The Energy Commission at the House of Representatives, as widely predicted, approved on Monday the government proposal to increase the volume of subsidized fuel by 1.2 million kiloliters (kl) at a cost of Rp 6 trillion (US$625 million), thereby raising this year’s wasteful spending to more than $24 billion.
That was the second increase this year. Last September when the House and the government agreed to increase the volume of subsidized fuel by 4 million kl to 44 million kl, the downstream oil and gas regulatory body (BPH Migas) warned that without restrictive measures the increase would not be enough.
BPH Migas had even predicted that the demand for subsidized fuel would increase to as large as 47 million kl this year. This estimate is simply sensible and logical.
As the subsidized fuel price has been as low as 45 percent of the market price, many car owners who used to buy gasoline (higher octane) at the market price decided to shift to the subsidized fuel available at all gasoline stations.
The wide price gap also has provided a lucrative margin for export smuggling and huge incentives to industrial users, who are required by law to use fuel procured at market prices, to misuse the subsidized fuel.
Politically, the House and government had no other option other than to simply increase the subsidized fuel allocation. Without the increase chaos would ensue, which could easily deteriorate into social and political instability when the 44 million kl quota is reached in the next two weeks. In fact, many provinces used up their quota last month.
At present, the government and House, battered by a series of corruption scandals, have neither political capital nor public trust to take such a measure, despite the raising of fuel prices being for long-term good of the economy.
As argued, any increase in the subsidized fuel quota would create a bottomless pit as export smuggling and the misuse of subsidized fuel by industrial users would increase at an even faster rate.
It is true that the increased fuel subsidy would not cause a significant rise in fiscal deficit. However, it is misguided to see the wasteful spending purely in terms of fiscal management.
We have time and time again asserted that uneconomically low fuel prices would eventually lead us into a severe energy crisis. We would face severe supply disruption as fuel subsidies hinder the development of alternative energy resources, which are quite abundant in the country.
Moreover, the bulk of the subsidies have always been enjoyed by the middle-class and rich private-car owners.
Bank Indonesia’s Governor Darmin Nasution warned again last week that the huge fuel subsidy had damaged Indonesia’s economic competitiveness and increased the current account deficit within our balance of payments.
Darmin argued that as Indonesia depends on imports for 60 percent of its fuel needs, consequently the increase in the use of subsidized fuel had raised fuel imports at a time when non-oil exports have decreased due to the economic contraction in Europe.
Further, the current account deficit has set off downward pressures on the rupiah. No wonder the rupiah has been among the worst performing currencies this year.
If this depreciation continues, inflation pressures (imported inflation) will become stronger as import prices rise as well — triggering a vicious circle within the economy.
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