Indonesian Finance Minister Chatib Basri said that the swelling of fuel subsidies is driven by the weakening of the rupiah. In the 2014 State Budget, the exchange rate was set at an average of IDR 10,500 per US dollar, while at the end of April 2014 the actual average exchange rate had been IDR 11,744 per US dollar. In the 2014 Revised State Budget, the exchange rate has been changed to IDR 11,700 per US dollar.

"Each IDR 100 weakening of the currency requires an additional IDR 3 trillion worth of fuel subsidy spending," Basri said in the DPR/MPR building on Tuesday (20/05).

He added that there is a possibility that domestic fuel consumption could grow 500,000 kilo liters (kl) above the fuel consumption target that was determined by the Indonesian parliament (48 million kl) for the year 2014.

The fuel subsidy spending ceiling of IDR 210.7 billion was determined by using a number of assumptions covering the year 2014. These assumption include an exchange rate of IDR 10,500 per US dollar, domestic fuel consumption at 48 million kl, an oil lifting target of 870,000 barrels per day (bpd), and a crude oil price of USD $105 per barrel. Of these four basic assumptions, only the estimated crude oil price is expected to be in line with the previously set target. On the contrary, oil lifting is only expected at 818,000 bpd, the exchange rate at IDR 11,700 per US dollar, and fuel consumption at 48.5 million kl.

Basri admits that the government should not let fuel subsidy spending go ballooning. However, he says it is difficult for the current administration to issue radical policy changes because the country is in the middle of an election year. The current government will only remain in charge for another five months.

Fuel subsidies in Indonesia have been a structural problem and continue to burden the state budget. The portion of state spending which is allocated to fuel subsidy spending is approximately 11.4 percent of the government's total budget. As such, fuel subsidy spending is even greater than capital expenditure at IDR 184.2 trillion. However, curbing the country's fuel subsidies implies great political risks as it results in social unrest and high inflation.

In the last five years, fuel subsidy spending only managed to achieve its target in 2010 when fuel subsidy spending remained below the ceiling that was set in the state budget. Last year, fuel subsidies swelled by over IDR 40 trillion, despite the fact that the Indonesian government raised prices of subsidized fuels by an average of 33 percent in June 2013.

In line with the swelling of fuel subsidy spending, electricity subsidy spending also surged by IDR 35.7 trillion. The swelling of electricity subsidy spending is actually unavoidable because most power plants still use fuel as their power source. Therefore, when calculating the total of energy subsidy swelling for 2014 (including both electricity and fuel), it exceeds IDR 110 trillion (USD $9.6 billion). Thus, for this year, the total value of energy subsidies is estimated to reach IDR 392.1 trillion, equivalent to 21.3 percent of total state spending in 2014.

Indonesian Fuel Subsidies 2010-2013:

Year  Revised State Budget
% of Revised
State Budget
2013       IDR 199.9 trillion  IDR 240 trillion¹  
2012       IDR 137.4 trillion  IDR 211.9 trillion        154.2
2011       IDR 129.7 trillion  IDR 165.2 trillion        127.4
2010       IDR 88.9 trillion  IDR 82.3 trillion         (7.3)

¹ unaudited figure