Jakarta puts off fuel subsidy changes

File photo of Indonesian motorists queuing at a state-owned petroleum company in Jakarta.

INDONESIA - Indonesia is to defer an unpopular decision to reform its fuel subsidy scheme until after the presidential poll in July, with Finance Minister Chatib Basri ruling out further price hikes before then.

Dr Chatib, a technocrat, however argued that the current government could decide on the fuel subsidy changes between July and October, when it hands over power to the new administration.

The key change, he said, should involve the government determining a fixed quantum per litre for the subsidy, rather than fixing the price of subsidised fuel as is now the case.

"Don't rule out the possibility of subsidy reform this year," he said yesterday.

"The next government will expect the current government to adjust the fuel price. But the current government will not adjust the fuel price until after the election," he told a one-day forum on prospects and problems in South-east Asia's largest economy organised by The Economist magazine.

Calls to move to fixed fuel subsidies, in place of fixing the price of subsidised fuel, are not new.

But they have gained greater urgency in the uncertain global economic climate and with a weak rupiah - now above 12,000 to one US dollar - and as the fuel subsidy bill for this year is set to soar past 250 trillion rupiah (S$27.53 billion).

Raising the fuel price remains a risky venture. President Susilo Bambang Yudhoyono's government backed down from a proposed hike in March 2012 following violent protests.

But pressures from a ballooning subsidy bill saw it go against significant opposition to raise prices last June, from 4,500 rupiah to 6,500 rupiah a litre for the lowest grade of fuel.

By comparison, the price of higher-grade unsubsidised fuel was around 9,000 rupiah a litre.

But a weaker exchange rate for the rupiah has seen this rise to almost 12,000 rupiah a litre today, and also cancelled out much of the savings from raising the price of the lowest grade of fuel.

Yesterday, Dr Chatib said a fixed subsidy of 3,000 rupiah a litre would mean fuel prices would fluctuate, but would be more fiscally prudent, and help cap the annual subsidy bill at around 150 trillion rupiah, allowing more funds to go towards improving education, health care and infrastructure.

While he acknowledged such a huge subsidy was not ideal, he felt a smaller amount would not be politically palatable, saying: "You have to start with the regime first, and adjust."

World Bank lead economist Jim Brumby told The Straits Times that such an adjustment, which economists had long argued for, was an appropriate shift.

"When constraints and risks are more obvious, you tend to get a better focus on policy," he said.

But observers fear political pressures could militate against changing the fuel subsidy scheme.

Earlier this month, state oil and gas firm Pertamina came under pressure to slash a days-old hike in the price of liquefied petroleum gas (LPG), used by many households, from 68 per cent to 17 per cent.

Many Indonesians fear higher fuel costs will drive inflation up although the government has given cash handouts to poorer people.

An Economist Intelligence Unit report on Indonesia's energy sector launched yesterday noted that wealthier and middle-class Indonesians disproportionately benefit from fuel subsidies.

As for the poor, "they also are likely to suffer more from the poor provision of infrastructure that is an indirect consequence of large subsidies: they live in the most flood-prone areas and often have the most difficulty accessing basic services".

zakirh@sph.com.sg


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