WHY INCREASE PRICE OF SUBSIDIZED OIL ?

Skyrocketing subsidy for oil had reached hundreds of trillions of Rupiah and was tormenting the State Budget. Analyst and economists rated that the Government must instantly axe the amount of oil subsidy before on power to the next Government.

Although President SBY’s period of office would end in the next 2 months, it did not cast aside the possibility of increased oil price before October. So far subsidy for oil had worried the people considering the magnitude of subsidy could have been allocated for a number of infra structure projects to be immediately built.

Over the year total subsidy for energy was predicated to break record to above Rp. 350 trillion. The amount would come to around 21% of total Government or around 3.4% of GDP. Although for many years political elite were afraid to increase oil aggressively, but at least there were 5 strong reasons for the present or next Government to axe the subsidy.

There were 3 reasons from Indonesia’s economic data itself, i.e. inflation which tend to be under control, slowing down economic growth and swelling deficit of current transaction.

Firstly, inflation which was moving relatively slow below 3% in the first 8 months or around 4,7% annually. However the risk of increased oil price could be felt directly. On July 2013 last, one month after the Government increased oil price, inflation touched highest level in the past 4 years at 8.61% being supported by inflation in July at 3.28%.

Secondly, Indonesia’s deficit in current transaction which was noted as still high or 4.3% of GDP in quarter II. The swelling was triggered by over sized imports of oil. So slashing of subsidy could make subsidy expenditure more efficient.

Thirdly economic growth which slowed down drastically. Indonesia’s economy posted growth of 5.12% in Q II-2014, the slowest since 2009, after only being able to grow by 5,12% in Q I. To axe oil subsidy could allow more room for fiscal to rechannel to infra structure projects to promote people’s economy.

The fact was that more subsidy was enjoyed by the middle class and up was rated as off target. The subsidy was not enjoyed by small people. So axing of oil subsidy could bring market’s positive reaction. Such would make investors more attracted to invest in Indonesia.

The only thing was that the Government must be very considerate in explaining to the public. The art of communicating was important where people’s interest. The illustration was that the fund obtained from axing of subsidy would be re-allocated to productive sectors to bring more benefit for the people.

If the Government found it hard to make a decision to increase price of subsidized oil, they probably had just found niche to adopt that policy. Assuming that the Government increased price of subsidized oil by Rp. 1.000 per liter, they could save Rp48 trillion. If price was increased by Rp. 2.000 per liter, the amount saved would be Rp96 trillion.

By saving at that amount, deficit in APBN State Budget 2015 could be less than assumptions in State Budget 2015 which was 2.32% of GDP. To be exact, if Premium oil was increased by Rp. 8.500 per liter, deficit could be reduced to 1,32% against GDP.

The saved Rp. 96 trillion be channeled to infra structure financing which was around Rp. 200 trillion so the total was around Rp. 396 trillion, an amount sufficient enough to jack infra structure development massively.

The amount saved from oil subsidy could be re-allocated for the Indonesia Educated Card Program [KIP] and Indonesia Health Card Program [KIS]. If the next Government was committed to reduce subsidy for oil, the KIP and KIS program which Jokowi-Jusuf Kalla relied on must be executed first, only thereafter the oil price increase could be executed. By such stages people would not be upset or outrage by Jokowi-JK’s policy.

With KIP and KIS, medical and educational expenses which were formerly borne by the people, were now taken over by the Government this would compensate on increased household expenses caused by oil price increase.

Now it was a matter of how the Government’s economic team schemed up the formula of increased subsidized oil price: to increase by one single stage or step by step. Only thing was that the economic calculation must come first, then only the political calculation.

Warning the subsidy fund in RAPBN State Budget 2015, especially for oil was signaling danger since the volume was oversized, only to hold back the next Government from taking any action. (SS)

Business News - September 5, 2014