Joko Widodo Aims to Cut Indonesia’s Expensive Energy Subsidies
Soon-to-be president of Indonesia Joko Widodo (popularly known as Jokowi) stated that he intends to cut the large fuel and electricity subsidies once in office. Indonesia’s Revised State Budget of 2015 (RAPBN 2015) allocates IDR 363.5 trillion (about USD $31.2 billion) to energy subsidies. This figure accounts for about 18 percent of total government spending (IDR 2,019.9 trillion) set for 2015. Although the energy subsidies aim to support the poorer segments of Indonesian society, they cause complex problems in Southeast Asia’s largest economy.
Indonesia’s expensive energy subsidies have risen considerably in recent years and therefore put serious pressure on the government’s budget deficit. As the country’s domestic oil output has been more-or-less declining year after year for nearly two decades, it relies heavily on expensive oil imports from abroad and is thus partly responsible for causing the wide current account deficit (which in turn causes downward pressure on the Indonesian rupiah exchange rate). Moreover, as state spending has a large focus on energy subsidies, investments in more long-term productive sectors (that have a multiplier effect on the economy) are limited (for example much needed infrastructure development, healthcare and education). Lastly, various studies - conducted by both international and national institutions - indicate that those who benefit most of the energy subsidies are in fact the country’s middle class and not the poorer segments of society. Generally, subsidies (when applied too long) distort the economy as they cause artificially low prices. Some day ahead this bubble will burst; the longer the wait, the more sever the impact will become. However, reducing these subsidies involves serious political and social risks as the government will lose popular support and high inflation (caused by the impact of higher energy prices) can push many people who live just above the poverty line (back) into poverty if the government is not able to provide well-managed social safety program to counteract sharp poverty basket inflation. Incumbent President Susilo Bambang Yudhoyono, who presented the revised 2015 State Budget to Indonesian parliament on Friday (15/08), said the government is aware that ‘economically-able people’ take advantage of the fuel subsidies and therefore he calls for an improvement in efficiency, particularly regarding the control of consumption of subsidized fuels.
The table below shows the steep growth Indonesian energy subsidies in the past decade. The target for electricity subsidies could be wound down in 2015 as prices of electricity have been increased gradually in 2014.
Indonesian Energy Subsidies:
|Year|| Fuel Subsidies
in trillion rupiah
The revised 2015 State Budget holds no real reforms to enhance fiscal room for Indonesia’s next government (which is scheduled to be inaugurated in October 2014) as fuel subsidies have been raised for 2015. Therefore it can be stated that the outgoing government is sluggish to help the future Jokowi-led government to boost economic growth to the level of seven percent (year-on-year) as targeted by Jokowi, thereby reversing the recent slowing economic growth trend. Once in office it will be difficult for Jokowi to lower this allocation as opposition in Indonesian parliament is large (unless Golkar will shift its sympathy from defeated presidential candidate Prabowo Subianto to Jokowi). As the revised 2015 State Budget implies a government budget deficit at 2.3 percent of gross domestic product (GDP), there is little fiscal room to manoeuvre for the incoming government (Indonesian law limits the budget deficit at 3 percent of GDP).
Revised 2015 State Budget (RAPBN 2015):
|Total State Spending
||IDR 2,020 trillion|
|Total State Revenue||IDR 1,762 trillion|
|Budget Deficit||IDR 258 trillion (2.3% of GDP)|
|Subsidy Spending||IDR 433.5 trillion|
|Energy Spending||IDR 363.5 trillion|
|Oil Production||845,000 barrels of oil per day|
|Crude Oil Price||USD $105 per barrel|
|Natural Gas Lifting||1,248 barrel of oil equivalent/day|
|Average Rupiah Rate||IDR 11,900/USD|
|GDP Growth||5.6% yoy|
|Treasury Bills Interest Rate 3-month||6.2%|
On Sunday (17/08), Jokowi said that, although he still needs to study the revised 2015 State Budget more thoroughly, he sees possibilities to reduce the energy subsidies and/or improve the current condition through enhancing efficiency. Regarding the latter, Jokowi suggests that state-owned electricity supplier Perusahaan Listrik Negara (PLN) could switch from expensive oil to coal as a power source. This may save up to IDR 60-70 trillion (Indonesia is one of the world's largest producers and exporters of coal, while oil output has been in a state of decline). But obviously, the most effective, yet unpopular, measure would be to raise prices of subsidized fuels in 2015. However, it remains to be seen whether political parties in parliament will agree as they are traditionally more concerned about short-term popular support than long-term structural nation-wide development.
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A difficult decision - in the long run a good move for the country Indonesia - just look at the situation in Brazil, where they have waited too long with the cut of the energy subsidies.
Yes, I agree with you Lugano..