Indonesia open to raising subsidized fuel prices

The Indonesian government is open to raising the price of subsidized fuel, but it will first try other ways to curb rapidly rising consumption, a senior official said.
Past proposals to raise prices have led to riots. The fuel subsidy, a legacy of more than three decades of rule by former President Suharto that ended in 1998, is aimed at aiding Indonesia’s millions of poor and garnering their political support. About half of Indonesia’s 240 million people live on less than US$2 a day, making fuel price increases extremely unpopular.
The Indonesian government is worried about the impact of the subsidies on the budget, and it has to juggle the cost of bridging high global oil prices and domestic price caps while at the same time keeping the electorate on its side ahead of coming elections.
“We are pushing for volume management. We’re in intense discussions to limit consumption levels,” Vice Finance Minister Mahendra Siregar told the Wall Street Journal at a business conference in Jakarta.
The “option to raise fuel prices remains open,” he added.
Siregar didn’t specify what steps were being discussed. Various government officials have previously raised the idea of promoting the wider use of gas-based fuels, instead of oil-based ones.
The price of subsidized gasoline and diesel fuel is pegged at US$0.46 a liter, about half the non-subsidized price. Some analysts say that the availability of cheap fuel creates an incentive for smuggling to neighboring countries, such as Malaysia.
Most Indonesians use subsidized fuels, which have lower octane levels and are distributed at state-owned company Pertamina’s pump stations across the Indonesian archipelago. Higher-quality, non-subsidized fuels, sold only in major cities at some Pertamina pumps and a limited number of stations owned by local units of Royal Dutch Shell (RDSA) and Total S.A. (TOT), are used by owners of newer vehicles and luxury models, and in government vehicles.
In 2012 the Indonesian parliament rejected a government proposal to raise subsidized fuel prices by 33% after massive demonstrations, some of them violent, flared across the country. The government then tried to curb consumption by barring government vehicles as well as plantation and mining companies from using subsidized fuels.
But these efforts failed to prevent consumption from exceeding official allocations, as robust economic growth enabled more Indonesians to buy cars and motorbikes. Consumption hit 45.3 million kiloliters last year, costing the government US$21.8 million in subsidies–more than what it spent on badly needed infrastructure projects.
Each year the government and parliament discuss the volume of fuel to subsidize, and the monetary amount of the subsidy.
The figures are incorporated into the state budget, and changes to either volume or value would require the potentially lengthy process of parliamentary approval.
Recently, the Acting Head of the Finance Ministry’s fiscal policy board, Bambang Brodjonegoro, said that consumption of subsidized fuel may hit as much as 53 million kiloliters in 2013, well above the allocated 46 million kiloliters.
As Indonesia has turned into a net oil importer since 2008, higher fuel consumption also means more imports, which in turn put pressure on the country’s current finances and push the rupiah lower against the U.S. dollar.
Indonesia’s fuel subsidy department posted a deficit of US$24.2 billion in 2012, about 2.7% of gross domestic product and a higher proportion than what the government and central bank had forecast. This was due to rising imports and sluggish prices of key export commodities.
Despite the economic logic behind raising subsidized fuel prices, many analysts believe that the government would only take such an unpopular step as a last resort ahead of parliamentary and presidential elections next year.
(March 13, 2013)