House proposes cap on fuel subsidy for next year

Aditya Suharmoko , The Jakarta Post , Jakarta | Fri, 06/27/2008 10:06 AM | Headlines

The House of Representatives has suggested the government put a cap on the gap between the price of subsidized fuels and unsubsidized ones next year, which would consequently cap the fuel subsidy.

"We suggest that the gap ratio of fuel prices in the domestic and international markets be made constant," Harry Azhar Aziz, chairman of the House's working committee on budget assumptions for the 2009 state budget, told a hearing Thursday.

"The government is expected to set the ratio that is deemed rational -- 20 percent, 25 percent, 30 percent and so on," he said.

That way, he said, the government can also cap the fuel subsidy as every time international crude oil prices increase, the prices of subsidized fuels would rise as well.

Harry said if the government keeps subsidizing fuels regardless of how much oil prices soar, the fuel subsidy could reach half of total state expenditures, crippling the government's ability to spend on more productive activities.

The House's suggestion is just of several proposals circulating about how the government can deal with the fuel subsidy amid soaring crude oil prices.

Earlier, the National Development Planning Agency (Bappenas) proposed a gradual fuel price increase, for example, by 2 percent per month or 5 percent per quarter, to bring subsidized fuel prices closer to international prices while minimizing inflation expectations.

The per-liter price of subsidized Premium gasoline is Rp 6,000 (64 US cents), compared to international prices of about Rp 9,000; subsidized diesel is Rp 5,000, compared to about Rp 11,000; and subsidized kerosene is Rp 2,500, compared to about Rp 11,000.

The hearing also saw the government predict fuel consumption in 2009 would reach 42.8 million kiloliters, higher than an estimated 41 million kiloliters this year.

With the rupiah exchange rate at Rp 9,100 per dollar, the fuel subsidy will reach Rp 155.7 trillion next year, higher than Rp 126.8 trillion in 2008.

Total state expenditures are set at Rp 1,152.2 trillion, the first time they have surpassed Rp 1,000 trillion.

Bank Indonesia senior deputy governor Miranda S. Goeltom said the central bank saw the government's budget assumptions as acceptable.

"They (the macroeconomic indicators) are within our range," Miranda said.

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