IMF denies forcing Indonesia to cut fuel subsidies

John Dodsworth, the fund's top official in the southeast Asian archipelago, denied the charges made by President Abdurrahman Wahid that the IMF is requiring a budget that includes a 30 percent fuel price increase and a 20 percent rise in electricity charges.

``What we're asking for is a viable plan to address the problem of the budget,'' Dodsworth said. ``In no way should the increases be seen as a condition. The question of whether and when to increase fuel prices is really a decision for the government.''

A week ago, Wahid said he had ``no choice'' on the fuel increases. ``The policy is related to the IMF rule,'' he said.

It's the second time in three years that the fund is being criticized for pushing the fuel subsidy increases. And in 1998 the fuel increases contributed to the overthrow of the government.

In May 1998, the IMF pushed Indonesian President Suharto to raise fuel and electricity prices by as much as 71 percent. In the riots that followed 500 were killed. And even though he rolled back the increases within weeks, Suharto stepped down that month after a 32-year reign.

This month, facing the same mix of a rising budget deficit and a rupiah near 12,000 to the dollar for the first time since 1998, Indonesia's government said it will cut the subsidies it uses to keep the country's fuel prices cheaper than anywhere in the world.

And even though many economists say the move is necessary, they also point to 1998 and warn of possibly dire political consequences.

``From a strictly economic point of view, the fuel subsidies are probably not a good thing,'' said Mark Weisbrot, director of the Center for Economic Policy Research and an IMF critic. ``But the IMF just squeezes too hard.''

``The fuel price increases could also provoke violent public protest,'' the International Crisis Group warned in a report on Jakarta's ``presidential crisis'' released today.

In response, Dodsworth said that the IMF is making sure that any increases don't harm the poor.

Even in saying that the subsidy cuts won't hurt the poor, the IMF is reliving 1998.

When the IMF approved a $1 billion loan disbursal on May 4, 1998, First Deputy Managing Director Stanley Fischer said that the fuel increases were ``designed to deal with their impact on different strata of society.'' Kerosene, which is used by the poorest in cities to cook their meals, would face the lowest increase, he said then.

In the days that followed, riots broke out across the country. Less than two weeks later, the IMF pulled its staff out of Jakarta.

And the lender then began denying any involvement with the rollback.

``In the end, you have to allow the government, which supposedly knows its country, to make those decisions as to its timing, where the subsidies are to be cut,'' Fischer said later that month.

That the subsidies need to go at some point isn't argued by economists.

Debt service, fuel subsidies and wages take up four-fifths of the government's annual spending, according to the World Bank.

``This puts severe pressure on the budget, and threatens to crowd out development spending,'' according to a bank report.

With its total debt totaling more than annual output, Indonesia has run out of easy answers, said Morris Goldstein, an economist at the Institute of International Finance and former IMF researcher.

``You start to run out of easy choices when you have big debt burdens,'' Goldstein said. ``They don't have the luxury of thinking exactly about what would optimal.''