This Weekend’s News: The Political Stakes of Indonesian Fuel Prices

The Indonesian government retreated from a planned increase in government-subsidized fuel prices on Saturday due to widespread protests that caused the government coalition that initially backed the plan to fracture. Indonesians have long enjoyed subsidized fuel prices, with gasoline prices at about US$2 a gallon. More than 10,000 demonstrators gathered around parliament to protest the legislation during parliamentary debate, with police reportedly firing tear gas and using water cannons to disperse the crowd.

Failing to increase fuel prices could potentially have a wide political reach as the Indonesian government struggles to rein in a ballooning budget that could stall the country’s economic growth. “The subsidies accounted for 20 per cent of government total spending last year, and analysts have said that cutting is needed if the government wants to limit its deficit and make room for investing in long-term growth projects,” The Financial Times reported on Saturday. “The country's fuel-subsidy bill has ballooned to more than $15 billion a year and could climb to close to $30 billion as global oil prices have been rising this year,” The Wall Street Journal added on Sunday. “The amount of money Indonesia spends to keep petroleum prices low is more than 15% of the country's budget and more than it spends on its military or its infrastructure.” What is more, the failure to pass the legislation could portend a difficult political future for Indonesia’s President Susilo Bambang Yudhoyono. According to The Wall Street Journal, “His inability to control his coalition and get the original plan passed could not only trigger a bigger budget deficit for Indonesia, analysts said, but it could also signal a political deadlock that could hurt future policy making.”

The government did not entirely dismiss its plan to cut fuel subsidies. Parliament approved a plan over the weekend that would allow the government to raise fuel prices if the average cost of oil over a six-month period grew by 15 percent. “The resulting policy that passed was that fuel prices won't be raised April 1 as the government had originally proposed but could be lifted only if average oil prices over a six-month period rose to 15% above the government's budgeted rate,” The Wall Street Journal reported. “The assumed average oil price for the 2012 budget is $105 per barrel, compared with a six-month average Indonesian crude price currently of about $116, which is lower than the 15% threshold.”

Indonesia is not the only country to endure political tumult from plans to cut government fuel subsidies this year. In January, Nigerian President Goodluck Johnson retreated from a planned end to government-subsidized fuel prices after political demonstrations erupted across the country. The Nigerian government chose instead to partially reinstate fuel subsidies to mollify demonstrators.

The Obama administration should keep a watchful eye on events in Indonesia given that the United States is set on forging a strategic partnership with the country. The long-term political implications could potentially undermine U.S. efforts to develop a more robust partnership with Indonesia if the country becomes mired in political turmoil over fuel prices and slow economic growth – which could also threaten political reform across the country as the government moves to end corruption and boost transparency.