Freeing the liquor trade

The policy measures taken by Finance Minister Sri Mulyani Indrawati and Trade Minister Mari Pangestu in the importation, distribution and levying of alcohol drinks are greatly sensible, making the country more hospitable to foreigners.
Sri Mulyani scrapped the luxury sales tax – which by the law could be as high as 200 percent – on alcohol drinks, while Mari abolished state trading company Sarinah’s monopoly in the importation of liquor.
They freed liquor trade, yet still control the distribution and consumption of alcohol drinks through punitively high excise taxes.
However laudable and welcome these measures may be, they are still quite daring a move since liquor is a socially and politically sensitive subject in the country with the world’s largest Muslim population. The consumption of alcohol, even by only a tiny percentage of the population, has always been a lingering issue.
Experiences so far had shown the ineffectiveness of the high luxury tax rate in controlling liquor, which are seen by Muslims, who make up some 80 percent of the country’s population, as something that is strongly forbidden as sin.
Instead of cutting down on imports and contributing revenues to the state, the high luxury tax and the monopoly in the importation of liquor had caused import smuggling and illegal trading (black market) to thrive, notably in Jakarta and Bali, two areas with sizeable pockets of foreign communities and the most popular destinations for foreign visitors. 
Until late 2006, two state trading companies were given the license in the lucrative liquor trading: Sarinah was the sole importer of duty-free liquor and Perusahaan Perda-gangan Indonesia (PPI) for importing duty-paid alcohols for the open market. However, the tough campaign launched by Sri Mulyani to clean up the notoriously corrupt customs service found in 2006 how collusion between PPI and customs officials had made it possible for most of the liquor imported for the free market to evade paying any duty, causing hundreds of millions of dollars in state losses and alcohol black market to thrive.
 PPI lost its license in late 2006 and Sarinah was eventually assigned the sole importer of both duty-free and duty-paid liquor. However, the lack of experience made the transition chaotic, drying up liquor stocks between late 2007 and 2008 and setting off complaints among foreign visitors and expatriate communities in major cities such as Jakarta, Surabaya and Medan.
Minister Mari said eight companies had applied for liquor import licenses and she would decide soon how many of them would be granted the licenses because the new policy measures would be effective early next month.
Banking on past experience, it is much better to allow as many importers as possible as competition is the best driver of an efficient market.  The measures will not, however, make liquor available at very cheap prices to everybody as alcohol drinks remain subject to punitively high excise taxes that will be twice as high as their current rates.
The trade liberalization will discourage black market, while the high excise taxes will serve to control liquor production, imports and distribution and consumption.
Of most important is for the trade and finance ministries to design an importation and distribution system that is easy to oversee, yet effective in controlling liquor sales to the targeted market niche – foreign visitors and residents.
Liquor drinking is increasingly part of modern lifestyles. And as our economy has become intensively globalized and our country more popular as a tourist destination, we will inevitably be the host to a rising number of foreigners.
Opini The Jakarta Post 25 Maret 2010