Wednesday, May 29, 2024 | 18:47 WIB

INDONESIA’S FUEL SUBSIDY DILEMMA A call to reform energy policy

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Jakarta, IO – The protracted war between Russia and Ukraine and the possibility of growing inflation present a complex challenge to Indonesia’s economic recovery trend, which has been going strong since 2021. Indonesia is one of the oil-consuming nations that has seen its commodity prices rise as a result of the rise in the price of energy commodities globally. 

The threat of high inflation is a serious matter because many countries have fallen victim to it. Even in some developed countries, including the United States, inflation has hit a record high. Meanwhile, inflation rate in Indonesia has touched 4.9% as of July, exceeding the government’s expectation of 3%. The government is now faced with a dilemma, whether to keep subsidized fuel prices with the consequence of increasing the subsidy budget and energy compensation or adjust subsidized fuel prices with ensuing implications of social, economic and political instability. 

Although the government has increased the fuel subsidy budget in 2022 from Rp11.3 trillion to Rp14.6 trillion and compensation for fuel (including LPG) by Rp211.3 trillion, it turns out that there may be shortfall in the budget until the end of the year because the fuel quota is estimated to run out by September or October. Consequently, if the government seeks to guarantee the availability of subsidized fuel, especially Pertalite (RON90) at the current price, it is estimated that the additional compensation for Pertalite will reach Rp198 trillion. The public is now waiting for the government’s imminent fuel policies. Will it hike the price of Pertalite or will it increase fuel subsidy and compensation budget? 

“Why the subsidized fuel exceeds its quota” 

The Indonesian economy is now recovering after falling into a recession in 2020 due to the Covid-19 pandemic. It grew 3.7% in 2021 and 5.44% in the second quarter of 2022, which shows that the national economic recovery momentum is on the right track and should continue to be maintained. However, threats to the national economy have now emerged in the form of rising global commodity prices, especially energy and food. 

The geopolitical conflict in Eastern Europe between Russia and Ukraine has led to spike in global inflation, due to rising commodity prices and is the biggest risk factor faced by the global economy going forward. Russia is the world’s second largest oil producer and is not a member of OPEC. The Russia-Ukraine conflict and the West’s harsh sanctions against Russia have pushed up commodity prices, especially oil. The price of international Brent crude oil continued to soar until it breached US$100/ barrel at the end of February 2022. In March and April, it traded at an average of US$112.5/barrel and US$105.9/barrel, respectively. This high price persisted until mid-May at around US$108.1/barrel. The war has also disrupted global supply chain and global trade, meaning the upward trend in global inflation is projected to last longer than previously expected. 

The increase in global energy commodity prices has implications for oil consuming countries. In developed countries such as the United States and the European Union, fuel prices are left to market mechanism without government intervention. However, in developing countries, the increase in fuel prices can result in domestic socio-economic turmoil such as what is happening in Sri Lanka. In developed countries, high fuel prices have triggered a spike in inflation as in Germany with inflation reaching 7.4% in April, the highest since 1949. In the United States inflation has reached 8.3 percent in April, the highest in four decades. 

Indonesia, where the majority of its energy consumption depends on fuel, also faces the same risk. In line with rising global crude price, the price of Indonesian crude oil (ICP) shot up to above US$100/barrel in May. This figure is much higher than the US$68.5/barrel realization in 2021 and the US$63/barrel assumption used in Budget 2022. 

Rising global energy prices and increased public mobility have pushed up inflation in administered prices, particularly in transportation. The government has carried out various price stabilization measures to keep inflation in check, among others through guaranteeing the supply of supply and improve supervision in the distribution of subsidized fuel and cooking gas (LPG), and increased the budget allocations for subsidies and energy compensation.

In response to the soaring global energy prices, the government and the House of Representatives finally agreed to increase the subsidy budget and compensation in Budget 2022 from originally Rp152.5 trillion to Rp502.4 trillion, stretching the role of the State Budget as a shock absorber to cushion the impact of high energy prices so the economic recovery momentum and purchasing power can be maintained. 

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