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Swelling subsidy fear haunts RI
The government says it is becoming more concerned that the weakening rupiah will unexpectedly cause soaring energy subsidies despite its commitment not to further raise fuel prices
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The government says it is becoming more concerned that the weakening rupiah will unexpectedly cause soaring energy subsidies despite its commitment not to further raise fuel prices.
An increase in fuel prices is necessary, according to analysts, to ease the burden of subsidy spending by the government. But the issue of fuel prices is a politically sensitive issue given the approaching 2014 general election.
Finance Ministry fiscal head Bambang Brodjonegoro said on Wednesday that the government would focus on 'pushing down' the volume for subsidized fuel, rather than raising prices to cope with the surge in subsidies.
'We need to get serious on enforcing the quota. Our subsidized fuel consumption supposedly won't exceed 48 [million kiloliters] with existing fuel prices,' he said after a House of Representatives' budget committee meeting.
Next year, Indonesia is expected to spend Rp 328 trillion (US$29 billion) on energy subsidies, which comprises Rp 230 trillion for fuel and Rp 98 trillion for electricity.
The spending on energy subsidies next year is Rp 44 trillion or about 15 percent higher than the President's initial proposal because of the sharp depreciation of the rupiah that will drive up oil imports.
This is because the earlier budget assumed the rupiah would trade at Rp 9,750 per US dollar, while the government now planned to revise up the currency assumption to Rp 10,500 against the greenback.
Although insisting a fuel-price hike was unlikely, the government acknowledged it 'is now becoming more concerned about the sharp depreciation of the currency and whether it would eventually lead to an increase in the government's fuel spending'.
'Moreover, if our currency becomes weaker, people who initially used non-subsidized Pertamax gasoline might switch to subsidized Premium again, because of the widening price discrepancy between the two,' Bambang told lawmakers.
For comparison, the additional Rp 44 trillion that the government must spend on energy subsidies is higher than the combined budget allocated to the Agriculture Ministry (Rp 15.5 trillion), the Law and Human Rights Ministry (Rp 7.3 trillion), the Maritime Affairs and Fisheries Ministry (Rp 5.6 trillion), the Forestry Ministry (Rp 5.2 trillion), the Foreign Ministry (Rp 5 trillion) and the Manpower and Transmigration Ministry (Rp 3.9 trillion).
Riski Sadig, a House budget committee lawmaker from the National Mandate Party (PAN), said the swelling energy subsidies were worrisome. To prevent the state budget from being pressured by the fluctuation in currency and global oil price, he suggested the government implement fixed energy subsidies.
The idea of fixed energy subsidies was once raised by Finance Minister Chatib Basri, who suggested the government impose a limit on fuel subsidies, for instance Rp 2,000 per liter, so the price of subsidized Premium gasoline would be adjusted up automatically at times when the oil price soared too high, or when the rupiah became too weak.
'If we can have a law limiting the state budget deficit at 3 percent [of gross domestic product], then why can't we have the same thing on subsidies?' said Riski, suggesting a 'huge revolution' in Indonesia's law so energy subsidies would not exceed a certain threshold.
The government has estimated that the bigger-than-expected energy subsidies will drive the deficit in the 2014 state budget to top 2 percent, higher than the 1.5 percent in its initial forecast.
A higher budget deficit means the government must issue an additional Rp 57.1 trillion of bonds to plug the shortfall, according to government estimates.
However, the idea the government would have to issue additional bonds to pay for unproductive spending, such as energy subsidies, might not bode well among foreign investors, according to JP Morgan Chase's senior country officer for Indonesia, Haryanto T. Budiman.
'Having an energy subsidy that is too big makes a lot of people nervous,' he said. 'They [foreign investors] would rather buy Indonesian bonds that are used to finance infrastructure, because it's productive ' if they are buying bonds and the bonds are used to pay for subsidies, it's a different story.'
