Govt hopes strong rupiah keeps brake on subsidy costs

The Jakarta Post ,  Jakarta   |  Fri, 07/14/2006 4:58 PM  |  Business

Urip Hudiono, The Jakarta Post, Jakarta

The government is pinning its hopes on improving macroeconomic indicators, including the rupiah exchange rate and inflation, to help limit the fuel subsidy and debt repayment burdens.

""The cost of fuel subsidies is determined by oil prices, the rupiah exchange rate and the volume of fuel consumption,"" Finance Minister Sri Mulyani Indrawati told reporters after a hearing Thursday with the House of Representatives.

""The fuel consumption volume is usually determined beforehand, although this still depends on how much is actually used in the end. We expect the rupiah exchange rate and consumption to affect the cost of the subsidies more than oil prices.""

In its mid-year budget revisions, currently being discussed by the House, the government has proposed increasing the fuel subsidy allocation to Rp 60 trillion (US$6.6 billion), from the previously budgeted Rp 54.2 trillion. It has also proposed revising the oil price assumption upward to $62 a barrel from $57 previously.

The fuel-related budget revisions are designed to take into account a recent surge in global crude prices, which last week hit a record high of $75 a barrel.

The rising oil prices, however, came amid the recent strengthening of the rupiah against the U.S. dollar, prompting the government to revise the budget's rupiah exchange rate assumption to Rp 9,300 per dollar from Rp 9,900 previously.

Meanwhile, last year's fuel price increases has contributed to a decline in fuel consumption by the public, as well weakened purchasing power leading to slower economic growth. These two factors -- the strengthening rupiah and lower fuel consumption -- may help save the government from the sort of dilemma it faced last year as a result of massive, unexpected increase in fuel subsidy spending.

Indonesia, now a net oil importer, nearly fell into a budgetary crisis at that time, when fuel subsidy spending surged to Rp 89.2 trillion from the anticipated Rp 19 trillion due to the adoption of oil price and rupiah assumptions that were too low.

Separately, state oil and gas firm PT Pertamina's vice president, Iin Arifin Takhyan, said fuel consumption for this year would likely come in at about 59 million kiloliters, lower than the 61 million kiloliters previously expected. This would result in fuel subsidies costing the taxpayer some Rp 62 trillion, he said.

Mulyani said that she also expected the recently strengthening rupiah to help further reduce the financial burden on the state arising from interest payments on foreign loans, which payments were expected to decline to Rp 25.1 trillion from the previous estimate of Rp 28 trillion.

In addition, she said, lower inflation would reduce the cost of paying interest on government bonds, even though her ministry was seeking an increase in the bond-interest budget allocation to Rp 58.4 trillion from Rp 48.6 trillion previously. However, the actual payments would probably be significantly lower.

The yields -- the rate of interest paid to investors -- on government bonds refers to the central bank rate, which currently stands at 12.25 percent. Bank Indonesia has frequently said that it will likely lower its rate further as inflation slows down to an expected 8 percent by the end of the year.

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