Indonesia feels the pinch as oil, commodity prices surge

Indonesia feels the pinch as oil, commodity prices surge

With prices for key commodities at record highs, Indonesia — Southeast Asia’s biggest economy and a key exporter — should, at first glance, be enjoying good times.

But with high oil prices leading to a government fuel subsidy blowout and rising food prices hitting the poor, analysts say most Indonesians are being squeezed.

Indonesia is the world’s largest exporter of palm oil and a major exporter of coal and gas.

It exported 4.9 billion dollars’ worth of coal and 4.5 billion dollars’ worth of crude palm oil between January and September last year, according to the trade ministry.

This has helped Indonesia achieve the strongest growth and stability it has seen since the 1997 Asian economic crisis, with the central bank forecasting first-quarter GDP growth of 6.2 percent.

But the commodity boom has meant little gain for most people here, said Fauzi Ichsan, an economist with Standard Chartered bank.

“Indonesia should benefit from the higher commodity prices because yes, Indonesia is a net importer of oil. But Indonesia is a net exporter of energy and commodities,” he said.

The problem, according to Ichsan, is that the benefit is mostly flowing to regions outside the main island of Java. And even there, the commodities business creates precious few jobs.

“It’s not infrastructure and it’s not manufacturing, it’s really driven by productivity growth, really it’s a capital intensive investment,” he said.

With too little jobs growth — unemployment has hovered stubbornly around nine percent — expensive oil and commodities are pushing up the price of daily necessities here.

Cooking oil, which comes from palm oil, has nearly doubled in price over the past year, while the cost of rice has soared along with that of soybeans — a key source of protein for the country’s poor.

The government has attempted to bring down the price of cooking oil for domestic consumers, slapping a 20 percent export tariff on crude palm oil, with global prices hovering just under 1,300 dollars a tonne. Any movement beyond that price benchmark will see the tariff rise to 25 percent.

The rising cost of oil has also taken its toll on prices for Indonesian consumers. The consumer price index (CPI) jumped 7.4 percent in February.

And it’s with oil that Indonesia — and the administration of President Susilo Bambang Yudhoyono — is having its biggest headache.

Record global oil prices have caused the cost of Indonesia’s generous fuel subsidy scheme to swamp the state budget. Revised budget figures released this week showed the projected cost of the fuel subsidy this year has nearly tripled to 126.8 trillion rupiah (13.8 billion dollars) from the original 45.8 trillion rupiah.

Yudhoyono has been under pressure from some economists to end or reduce subsidies, but with an election in the offing next year, he has sworn off any cuts.

The last cuts to the fuel subsidy in 2005 were met with rowdy street protests.

According to Binny Buchori, an economist with think tank Perkumpulan PraKarsa, any new attempt to reduce subsidies would further hurt the poor.

“With all the commodity prices, the pressure to scrap the fuel subsidy would increase the number of poor people and make the near-poor fall into (poverty),” Buchori said.

But other economists argue the subsidies disproportionately favour the rich and leave the government unable to pay for essential services.

The World Bank estimates that combined subsidies for fuel and Indonesia’s oil-burning electricity industry cost over 20 billion dollars a year, outstripping government spending on housing, law and order, health and education combined.

Bank figures show nearly half of the subsidy goes to the country’s richest 10 percent, while the poorest half of the population gets less than 20 percent.

“The fuel subsidies… represent a missed opportunity for investment and that’s what we want to highlight, (that Indonesia can) use all or some of these resources to finance investment in social programmes and infrastructure,” Bank country director Joachim von Amsberg told AFP.

“The resources that are gained could be used for putting in place stronger social programmes,” said von Amsberg, adding that such programmes were more effective at helping the poor than efforts to control prices.

However, PraKarsa’s Buchori argues that Indonesia could find the savings in other ways, including cracking down on oil smuggling, renegotiating foreign debt and abandoning expensive support of shaky local banks.

“The World Bank doesn’t talk about servicing the debt (or) how much the government has put out bailing out the banks,” she said.


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