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nternational financial institutions are urging the government to move faster to reform energy subsidy policy to help ease financial strains resulting from the growing deficit in the state budget.

In a recent report, the World Bank, Bank of America (BofA) Merrill Lynch and Standard Chartered said the government urgently needed to resolve the issue.

“Increased public spending on subsidies means a higher opportunity cost in terms of money that can be spent on pressing development needs, such as education, health, social protection and infrastructure,” World Bank lead economist for Indonesia Shubham Chaudhuri said in a statement released Tuesday.

The warning was issued amid the steady increase in the world’s oil prices.

“The savings from reform could also be used for cash transfers to limit the impact on vulnerable households,” he said, citing a possible ballooning fuel subsidy to close to Rp 150 trillion (US$17.4 billion) if there’s no change in the government’s policy, given increasing prices and consumption.

The government plans to spend Rp 136.6 trillion for overall energy subsidies this year, of which Rp 95.9 trillion is allocated for fuel subsidies. The energy subsidy accounts for the larger part of the government’s overall subsidies of Rp 187.6 trillion this year.

The energy subsidy exceeds the Rp 135.9 trillion allocated for capital expenditures.

The World Bank estimates that higher oil prices could increase the overall subsidy bill to Rp 253.3 trillion.

Chaudhuri called for the government to reform its subsidies by, among others, raising fuel prices and implementing a closed distribution of subsidized fuel directly to those in need.

“Ballooning fuel subsidies raise the pressing issues of resource misallocation and crowding out. This is especially given the inadequate funds allocated for infrastructure and more direct lower income household support,” Hak Bin Chua, BofA Merrill Lynch emerging Asia economist, said in a recent report focusing on Southeast Asia.

Standard Chartered also shares the same view, saying in its latest Asia report that the Indonesian government “is spending more on energy subsidies and not enough on infrastructure”. The government and House of Representatives members, concerned with high international oil prices and relatively high inflation, have again indefinitely postponed the plan to restrict subsidized fuel consumption for private cars that was supposed to take effect in April of this year.

The House is allowing the government to hike subsidized fuel prices if the actual oil price is at least 10 percent higher than the price assumed in the budget. “However, we believe the final decision on raising fuel prices rests with the President,” Standard Chartered economists Fauzi Ichsan and Eric Sugandi said in the report.

Hak Bin Chua said fears of social unrest and high inflation will likely continue to delay Indonesia’s plan to limit the sale of subsidized fuel to passenger cars. “A more modest fuel price adjustment and subsidy cut is likely before year-end, replace this more ambitious plan.”

“Political costs implementing the scheme in the current climate may be high,” he added, citing President Susilo Bambang Yudhoyono’s falling popularity rating to about 66 currently from 85 when he was re-elected to his second term.

A recent survey by the Indonesian Survey Circle also shows that the President’s job approval rating reached a new low of 47 percent from 57 percent due to his failure to get things done and the graft allegations surrounding his Democratic Party.

The BofA Merrill Lynch assessment shows that Indonesia could see energy subsidies balloon to Rp 178 trillion from the budgeted Rp 136.6 trillion, widening the fiscal deficit to 2.4 percent of GDP from the projected 1.8 percent. “Slow disbursements of funds are, however, counterbalancing the higher subsidy costs,” Hak Bin Chua said.