since the 1960s there are an increasing number of voices calling for the renegotiation of all contracts with foreign oil companies and even nationalisation of the whole industry.
From 91×ÔÅÄÂÛ̳ Weekly, September 14, 2005.
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