Oil price rise a boost for Indonesia but worries about backlash

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Tuesday February 22, 2000 1:27 a.m. EST

Oil Price Rise a Boost for Indonesia but Worries About Backlash

JAKARTA, Indonesia (AP) -- The last time the government pushed up gasoline prices by cutting fuel subsidies, Indonesians took to the streets in bloody riots that ousted President Suharto.

Nearly two years later, even with oil prices soaring, Indonesia's new reformist government is considering reducing subsidies once again to meet demands from international lenders for a more market-oriented economy.

For now, no one expects a recurrence of the social unrest of 1998, but many people are still uneasy because the country already is plagued by sectarian and separatist violence and is struggling to recover from Asia's economic slump.

The more than doubling of world oil prices over the last year is a two-edged sword for Indonesia, which is a member of OPEC. As the producer of 6 percent of the world's oil supply, it is profiting from the runup in prices set off by OPEC's agreement a year ago to hold down production.

But with prices up, reducing fuel subsidies would hit poor Indonesians hard.

Analysts believe OPEC will come under increasing pressure - especially from the United States and other industrialized nations heavily dependent on oil - to raise production and thus pressure prices downward.

Such a move would have a detrimental effect on Indonesia's economy, which is struggling to recover from its worst recession in a generation. Last month, 20 percent of the country's exports were from its oil and gas industry, bringing in billions of desperately needed dollars.

In Indonesia's 2000 state budget, the government assumed the price of oil would be $18 a barrel. At its present level around $30, President Abdurrahman Wahid's government has the money it needs to implement reform programs and help kickstart the economy.

``It's a windfall for the government,'' said Raden Pardede, an economics analyst at the state-owned securities group Danareksa Securitas. ``But in budget terms, it's a real challenge to maintain the oil subsidy.''

Indonesia spent $4 billion last year on fuel subsidies. And even though the skyrocketing oil price means a boost in revenue, the government is having to shell out even more to maintain the subsidies.

So it is now thinking about reducing the amount by which it subsidizes gasoline prices, a move that would result in an immediate rise in the price of gasoline at the pump. It is 49 cents a gallon.

The subsidy reduction is due to the International Monetary Fund, which has conditioned future loans on a reduction in government economic subsidies.

Pardede said the government was planning to offset the increase in gasoline costs to the poor by maintaining its heavy subsidies on kerosene, a popular fuel for cooking.

But not everyone believes the government will be able to maintain stability and reduce fuel subsidies. Many lawmakers have come out in opposition to the plan in recent weeks, saying it would have a detrimental effect on society and the economy.

Whatever the government does on subsidies, the rise in oil prices is allowing Indonesia's economy to start catching up with neighboring Malaysia and Singapore, which both expect economic growth of 5 percent this year.

On Wednesday, the Indonesian government predicted the economy would grow 4 percent this year. That would be the first increase since the economy collapsed during the Asian currency crisis in 1997.

The oil boon won't last, though. Indonesia exports 1.5 million barrels of oil a day now, but its fields are predicted to begin running dry around 2015 and it will become a net importer.

By DANIEL COONEY, Associated Press Writer

-- Old Git (anon@spamproblems.com), February 22, 2000


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