Spending pump primed as fuel subsidies cut

Spending pump primed as fuel subsidies cut

While analysts have praised Indonesian President Joko Widodo's bold determination to reduce fuel subsidies, the question now is what will he do with the money?

The move will save an estimated 225 trillion rupiah ($18 billion) a year, which authorities plan to use to improve infrastructure, as well as for education, healthcare and other social spending.

The government in November increased fuel prices by 2,000 rupiah per litre for both gasoline and diesel, or 31% and 36% respectively. Petrol shot up to 8,500 rupiah (22.10 baht) a litre and diesel 7,500 rupiah (19.50 baht), still among the cheapest in Asia. However, plunging global oil prices have since led to declines: to 6,600 rupiah for petrol and 6,400 rupiah for diesel.

The subsidies had long been criticised as helping the middle class and doing little for the poor, for whom they were intended, a point Finance Minister Bambang Brodjonegoro has acknowledged.

"There is no other way we can push growth and reduce poverty and inequality if, from the beginning, we are already misallocating our spending," he said.

The new approach, he said, would involve replacing price and commodity subsidies with targeted or people-centred subsidies. In other words, the people who really need the help will get it. Such assistance could be used in the case of electricity, food, or even fertiliser.

Of the fiscal savings from the reduced fuel subsidies, roughly 60% or about 1.3% of GDP will be channeled into basic infrastructure such as main roads and seaports to create a more connected archipelago. There will be more spending on infrastructure to support food security and the maritime and fishery sector.

In 2014, only 0.4% of GDP was allocated to public works and 0.8% to transport but those figures are expected to double this year, according to Bank of America Merrill Lynch.

The government has already announced plans for 20 non-commercial seaports and 10 airports. Several major railways will also be lunched this year, including the Trans-Sumatra, Trans-Sulawesi and Kalimantan lines, as part of a five-year plan.

Spending on direct social protection will include a smart card project to help authorities deliver healthcare, education and welfare support more efficiently. The cards offer free health insurance for the poor, guarantee 12 years of free education and provide for students' educational needs.

"As we have a limited budget and spending, it has to go by priority and our priorities are the two groups including the poor and near-poor households," said Mr Brodjonegoro.

Because low-income people are most vulnerable to price shocks, whether for food or fuel, the smart card system delivers assistance via electronic transactions directly to qualified recipients' bank accounts. The elimination of cash transactions also reduces misuse and corruption, which have been endemic under previous assistance schemes.

"There are two main risks regarding physical distribution," said the minister. "The money might not be the full amount because along the way there might be some kinds of 'fees'. The second bigger risk is that you might not receive the money at all because somehow your name and address are not on the list."

Mr Brodjonegoro said the conditional transfer system had been successful in reducing income inequality, most notably in Brazil. In Indonesia, the Gini coefficient, a widely accepted measure of income inequality, is still on the rise, from 0.37 in 2012 to 0.43 last year.

The government is also trying to develop the use of mobile phone numbers for money delivery, especially in remote areas where few people have access to banks.

Other savings from fuel subsidies will be used to stimulate local development, with transfers to regional administrations and village funds. As in Thailand, the latter are intended to allow villagers to do things that help residents directly.

"If a village is in a rice cultivating area, the fund can be utilised for an irrigation system. The idea is to make local people more responsible for the infrastructure that they build themselves," said Mr Brodjonegoro.

BALANCING THE BUDGET

Finally, part of the savings will be used to reduce the budget deficit to about 1.9% of GDP, below the 2.3% proposed by the former administration, and to 1% of GDP by 2019, with additional help from tax system reforms.

The revised budget was submitted on Jan 12 for parliamentary consideration and is expected to be passed by the House of Representatives sometime this month.

"Given what might happen in the US regarding the Federal Reserve interest rate hike, we are anticipating the probability of [rising] debt by trying to reduce the deficit," the minister said.

Another direct impact of fuel price reform is expected to be lower consumption and a decrease in oil imports, lowering the current account deficit.

"The impact of [energy] reform could go far beyond better budget and current account pictures," said Mr Brodjonegoro. "We are very serious about addressing economic structural problems that have often hampered our economic development agenda, and it will also trigger other reforms in various areas."

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