Jakarta. The Indonesian government must cut its energy subsidy this year if it wants to keep the budget deficit at less than 3 percent of the country’s gross domestic product, some economists said.
“Whether it’s by the administration of President Susilo Bambang Yudhoyono or the next government, the president must approve the plan to cut the fuel subsidy,” Fauzi Ichsan, the chief economist at Standard Chartered, said in Jakarta on Wednesday. “[Cutting the fuel subsidy] has now become a matter of abiding by the law,” he added, alluding to a regulation that mandates the budget shortfall must not exceed 3 percent of GDP.
The country’s budget deficit will definitely be at risk of surpassing the mandated rule of being 3 percent below GDP if the government lags in cutting the energy subsidy, according to Fauzi.
Indonesia set aside more than Rp 310 trillion ($27 billion) for subsidizing energy costs — both in electricity and fuel — to its citizens last year, above its original budget of Rp 299.8 trillion. Government has allocated Rp 282 trillion in energy subsidies this year. In the first two months this year government has spent Rp 19.6 trillion, or 6.9 percent, of the subsidy budget.
Still, cars and motorcycle sales growth remain strong — growing 18 percent and 9.2 percent, respectively, on an annual basis in March — indicating rising demand for fuel consumption this year.
“The price of fuel in Indonesia is even cheaper than its less rich neighbors like Vietnam — and it’s even mostly used by the medium and upper class,” said Fauzi.
In June the nation raised the price of subsidized fuel by an average 33 percent to trim the subsidy.
Cutting the subsidy further, Fauzi said, will in turn provide room the country to set aside more funds to finance other purposes including more spending on the country’s infrastructure.
Indonesia’s poor infrastructure — from pot-holed roads to airports at overcapacity — has been named as one of the biggest stumbling blocks for prospective foreign investors. Infrastructure spending in Indonesia is expected to reach Rp 469.7 trillion this year, according to the Public Works Ministry.
“What’s certain is [a subsidy cut] will lower gas and oil imports, as well as the current account deficit. The pressure against the rupiah will also loosen and the government will give it ammunition to develop new projects,” he said.
The country’s current account balance fell $28.4 billion short at the end of last year, or 3.7 percent of GDP. The rupiah has gained 6.2 percent so far this year, after last year’s 26 percent decline.
Johanna Chua, head of head of Asia economic and market analysis at Citigroup, agreed with Fauzi’s assessment.
“Fuel subsidy reform is inevitable,” she said in a statement on Wednesday.
Johanna said that the next president must choose a vice president who is capable to push for hard economic policies through legislators, and he also must select credible key economic ministers.