Indonesia’s Fuel Hike: Eliminating Arbitrage?

The discussion about the impending rise of fuel price as the government schedules on removing subsidies for fuel has turned into a fiery political debate in every part of Indonesia. Despite President Yudhoyono’s coalition not unanimously approving of this proposed policy (I saw supporters of Partai Keadilan Sejahtara demonstrating earlier this afternoon), the probability of it happening is so high that markets have reacted, adjusting to expectations. Just today, Rupiah significantly depreciated against the USD. The price of a dollar reached more than Rp. 10,000, which happened for the first time since 2009 as the world slowly recovers from the 2008 financial meltdown.

Our recently-appointed Finance Minister, Dr. Chatib Basri, commented that the government’s decision to revoke the subsidy will bring about a positive outcome. Most people and economists supporting the government base their support on a classic argument: they argue that subsidies should be channeled towards productive long-run sectors (technology, health, education). But Dr. Basri takes a different angle. Quoting from an interview by the Jakarta Globe, Dr. Basri commented that:

“The biggest deficit in our trade balance is from oil and gas imports,” Chatib said at the State Palace on Wednesday. “If the price increases, the price disparity between the domestic and international fuel price will narrow.”

To elaborate further, Dr. Basri, as paraphrased by the interviewer, said that “the government’s plan to raise the price of subsidized fuel would cut the amount of oil and gas smuggled out of the country.” In the article, the Ministry of Energy and Mineral Resources confirms that Indonesia has indeed been a recurrent victim of rampant fuel smuggling. Subsidized fuel is comparatively less expensive in Indonesia compared to other Southeast Asian countries that those knowing how to circumvent the procedures of Indonesia’s customs have taken advantage of such significant disparity in price. Buy low in Indonesia, sell high overseas. Assuming that all types of transportation costs are removed, this act of fuel smuggling is a form of arbitrage in the fuel market.

However, I believe that price differences between Indonesia’s and foreign fuel markets shouldn’t be a problem if there exists a strong and strict regulative framework within Indonesia’s customs. The argument that the government should let the price of fuel increase so as to eliminate arbitrage opportunities isn’t compelling enough. While it’s very clear that Dr. Basri, one of Indonesia’s esteemed economists, is not advocating for this argument, some important government officials actually are. A solution to Indonesia’s problem in catching profit-making arbitrageurs shouldn’t be raising the cost of fuel. It should be anything other than that i.e. stronger enforcement of export-import laws, better oversight and controlling or cargos.

Regardless, the price of fuel is rising soon. Like it or not, it’s happening, and any Indonesian consumer irrespective of their level of wealth, in the short run, wouldn’t be happy with things getting more expensive. While I believe that taxpayers’ money should be directed at productive sectors (just like most people do), it still somewhat saddens me that an hour ago I was asked to pay for an extra 20% to buy a bottle of a drink I’m currently addicted to. Oh well—what can you do.

The Goat Loan

When firms or individuals seek financial capital to start or catalyze their projects, they rely on banks to provide them with the amount of loans they want to borrow. At the same time, they hope that the central bank has not been letting the interest rate rise, because if it did, they would change their minds and save the idea until things get amenable. Nobody wants to take the risk of defaulting on a loan due to high interest rates. What complicates further is the fact that not everybody–especially people with low income–is deemed creditworthy enough to borrow. And even if they pass the strict creditworthiness evaluation (assuming that politicians have learned from the 2008 financial crisis), it is not guaranteed that there is no red tape interweaving the banking system.

A priest residing in Indonesia by the name of Father Charles Patrick Edward Burrows (also known as Romo Carolus, among the locals) managed to find a way to escape from the conventional banking system. Instead of loaning out Rupiahs (Indonesia’s currency) and expecting borrowers to return them in the future with an exorbitant interest rate as a compensating differential for not being financially secure, he loans out goats–the grass-eating herbivore. Here is how it works: the loaner loans out at least two goats to a borrower (I will call these goats ‘parent goats’), the borrower nurtures the goats until they breed more little goats, and finally the borrower returns the parent goats to the loaner. The borrower, who amasses capital gains from the little goats to which the parent goats give birth will then raise them and sell them for money.

It is not directly stated how Romo Carolus assesses a borrower’s creditworthiness, but based on a Youtube video a friend of mine posted on Facebook, I am convinced that everybody with a low income can borrow a goat under a binding agreement that profits earned from raising the goats are allocated to the borrower’s or the borrower’s relative’s educational advancement. The Youtube video itself names the loan a scholarship due to the compulsory requirement that the money acquired be used for enrolling in a higher level of education. The hardworking yet gleeful scholarship recipients starring the video, for instance, are able to study at Yos Sudarso Jeruklegi Senior High School in Cilacap, West Java as a result of the goat loans. Raising goats is not easy as it seems, but who does not want to borrow with 0% interest rate and low cost (grass is still everywhere in most rural areas) to gain human capital?

Indeed, the priest who initiated the program is evidently not aiming for profit as he only demands the borrower to return the parent goats without additional perks. Moreover, as the parent goats get older, their value depreciates, suggesting that the program itself is driven by altruistic rationales. But since outcomes of researches on microfinance have inclined towards inefficiency (the outcomes are mixed), why not turn Romo Carolus’ compassionate program into a social enterprise, so as to ensure the program’s sustainability? There has not been any research yet, but I will not be surprised if we find out that people below the poverty line living in areas that support sustenance for livestocks, or people in general, will be more responsible when it comes to raising two goats than maintaining millions of Rupiahs. It might be a long shot, as goats are not as liquid as money, grass will eventually be hard to find, and it takes around 150 days for goats to give birth to little goats, but there must be a creative thinker out there who can transform ‘The Goat Loan’ tagline from a joke into something laudable.