Alarm at fuel subsidies
Finance Minister Agus Martowardojo didn’t say it in so many words for fear of being misinterpreted. Agus refrained from explicitly acknowledging the alarming increase in the amount the government has paid for fuel subsidies since January out of fear of triggering an unnecessary panic on fiscal sustainability.
But we should look more deeply at Agus’ urgent appeal to Energy and Mineral Resources Minister Darwin Zahedy Saleh last week to act immediately to cut subsidies amid gyrations in international oil prices.
The finance minister reminded us during a news conference on Thursday that the 2011 State Budget Law authorizes the government to raise subsidized gasoline prices if the oil price assumed for fixing the subsidy is more than 10 percent of market price, without obtaining prior approval of the House of Representatives, a process which usually causes political turbulence.
International oil prices have been hovering above US$100 a barrel since January, substantially higher than the $80 a barrel price on which the subsidy is based.
The price of our subsidized fuel is now only 50 percent of the market price — the lowest in Southeast Asia, even when compared to Vietnam, whose per capita income is ony half that of Indonesia’s.
Agus’ appeal and reminder simply reflected confusion within the government, ignorance on the part of the House and an acute lack of leadership from President Susilo Bambang Yudhoyono, who in the end is responsible for taking a final decision to address the problem.
We don’t see the finance minister’s remarks as alarmist but rather as a toned-down warning of the subsidy’s skyrocketing cost and how more wasteful spending on subsidies might threaten the fiscal sustainability and the viability of a long-term energy policy that would shift focus away from fossil fuels to renewable, clean-burning energy sources.
The consumption of subsidized fuel in the first four months has reached almost 13 million kiloliters — exceeding estimates by more than 5 percent — not only because more car owners have shifted to subdizied low-octane gasoline.
Many, including Coordinating Minister for the Economy Hatta Rajasa himself, believe the sharp increase in subsidized fuel consumption was caused also by export smuggling. If our domestic fuel prices are twice as cheap as those in Singapore or Malaysia — which are only 20 minutes away by boat — the potential huge profit margin (currently 55 US cents per liter) is simply too big and lucrative to be passed over by smugglers.
The government has been embroiled in a stop-and-go policy regarding oil prices. Last July, the government proposed a plan to prohibit all private cars from using subsidized fuel but that idea was abandoned before the technical details were ready for a trial implementation. The plan was revived in March only to be put off again indefinitely.
Rather than throwing more money at keeping fuel prices low (most subsidized gasoline is used by private car owners) the government would be better served by instituting social protection policies that guarantee the poor healthcare, pensions and unemployment benefits.
The government is not so ignorant as to not understand the economic rationale of gradually phasing out the waste of tens of billions of dollars in taxpayer money annually on subsidizing fuel for private car owners.
Fuel subsidies are not only a question of fiscal sustainability and wasteful spending.
The subsidies blur price signals, distort consumption and investment decisions on alternative energy, increase the vulnerability of the state budget to oil-price volatility, encourage inefficient energy consumption and reduce incentives for energy conservation.
But we should look more deeply at Agus’ urgent appeal to Energy and Mineral Resources Minister Darwin Zahedy Saleh last week to act immediately to cut subsidies amid gyrations in international oil prices.
The finance minister reminded us during a news conference on Thursday that the 2011 State Budget Law authorizes the government to raise subsidized gasoline prices if the oil price assumed for fixing the subsidy is more than 10 percent of market price, without obtaining prior approval of the House of Representatives, a process which usually causes political turbulence.
International oil prices have been hovering above US$100 a barrel since January, substantially higher than the $80 a barrel price on which the subsidy is based.
The price of our subsidized fuel is now only 50 percent of the market price — the lowest in Southeast Asia, even when compared to Vietnam, whose per capita income is ony half that of Indonesia’s.
Agus’ appeal and reminder simply reflected confusion within the government, ignorance on the part of the House and an acute lack of leadership from President Susilo Bambang Yudhoyono, who in the end is responsible for taking a final decision to address the problem.
We don’t see the finance minister’s remarks as alarmist but rather as a toned-down warning of the subsidy’s skyrocketing cost and how more wasteful spending on subsidies might threaten the fiscal sustainability and the viability of a long-term energy policy that would shift focus away from fossil fuels to renewable, clean-burning energy sources.
The consumption of subsidized fuel in the first four months has reached almost 13 million kiloliters — exceeding estimates by more than 5 percent — not only because more car owners have shifted to subdizied low-octane gasoline.
Many, including Coordinating Minister for the Economy Hatta Rajasa himself, believe the sharp increase in subsidized fuel consumption was caused also by export smuggling. If our domestic fuel prices are twice as cheap as those in Singapore or Malaysia — which are only 20 minutes away by boat — the potential huge profit margin (currently 55 US cents per liter) is simply too big and lucrative to be passed over by smugglers.
The government has been embroiled in a stop-and-go policy regarding oil prices. Last July, the government proposed a plan to prohibit all private cars from using subsidized fuel but that idea was abandoned before the technical details were ready for a trial implementation. The plan was revived in March only to be put off again indefinitely.
Rather than throwing more money at keeping fuel prices low (most subsidized gasoline is used by private car owners) the government would be better served by instituting social protection policies that guarantee the poor healthcare, pensions and unemployment benefits.
The government is not so ignorant as to not understand the economic rationale of gradually phasing out the waste of tens of billions of dollars in taxpayer money annually on subsidizing fuel for private car owners.
Fuel subsidies are not only a question of fiscal sustainability and wasteful spending.
The subsidies blur price signals, distort consumption and investment decisions on alternative energy, increase the vulnerability of the state budget to oil-price volatility, encourage inefficient energy consumption and reduce incentives for energy conservation.
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