Fuel Subsidies Should Have Ended Years Ago: Economist

By webadmin on 09:55 pm Mar 27, 2012
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Faisal Maliki Baskoro

Indonesia should have scrapped its fuel subsidies years ago because using government funds for private purchases creates “lying prices” that distort decision-making, a visiting US economist said on Tuesday.

Steve Hanke, a professor of applied economics at Johns Hopkins University, said that by maintaining the subsidy, Indonesia put its economic stability at risk and weakened its ability to replicate its success in shrugging off the 2008 financial crisis.

But by missing a chance to cut subsidies during a time of low oil prices several years ago, the government risks causing a market shock if it proceeds with the plan now, Hanke told a Globe Asia breakfast meeting.

“The timing is off. The government should have removed the subsidy years ago,” he said.

He supported an end to state fuel subsidies but said Indonesia should have removed the subsidy in 2009, when the oil price was at around $35 per barrel. Oil is now over $105 per barrel.

“If the government did it then, the shocks would be limited and growth today would be better [than it is]. Now that the market price is high, the impact will be greater,” said Hanke, who is a contributing editor to Globe Asia magazine.

He said the government should wait for the oil price to drop as new supplies from Canada become available.

“In the short to medium term, the oil price will continue to rise, driven by the tensions in the Gulf,” he said, referring to fears of conflict with Iran.

Hanke said he had doubts the government would proceed with the price increase on Sunday as it had done a poor job in negotiating with opposition parties.

The government and lawmakers reached an agreement on Monday to set aside Rp 137 trillion ($14.9 billion) to fund fuel subsidies. That would allow the government to increase the Rp 4,500 Premium fuel price by Rp 1,500. But the government and lawmakers are still negotiating on final approval for the increase.

Hanke said removing subsidies was important for Indonesia as it would help the government maintain its economic stability and fiscal policy, something that helped it cope with the 2008 economic crisis.

“The key to Indonesia is a stable rupiah and tight fiscal management,” he said. “Indonesia’s recovery from the 2008 crisis has been very fast thanks to its prudent fiscal policy.”

Hanke said that the money saved from reducing the subsidy should be channeled to improve infrastructure.

“The cost of doing business in Indonesia is higher than it should be because of the lack of infrastructure, both hard and soft. Indonesia can grow by 7 to 8 percent if it can improve infrastructure,” he said.