Editorial: We Need to Rethink The Fuel Subsidy Issue

By webadmin on 01:05 pm Jul 07, 2012
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Kunardy Lie is now chief country officer for Deutsche Bank in Indonesia. (Photo Courtesy of Deutsche Bank)

Fuel subsidies have always been politically combustible and socially sensitive in this country. Since former President Suharto introduced fuel subsidies to protect the poor, they have become sacrosanct.

In April, the government tried to partially remove the subsidies as rising global oil prices and consumption were imposing a huge burden on the state budget. The move was blocked and that decision is now coming back to haunt the nation.

The Finance Ministry now forecasts that total energy subsidies will reach Rp 305.9 trillion ($32.4 billion) this year, or 51.2 percent above its allocation, and up about a fifth from last year. The higher-than-budgeted-for subsidy may push the country’s budget deficit to 2.3 percent of GDP, from the 2.23 percent previously estimated.

The fuel subsidy is sucking funds away from major priorities like education, health care and infrastructure. Rather than shield the poor, subsidies help the middle class enjoy cheap fuel.

Society must accept that fuel subsidies are an efficient and costly luxury. Some say that such subsidies help local companies stay competitive because of lower energy costs, but this is untrue. It would be beneficial for companies if they were offered fiscal incentives and better infrastructure.

The key to solving this problem is to undertake real reforms, especially in the private sector and within the bureaucracy. We must ensure that the private sector has a fighting chance by lowering business costs and red tape. This is where they feel the most pain and face the biggest hurdles.

The government must also speed up investments in infrastructure. The government has recently shown greater urgency on this front by launching several major projects, but much more is needed. The funds used for fuel subsidies can be more wisely used. We need the political will and courage to do the right thing.