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lthough a widely unpopular move, the gradual removal of fuel subsidies is the best option for the government to reduce its swelling budget deficit, a think thank says.

The Centre for Strategic and International Studies (CSIS) said that for the sake of the country’s economy, which is currently threatened by soaring global oil prices, the government should no longer delay its plan to gradually lift fuel subsidies.

The CSIS estimates that if the government continued to subsidize fuel to remain at the current price levels, the country’s economic growth of 6.4 percent this year could slump 0.2 percent.

CSIS researcher Pratiwi Kartika said increasing global oil prices would force the government to ramp up subsidies, which meant its capability to finance the development of vital infrastructure would shrink.

“The funds allocated for development would have to be shifted to cope with ballooning fuel subsidies. To save the country’s economy, now is the right moment for the government to adjust the amount of the subsidies,” she said at an event Tuesday to announce the findings of the CSIS study on fuel subsidy adjustments in Jakarta.

The study results show that if the price of premium gasoline (a subsidized fuel) was maintained at Rp 4,500 (53 US cents) per liter, subsidy for premium would jump 40 percent to Rp 69 trillion from the targeted allocation of Rp 41 trillion.

The study also said that if the government raised the price of premium to Rp 5,500, the subsidy would top
Rp 49 trillion, Rp 8 trillion higher than previous estimates.

The best choice to maintain the stability of the country’s budget this year, according to the CSIS, was to set the price of premium at Rp 6,000, meaning the subsidy required would be exactly Rp 41 trillion.

The calculations assume the economic price of premium was Rp 7,950 per liter.

Pratiwi said if the government increased the price of premium to Rp 5,500 per liter, the country’s GDP could grow 0.1 percent more than the government’s prediction of 6.4 percent in 2011.

“If the government removes the subsidy on premium and allows the price to follow the market [and sell at Rp 7,950 per liter], Indonesia may see the economy grow 0.8 percent more than previous estimates,” she claimed.

Previously, the government had announced it would restrict the sale of subsidized fuel to private vehicle owners beginning in April in Jakarta.

The program was to be expanded to other parts of Java and to Bali in July and to Sumatra and Kalimantan in 2013. But the plan was delayed on fears that lifting the subsidy would trigger strong protests from the public, which could lead to political chaos.

A legislator from House of Representatives’ Commission VII overseeing energy, Satya W. Yudha, urged the government to increase the price of premium and announce when and how the plan to control the distribution of subsidized fuel would be implemented.

“We request that the government raise the price of premium. To control subsidized fuel distribution, we acknowledge that better infrastructure is required, so we hope the government can announce when it will be implemented to end speculations and unrest among the people,” he said on the sideline of the US-Indonesia Energy Investment Roundtable in Jakarta on Monday.

To reduce the impact on the public when the price of premium was increased, the CSIS recommended the government provide compensation such as direct cash assistance (BLT) for the poor so they could adjust to the new price without suffering severe impacts to their lives.

To minimize resistance, the center suggests the government cut unnecessary spending and inform the people why such policy was needed. It said people had to understand that according to the 2008 National Social and Economic Survey, 84 percent of subsidized fuel was used by the wealthiest 50 percent of people in the country.