Indonesia argues for aid package

The price hikes met with often angry protests

By David Bottomley in Jakarta

Officials from a group of financial donors are meeting in Bali on Tuesday to discuss whether to approve a multi billion dollar aid package to Indonesia.

The Consultative Group on Indonesia will make its decision after assessing how much progress is being made in certain key policy areas such as economic reforms.

But the government's decision to cut its controversial price hikes on fuel products could be a sticking point.

Many donors and investors see the rises as essential economic reforms in Indonesia's bid to tackle its budget deficit and reduce government subsidies.

Meeting demands

The Indonesian government is seeking a $2.8bn (£1.7bn) aid package to help support its fragile economy.

This is not an indication of the government's commitment to fiscal discipline, rather an indication of a weak government

Heriyanto Irawan, Merrill Lynch

However, it will receive the money only if it can convince the World Bank-led Consultative Group that significant progress has been made in key areas.

It is likely that at the two day meeting in Bali, Indonesia's attempts to restore peace in the separatist Aech province, and its fight against terrorism, will meet with approval.

But an assessment of its pace of economic reform is less clear cut.

'Weak government'?

The government had decided to cut subsidies on certain fuel products, including car and lorry diesel fuel and diesel for industrial use, from 1 January.

The move was welcomed by the World Bank but sparked widespread protests throughout Indonesia.

Protests continued for two weeks

On Monday, the government reversed that decision, saying that price rises would not be as high as originally expected.

IMF and World Bank representatives said the decision was "understandable" given the high price of oil in the international marketplace at present.

This decision is unlikely to be welcomed by the Consultative Group and is already being seen by some as the sign of a weak government unwilling to implement harsh, but perhaps necessary, reforms.

"This is not an indication of the government's commitment to fiscal discipline, rather an indication of a weak government which is not able to implement its own policy," said Heriyanto Irawan, head of research at Merrill Lynch in Jakarta.

Different purse

The Indonesian government claims the reductions will be funded through the large profits from oil exports.

"The new price for domestic oil products will be effective as long as the world oil price is still high," said Indonesia's chief economic minister Dorodjatun Kuntjoro-Jakti.

He argued that this would avoid putting a strain on the country's already strained budget.

The government's decision to roll back the price increases coincides with a visit from members of the International Monetary Fund (IMF) reviewing Indonesia's economic reform progress.

Many protestors have targeted the IMF for being a key proponent of the price increases.