Wednesday, 16 April 2014


The future Government of RI must learn from the previous Governments in managing subsidy post for oil subsidy. Year after year, the amount of subsidy never got any lower, it increased instead.

The Government had always been forgetful about downsizing budget for oil subsidy which in fact be used for other purposes which were more productive and be benefited by the people, such as infra structure building.

Previously the World estimated the total subsidy expenditure this year would come to 2.6% of GDP. This portion was an increase compared to last year when energy subsidy was only 2.2% of GDP. According to the World Bank reformation of energy subsidy must be effective whereby to reduce fiscal burden.

The World Bank proposed two scenarios of Reformation for subsidized oil policy. The first scenario was increase of subsidized oil price by Rp. 2,000 per litre for Premium and Rp. 1,000 per litre for solar oil so State Budget could be saved by Rp. 45.2 trillion and deficit with could be maintained at 2.1% of GDP.

The second scenario: the Government increased price of subsidized oil to only half of economically-justifiable price which would save more subsidy, i.e. Rp. 68.8% - hence deficit in budget could be maintained at 1.9% of GDP.

In a nutshell: if price of Premium oil was increased by Rp. 2,000 per litre and Solar oil was Rp. 1,000 per litre, the subsidy to be saved was Rp45 trillion. If the price of subsidized oil was increased to half of its economically justifiable price, the subsidy would be reduced by Rp68.8 trillion.

Of the two scenarios recommended by the World Bank, the first scenario could be recommended by the next Government. Even the first scenario could be modified according to political appetite of the next Government. Admittedly reduction of energy subsidy through increased price of subsidized oil on June 22, 2013 next was one of the strongest from of reformation.

Oil price could be increased by the next elected Government after the 2014 Election on the basis of State Budget. Moreover there was predicted changes in stat macro assumptions, like appreciation of Rupiah and increased oil production. Last year the percentage of subsidy was 2.2% against GDP, and this year it was 2.6% against GDP.

In 2014, all stakeholders must discuss with the Minister of Finance before increasing oil price. Reduction of oil subsidy contributed more to state’s income than increased export or import tax.

The above statement was based on the fact that subsidy expenditure increased year after year. In 2014 the Government allocated subsidy for energy amounting to Rp. 282.1 trillion, consisting of subsidy for oil Rp. 2010.7 trillion and subsidy for electricity Rp. 71.4 trillion. The figures were an increase against total energy subsidy in 2010 at Rp. 143.79 trillion.

So it was truly dangerous if the Government persisted to maintain oil subsidy. No reason was justifiable enough for the Government to keep oil price from going up. The economic condition was no longer permissible for the Government to maintain oil subsidy which kept expanding. This year, the Government allocated fund for oil subsidy to the amount of Rp. 210.7 trillion.

From the fiscal side, besides reducing budget garden, subsidy fund could be used for building basic infra structure needed by the people. Even if the future Government had to increase price of oil, most likely the people would not be furious and resistant as long as they were told that the fund from austerity plan would be used for development like building roads, hospitals, traditional markets, bridges, irrigation etc.

With reference to increased oil consumption and Rupiah exchange rate against USD, subsidy for oil this year was predicted to soar up to Rp. 267 trillion, an amount equal to 2.6% of GDP or higher than budget for infra structure amounting to Rp. 206 trillion.

The estimate was reasonable. For many years the budget for fuel subsidy never covered up consumption increase. In 2011-2012, excess of oil subsidy came to Rp. 30 – Rp. 40 trillion, this was because fuel consumption had been inevitable.

Automotive sales in the past 2 years had been fantastic, i.e. 2.34 million units. This year, 125 million cars were ready to be on the road. The Green and Low Cost cars program would but increase consumption of subsidized oil and these cars were designed to use subsidized oil.

The implementation of oil fuel subsidy reduction had not been fully successful. Meanwhile the oil lifting program had dropped below target. This year, marketable oil which was targeted at 870 thousand barrels. The had caused the gap between production and consumption to widen.

Assuming that each day 1.2 million barrel of oil was needed to energies all the vehicles in Indonesia, Pertamina and other companies had to buy oil from the international market using USD. A condition as such triggered another structural problem, i.e. weakening of Rupiah value as more USD were needed.

Word was out that each month Indonesia imported crude oil at the value of USD 2-3 billion. High importing caused permanent pressures on Rupiah and might last all year through. Therefore if reduction of oil subsidy could not be exercised by the present Government due to various obstacles and limitations, the next Government must do it.

The conclusion instead of moving back and forth in hesitation only to stop on a dead end, the option of increasing oil price was indeed the most rational option. Only the educational and illumination approach for the public needed to be more informative and wiser.

If last year Pertamina claimed to have succeeded in running austerity plan through oil subsidy reduction plan on June 22, 2013 to the amount of Rp8 trillion, it must be still possible to repeat the same process. In tandem with that, oil lifting must be intensified by tapping old wells and exploiting new wells. (SS)

Business New - April 2, 2014      

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