Indonesia Gov’t to Foot Rising Fuel and Electricity Subsidy Bills
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The government has reiterated its commitment to keep fuel and electricity prices steady this year, amid rising global oil prices and the recent strengthening of the US dollar.
State Enterprises Minister Rini Soemarno said the government will continue to subsidize diesel fuel at the current rate, which is four times higher than planned in the state budget. The government will also increase its subsidies for electricity.
“Diesel was subsidized Rp 500 [a liter] by the government. Now it is Rp 1,500 and it will be Rp 2,000. It is covered from the current state budget,” the minister said over the weekend.
According to her deputy, Harry Fajar Sampurno, the government’s diesel fuel quota is 16.23 million kiloliters for this year, which means the subsidies will cost Rp 32 trillion ($2.3 billion).
The government will discuss the increase with House of Representatives Commission VII, which oversees the energy sector.
It was previously planned to keep fuel and electricity prices stable until the end of 2019, but pressure is mounting to increase them, as crude oil prices are now nearly 50 percent higher than the government’s initial forecast of $48 a barrel.
President Joko “Jokowi” Widodo, who is preparing to run for a second term next year, went as far as to support consumer purchasing power by raising energy subsidies to $588 million to keep fuel and electricity cheap until the end of 2019.
“The government will discuss the increase with House of Representatives Commission VII, which oversees the energy sector.”
Household consumption, which accounts for half of Indonesia’s economy, has been subdued over the past few years as Jokowi opted to divert money previously used for energy subsidies toward infrastructure development.
The government spent Rp 98 trillion on energy subsidies last year, compared with Rp 342 trillion in 2014. State spending on infrastructure has meanwhile increased by more than 80 percent to Rp 376 trillion in the same period.
Last month, oil prices spiked after the United States announced plans to impose new sanctions on Iran, a major exporter. The announcement resulted in oil prices hitting their highest levels since November 2014, with Brent crude futures at $77.90 and US West Texas Intermediate at $71.80 a barrel.
Meanwhile, the rupiah traded at an average rate of 13,713 versus the dollar, compared with the initial forecast of 13,400, according to central bank data. Bank Indonesia governor Perry Warjiyo said the central bank expects a rupiah exchange rate of between 13,800 and 14,100 to the dollar for the remainder of this year and next year.
Although higher oil prices and the weaker exchange rate will likely boost state revenue from oil and gas, they will also increase energy subsidies, especially for electricity and liquefied petroleum gas.
The decision to maintain fuel and electricity prices is also intended to avoid undue pressure on the 2018 state budget, while at the same time limiting the budget deficit to 2.19 percent of gross domestic product.
The government aims to keep the budget deficit at Rp 325.9 trillion, or 2.19 percent of GDP for the full year, compared with last year’s Rp 336.4 trillion, which amounted to 2.48 percent of GDP.
Questions & Answers
Q.Why is the government increasing fuel and electricity subsidies now?
Why is the government increasing fuel and electricity subsidies now?
The government is increasing subsidies to keep fuel and electricity prices steady, despite rising global oil prices and a stronger US dollar. This also aims to support consumer purchasing power and avoid pressure on the current state budget.
Q.How much has the diesel subsidy rate increased compared to initial plans?
How much has the diesel subsidy rate increased compared to initial plans?
The diesel subsidy rate has increased significantly. It was initially planned at Rp 500 per liter, but is now Rp 1,500 and will rise to Rp 2,000, making it four times higher than the original state budget plan.
Q.What impact could higher oil prices and a weaker rupiah have on state finances?
What impact could higher oil prices and a weaker rupiah have on state finances?
While higher oil prices and a weaker exchange rate might boost state revenue from oil and gas, they are also expected to increase energy subsidies. This is particularly true for electricity and liquefied petroleum gas.
Q.How do the current budget deficit targets compare to the previous year?
How do the current budget deficit targets compare to the previous year?
The government aims to limit the budget deficit to 2.19 percent of GDP this year, or Rp 325.9 trillion. This is a reduction compared to last year's deficit of Rp 336.4 trillion, which was 2.48 percent of GDP.
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