The budget for fuel and LPG subsidies have undergone fluctuating developments, a result of the changes in various parameters, such as basic macroeconomic assumptions, related parameters and policies on the amount of fixed subsidy on diesel fuel. The realization of fuel subsidies and LPG in the 3-kilogram tank in 2017–2021 increased by an average of 15.5% from IDR 47.0 trillion in 2017 to IDR 83.8 trillion in 2021. The rise was influenced by developments in basic assumptions of the macroeconomy, particularly the ICP and the Rupiah exchange rate, the increasing consumption volume and the disbursement of subsidies that had not been paid in previous years.
It seems that the fiscal capacity to absorb the fluctuations of global energy prices through energy subsidies and compensation instruments will face a major test in 2023. The year 2023 will be a phase of fiscal consolidation, in which the State Budget deficit must return to below 3% of the GDP. It means that if there is a change in the parameters for energy subsidy and compensation this year, particularly the Indonesian crude oil price (ICP) variable and the Rupiah exchange rate, the Government must anticipate the risks to inflation amid increasingly limited fiscal maneuvers.
The total energy subsidies allocated in the 2023 State Budget reach IDR 210.6 trillion, consisting of subsidies for certain types of fuel and LPG in the 3-kilogram tank of IDR 138.3 trillion and electricity subsidies of IDR 72.3 trillion. The budget of subsidies for certain types of fuel and the 3-kilogram LPG in 2023 is calculated using assumptions and parameters, including (1) the exchange rate of the Rupiah against the US dollar and the ICP, (2) limited subsidies for diesel fuel of IDR 1,000/liter, (3) the volume of diesel fuel of 17.0 million kl and kerosene of 0.5 million kl and (4) the volume of LPG in 3-kilogram tank of 8.0 million metric tons.
The challenges to the energy subsidy policy will become more strenuous, as 2023 is a year of fiscal consolidation where the State Budget deficit has been set at 2.85% of GDP so that the fiscal space to anticipate additional energy subsidy and compensation is also increasingly limited. On the other hand, although the Government has allowed space for Pertamina to make price adjustments for non-subsidized fuel and LPG, in practice, price adjustments for non-subsidized products in the open subsidy policy era also pose the risk of shifting consumers from non-subsidized to subsidized products. The phenomenon of consumer migration will eventually trigger the risk of subsidized fuel and LPG over-quota.
Likewise, the option to adjust the selling price of subsidized fuel and LPG also entails significant social and economic risks. In the future, the Government will face an increasingly problematic situation, whether to increase the energy subsidy and compensation budget amid increasingly narrow fiscal space or to limit and adjust the selling price of subsidized fuel and LPG amidst the trend of persistently high inflation.
Amid these complicated conditions, at the beginning of 2023, the Government has taken preventive measures by increasing the quota for subsidized fuel of Pertalite for 2023 by 32 million kl, or an increase of 6.9% from the 2022 quota of 29.91 million kl. On the other hand, the Government decided to reduce the subsidized diesel fuel quota for 2023 by 10%, from 17.83 million kl in 2022 to 16 million kl in 2023. Nonetheless, the subsidized fuel quota will be evaluated every three months, so that the Government can decide if a readjustment is needed in the middle of the current year, also by considering the extent to which the fiscal space can bear the additional burden of energy subsidy and compensation.
Simulation of additional energy subsidies
With the 3.3% infation target in 2023 assuming an ICP of USD 90/ barrel and a Rupiah exchange rate of IDR 14,800/USD, the Government faces an enormous challenge to manage the energy subsidy policy. If the surge in world crude oil prices or the weakening of the Rupiah exchange rate exceeds these assumptions, there will be extra risks of overwhelming the energy subsidy and compensation budget.
To identify additional risks of energy subsidy and compensation needs in 2023, INDEF has compiled four simulations of changes in fuel and LPG subsidy and compensation. The assumptions used in the simulation include changes in the ICP price variable, reaching USD 110/ barrel and a Rupiah exchange rate of IDR 15,500/USD. However, it should be noted that this simulation is static, meaning that no changes are assumed to occur in other State Budget components, especially on the state revenue side.