Energy Subdies Reduced

President Susilo Bambang Yudhoyono’s government has finally moved to to reduce the ballooning energy subsidies that have absorbed far too much of the State budget for years. In the form of a budget revision, the reduction was approved by Parliament with the President’s coalition (Golkar, PAN, PKB, PPP, PD) holding together except for the PKS party.  A cash transfer program will enable Indonesia’s poorest to cope with fuel price increases and subsequent inflation.  Getting the program through Parliament involved several flip flops of parties angling for support heading into the 2014 elections.  Gerindra’s leader Prabowo supported raising fuel prices but his party ultimately voted against it.   The same happened with PKS.  The leader in Presidential straw polls, Jakarta Governor Jokowi, favors the policy (although his party, PDI-P voted against it) but opposed the cash transfer program, believing the money should be spent to support small scale business development.
 
The 33% rise in fuel prices only partially ends the subsidy as the current market price for gasoline will still be 50% higher than the new rate.   With a cash transfer program estimated to cost $465 million over the next 6 months the estimated savings to the government will be $4.5 billion.
 
Although we can praise the government for raising fuel prices, its clear that they only did it because their backs were against the wall as declining production and surging demand blew out their budget projections. Up until only a few months ago, government officials still maintained that the subsidies where necessary and should remain.  What will be needed now is a concerted effort to reduce the subsidy further (which will stimulate investment in both mainstream and alternative energy production) as well as target infrastructure for how the the savings will be used.
 

About the Author:

Wayne Forrest is President of the American Indonesian Chamber of Commerce, a private not for profit membership organization based in NY.

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