As oil prices rise, govt urged to cap fuel subsidy

Aditya Suharmoko and Ika Krismantari ,  The Jakarta Post ,  Jakarta   |  Tue, 04/29/2008 12:39 PM  |  Headlines

The government would be better off raising the price of fuel rather than subsiding it, says a member of the House of Representatives.

Suharso Monoarfa, the vice chairman of the House budget committee, said the amount of the subsidy poses an immense threat to fiscal stability.

"The government needs to gradually shift subsidies from fuel to other productive sectors, such as food, education and infrastructure, which have multiplier effects on the economy," he said.

He added that the amount of the fuel subsidy should be capped at Rp 135.1 trillion (US$14.84 billion).

Under the revised 2008 state budget, Rp 126.82 trillion is allocated to the fuel subsidy, with another Rp 8.3 trillion as backup if the Indonesian Crude Price (ICP) -- the country's benchmark oil price -- reaches $100 per barrel on average and fuel consumption exceeds 37 million kiloliters this year.

Analysts have said the fuel subsidy is too high, compared to the total state revenue of Rp 989.3 trillion.

The ICP is usually traded lower than other international crude oil benchmark prices. In New York, for instance, world oil prices hit an all-time high of $119.93 per barrel on Monday.

Suharso said many higher income consumers were benefiting from the current fuel subsidy, choosing to run their luxury cars on subsidized fuels.

"The government-subsidized fuels should only be used for public transportation," he said.

According to Suharso, the amount of the subsidy will not increase if the country can produce more than 977,000 barrel per day (bpd) -- with an additional 50,000 bpd from Chevron -- and fuel consumption is capped at 35.5 million kiloliters this year.

If the country can produce more than 927,000 bpd and fuel consumption is higher than 35.5 million kiloliters, the subsidy will not burden the state budget because the government will benefit from the windfall profit of high oil prices, said Suharso.

Another member of the House budget committee, Hasto Kristianto, opposed the proposed rise in domestic fuel prices. Instead, he said, the government would be better off limiting fuel consumption through the use of the "smart-card" scheme.

He said the House had provided certain measures in the state budget to avoid raising fuel prices.

Tjatur Sapto Eddy, a member of House Commission VII overseeing energy and mineral resources, also said that raising fuel prices should be a last resort for the government.

"The government must focus on other efforts to safeguard the state budget from the pinch of the skyrocketing global oil prices," said Tjatur.

He said the government should renegotiate its overseas loans, lower bond rates, cancel the distribution of revenue sharing for provinces and reduce the electricity subsidy for higher income households, before deciding to raise fuel prices.

Sofyan Wanandi, chairman of the Indonesian Employers Association (Apindo), said business people wouldn't react adversely if the government raised fuel prices.

"It will be better if the government allocates the fuel subsidy to infrastructure, which can create employment," he said.

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