INDONESIA’S ENERGY ADDICTION The looming dilemma of fuel subsidies

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There must be a way out 

If the Government wants to restrict subsidies for certain users, then begin with Solar ‘diesel’ leakage. The easiest to handle leakage of subsidies is the leakage of diesel fuel for logistics transportation. The number of logistics transportation vehicles is much smaller than that of private. So far, Pertamina has complained that 97% of the portion of diesel is subsidized, while only 3% is non-subsidized. This means that Pertamina itself says that there are indications that mining and palm oil companies often purchase subsidized diesel. The practice of buying subsidized diesel needs to be solved, because large companies have enjoyed various tax incentives during the pandemic, and now they enjoy oil subsidies. 

The way to uncover the practice of purchasing subsidized diesel can be done through a naming and shaming strategy, where large companies based on evidence in the field buy subsidized diesel are removed from the list of recipients of tax incentives, and even business licenses can be temporarily frozen. The next improvement is related to data collection of all logistics transportation in and out of mining and palm oil companies. Gas stations selling subsidized and non-subsidized diesel outside Java should be separated. With this separation, trucks that still buy subsidized diesel even though they are categorized as large company transport can be subject to various sanctions. 

The Government should regulate fuel subsidies restrictions for private vehicles at a time when crude oil price momentum is at a low level, so when there are restrictions, then the upper middle class buys non-subsidized fuel and the price disparity will be relatively small. It will be easier to encourage fuel migration if the price difference between Pertalite and Pertamax, for example, is only IDR 1,000-1,500 per liter. Compared to now, when the difference between subsidized and non-subsidized prices is too great, it can lead to quite a strong rejection, because even the middle class consumer who enters the threshold will object to buying at a price difference of IDR 4,000 per liter. 

Efforts to keep subsidized fuel prices stable must indeed sacrifice other budget items. It is possible that the allocation of personnel expenditures, and goods expenditures such as official travel and procurement of goods in the Government can be cut and transferred to additional energy subsidy spending allocations. Efforts made by the Ministry of Finance to order ministries to have reserve funds in anticipation of reallocation are quite extreme measures to shift funds to additional fuel subsidies in the near future. 

The Government needs to refocus, by utilizing pandemic stimulus funds that have not been optimally absorbed. Keeping inflation low by holding down subsidized fuel prices is an integral part of the economic stimulus amid the pandemic. So it would not be unusual if the PEN (National Economic Recovery program) stimulus funds were partially diverted to compensation funds and fuel subsidies. However, concerns about the increase in pandemic cases are also a challenge in shifting more than 50% of PEN funds that have not been absorbed for additional energy subsidies. 

A broader fiscal space can be created through debt restructuring, to reduce the burden of debt interest payments and extend the tenor of debt maturing. In the G20 forum, the theme of debt relief for developing countries is being discussed. Indonesia itself can actually take advantage of the debt relief momentum to secure priority on delaying various debt obligations, by reason of preparing to face high inflation due to the conflict in Ukraine, with recovery still ongoing in the country. Debt relief is not only designed for countries that have failed to pay their debts, such as Sri Lanka, but also countries with a fairly high debt service ratio, such as Indonesia. 

Regardless of whether the Government plans to limit fuel subsidies or not, social protection for the poor and the vulnerable middle class still needs to be encouraged. The greater the concern for the adjustment of subsidized fuel prices, a vulnerable middle class facing the threat of stagflation with limited job opportunities will become the new poor. The allocation of social spending, both cash and non-cash, needs to be considered. In addition to the amount of the budget, the accuracy of targeting and the speed of budget disbursement are also technical problems related to social assistance, particularly ahead of the election, where the level of misuse of the social assistance budget is quite high. So far, several regions have not been sufficiently prompt in disbursing their social assistance budget. Some regions are even still holding funds of up to IDR 200 trillion in banks as of May 2022. 

Another way to widen the fiscal space so that fuel subsidies are still provided is to postpone several infrastructure projects. Delaying mega-projects such as moving the national capital to Kalimantan, and several postponed toll road ambitions is a must. Still, in the run-up to the General Election, infrastructure is the most effective campaign point, so that there is an acceleration of project completion; not all infrastructure ,so far, has a positive impact on people’s purchasing power. Logistics costs are still quite high at 23.5% of GDP, and the import content of infrastructure materials is as dangerous as oil and gas imports.