Fuel subsidy issue awaits new govt

JAKARTA. With two presidential candidates set to contest the July 9 presidential poll, whoever wins the presidency will face tough challenges in steering the economy, particularly in controlling the current-account deficit from the ballooning fuel subsidies, experts say.

Economist Didik J. Rachbini said the fuel subsidies had spiraled out of control, straining the state budget.

According to him, the next administration would inherit tough monetary and fiscal conditions as the country faced trade and service deficits due to the soaring fuel and electricity subsidies.

“The current president has not had the courage [to cut the subsidies] and, consequently, he has sacrificed the state budget,” Didik said on Wednesday at a seminar discussing the economic outlook after the presidential election.

Despite the challenges and political uncertainty, investors remained confident that Indonesia was a good place to put their investments due to its stable reputation as the third-largest democracy in the world, he added.

Didik said the next administration would have to focus on the 2015 state budget and be committed to lowering the fuel subsidies.

“Had the fuel subsidy funding, which currently amounts to Rp 250 trillion [US$21.68 billion], been allocated to building railroads — bearing in mind that the Jakarta-Surabaya double-track railway cost Rp 12 trillion to lay — just imagine how many railways could have been built. It [fuel subsidy funding] is such a waste,” he said.

The government decided recently to tighten its fiscal policies due in part to the surging subsidy spending as well as the low tax revenue.

According to a draft of the revised 2014 state budget, released on Tuesday, Indonesia will see its fuel subsidy spending soar to Rp 285 trillion by the end of this year, an increase of Rp 74.3 trillion compared to the original allocation, while the weak rupiah drives up the cost of fuel imports.

Meanwhile, tax revenue will fall to Rp 1,232.1 trillion, down by Rp 48.3 trillion from earlier estimates, because the economic slowdown is putting pressure on domestic companies’ earnings.

Echoing Didik, a researcher with the National Team for Accelerating Poverty Alleviation (TNP2K), Ari A. Perdana, said that as fiscal space was limited, the next administration would have to revise energy subsidies. ”The next administration needs to have the courage to be unpopular.”

Cutting energy subsidies would allow the new administration to develop other sectors, such as social welfare and infrastructure, Ari said.

He added that if the next administration increased the allocation for social welfare from 0.3 percent of gross domestic product (GDP) to 1.2 percent by 2025, it would provide the government with the leeway to reduce poverty and income inequality.

Besides the need to reduce energy subsidies, the administration also had to prioritize improvements in the country’s workforce, he explained.

“The next administration should review the labor laws so as to put an end to long disputes between workers and their employers. Also, the next administration should start investing to improve workers’ skills,” he said. (ask)