Wednesday, May 29, 2024 | 19:16 WIB

Energy subsidy challenges in a year of fiscal consolidation

Jakarta, IO – Moving into 2023, the world is engulfed with hopes and worries about the global economy’s recovery and stability. After being tested with the COVID-19 pandemic for almost three years and the geopolitical instability between Russia and Ukraine, all countries are anxious about what will happen this year. One of the hardest tribulations to face is the uncertainty of world energy prices, where skyrocketing energy prices in 2022 have ignited an increase in inflation and the fiscal burden to support energy subsidies. 

Amid the five-percent economic recovery in Indonesia from the first to the third quarter of 2022, rising inflation has become a looming threat, eroding the people’s purchasing power. An upward trend in inflation could be seen from 2.18% (YoY) in January 2022 to 5.51% (YoY) by December 2022. Undeniably, the main contributors to inflation are gasoline, air freight rates and intracity transportation fares, with 1.15%, 0.27% and 0.10%, respectively, against the annual inflation in December 2022. Moreover, inflation in the transportation sector in 2022 hit 15.26%. 

Although actual inflation in 2022 has touched 5.51% (YoY) or above the inflation outlook in the 2022 State Budget of 4.8%, the Government has tried to curb the increasing inflation rate, which could have been even higher, such as by increasing the budget allocation for energy subsidy and compensation in mid-2022. Through Presidential Decree No. 98/2022, the Government redesigned the 2022 State Budget as a shock absorber by increasing the allocation for energy subsidy and compensation from IDR 152.5 trillion to IDR 502.4 trillion. More specifically, the allocation for fuel and LPG subsidies increased from IDR 77.5 trillion to IDR 149.4 trillion, and the allocation for fuel compensation leaped from IDR 18.5 trillion to IDR 252.5 trillion. 

Despite the increased budget allocation for energy subsidy and compensation in the 2022 State Budget, crude oil prices continued to move frantically, pushing the economic price of fuels, especially the non-subsidized products. This results in the phenomenon of consumers shifting from non-subsidized to subsidized products, sparking the potential for a subsidized fuel over-quota in 2022. After observing the rapid demand for subsidized fuel in the first half of 2022, it was estimated that the realization of subsidized diesel fuel in 2022 could reach 17.21 million kiloliters (kl) or 15% higher than the initial quota (14.91 million kl). Similarly, the quota of Pertalite and Premium (low-octane gasoline produced by state-owned oil and gas company Pertamina) of 23.05 million kl is predicted to reach 28.48 million kl or 24% higher than the 2022 quota. 

After scrutinizing the sales development of subsidized fuels and considering the socio-economic implications if the subsidized fuel quota were to run out in the second half of 2022, the Government finally decided to increase the subsidized fuel quota for 2022, Pertalite from 23.05 million kl to 29.9 million kl and diesel fuel quota from 15.1 million kl to 17.83 million kl. The urgency to increase the subsidized fuel quota amid economic recovery is perfectly reasonable because the availability of fuels and LPG is a fundamental factor in maintaining economic stability. However, the Government needs to measure its increasingly limited fiscal capacity in mitigating inflation risk due to the potential increase in global energy commodity prices. 

The main factor causing the rising global crude oil prices is the increasing intensity of the Russia-Ukraine war, after NATO member countries agreed to enhance weapons or defense equipment in Ukraine. The increase in world crude oil prices also potentially recurs due to the Russian Presidential Decree that comes into effect from Feb 1 to Jul 1, 2023, by which Russia will stop exporting crude oil and oil products to countries that participate in capping the price of Russia’s crude oil. Under these dire conditions, SKK Migas (Indonesia’s Special Task Force for Upstream Oil and Gas Business Activities) also predicted that world oil prices would soar to USD 110/barrel. 

Fiscal consolidation year 

During the 2020-2022 period, the Government, with the support of the Indonesian House of Representatives, has issued a number of extraordinary policies to handle the COVID-19 pandemic and inspire national economic recovery. While facing these trying times, the Government issued Law No. 2/2020 on State Financial Policy and Financial System Stability for Handling the COVID-19 Pandemic. With this legal umbrella, the Government can flexibly relax the State Budget deficit to exceed 3% of GDP for 2020-2023. 

As a consequence of implementing Law No. 2/2020, the fiscal deficit jumped from 2.2% of GDP in 2019 to 6.14% (IDR 947.7 trillion) in 2020. Then in 2021, as the COVID-19 pandemic started abating and the economy looked to recover, the State Budget deficit began to decline to 4.57% (IDR 775.1 trillion). Meanwhile, the State Budget deficit in 2022 was expected to be below the 2022 State Budget ceiling (Presidential Regulation No. 98/2022) of 4.5% (IDR 840.2 trillion), which was 3.92% (IDR 732.2 trillion).