T

he government will likely go ahead with its plan to implement the fixed, market-based subsidy scheme in the sale of subsidized fuel after Coordinating Economic Minister Hatta Rajasa threw his support behind the plan.

While any adjustment in fuel subsidy policy was initially feared to be politically unfeasible ahead of the 2014 elections, Hatta said on Thursday the government '€œis discussing it with the House of Representatives'€.

'€œDon'€™t say this is not possible [this year]; we are now studying its implementation,'€ the minister said, when asked by reporters whether the fixed-subsidy scheme could be implemented in 2014.

'€œThe plan is worth our consideration,'€ added Hatta, who is the presidential candidate from the National Mandate Party (PAN) for the upcoming election.

The fixed-scheme subsidy mechanism was first raised by Finance Minister Chatib Basri in 2013. The idea, however, was rejected by his peers in the Cabinet who feared a political backlash over fuel price adjustments, with the detractors including Hatta, who last year criticized the plan as burdening the people.

Under Chatib'€™s proposal, the government would fix fuel subsidies at a certain amount, such as Rp 1,500 (12 US cents) per liter. With this mechanism, the price of subsidized Premium gasoline can be adjusted automatically based on its market price, when its price goes up or down, depending on the movement of the oil price and the exchange rate of the rupiah against the US dollar.

Indonesia adopts a price-based subsidy scheme where the price of Premium gasoline is fixed at Rp 6,500 per liter.

That is well below its market price of Rp 11,000, as the recent steep depreciation of the rupiah, combined with a fluctuation in oil prices, has made oil imports more expensive.

The govermment has earmarked Rp 210 trillion for fuel subsidies in the 2014 state budget, or one-ninth of its total spending.

The fuel subsidies might go higher, government officials have acknowledged, noting that the rupiah'€™s depreciation had driven up the cost of oil imports.

The Finance Ministry estimated the government'€™s subsidy for the sales of fuels including compressed natural gas (CNG) and biofuel, reached Rp 250 trillion in 2013, far higher than Rp 199.9 trillion allocated in the 2013 revised budget.

The 2014 state budget assumes the rupiah trading at 10,500 per dollar, while latest data from the Jakarta Interbank Spot Dollar Rate (JISDOR) showed the currency hovered at 12,159 against the
greenback, as of Thursday.

'€œWe cannot risk creating any more uncertainty in our state budget,'€ said Hatta.

'€œThe rising quota of oil consumption, as well as fluctuations [in the rupiah and oil prices], could swell subsidies, prompting a bigger budget deficit.'€

The rising costs of oil imports have been blamed for the huge shortfall in the oil-gas trade balance, which recorded a $2.7 billion deficit in the fourth quarter.

The deficit was caused by rising oil imports, which stood at $4.1 billion in December, compared to $3.9 billion a month earlier. The deficit has weighed on the current-account deficit and has pressured the rupiah, ultimately complicating the central bank'€™s efforts to maintain the stability of the currency.