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The Contrapositive Policy: Fuel Price Increase vs Subsidies

As a preventive measure to withhold the APBN budget, the Indonesian government has been gearing up for a fuel price increase. The global turmoil has weakened the Rupiah, and international crude oil prices are still relatively high. Meanwhile, consumption rose significantly due to the ease of mobility, which raised fuel prices. According to Indonesia's Coordinating Minister for Maritime Affairs and Investment, Luhut Binsar Panjaitan, President Joko Widodo will announce the increase in fuel prices because a failure to lower subsidies will cause the entire state budget to collapse. Head Economist of Bahana Securities, Satria Sambijantoro, assesses that the government's option to increase fuel prices is unavoidable due to the swelling spending for subsidies and high oil prices. The 2022 state budget for energy subsidies, especially gasoline, is forecasted to increase from the initial Rp152 trillion to Rp698 trillion. Next year, the government will be faced with a significant burden of paying subsidies and compensation to Pertamina and PLN, narrowing the budget space for 2023. Therefore, the views of the fractions on how to respond to such a significant shock absorber expenditure should be noticed thoroughly, conveyed by Sri Mulyani in a meeting with the DPR RI Budget Board in Jakarta, Wednesday (8/30). Given that the poor and underprivileged households only derive 5% and 20% of the solar and pertalite subsidy consequently, subtraction on fuel subsidies are anticipated to be reconsidered as a measure to minimize the gap in societies.

The aforementioned surging fuel prices directly increase the cost of transportation, leading to an escalation in the general prices of goods and services for end consumers. According to the Minister of Industry, Agus Gumiwang Kartasasmita, on Wednesday (8/31) at the 32nd Apindo’s Work Meeting and National Consultancy (Rakerkonas), the increment of solar prices will raise logistic costs and products prices by approximately 10-15%. Moreover, General Secretary of the Indonesian Market Merchants Association, Reynaldi Sarijowan, other than goods, food staples also spikes significantly. The increase of price trends could be seen as psychological effects to anticipate rising fuel prices. Director Center of Economic and Law Studies (Celios), Bhima Yudhistira, conveyed that some sectors will be affected, namely automotive and its sub-sectors, financial, retails, electronic, and clothing. On the demand side, the greater public focuses on spending its income on fuel. People tend to limit their spending on secondary and tertiary, which lowers the purchasing power and affects the industry. In addition, MSME became one of the government’s main concerns. As consumer purchasing power decreased, MSME could execute efficiently; inflation could swell higher with the correlation between rising fuel prices and declining workers. However, as of July 2022, food inflation year-on-year reached double digits, approaching 11%. The risks might significantly escalate if subsidized fuel price increases and raise the number of poverty in Indonesia.

Following this subsidized fuel price hike, the government is set to reallocate a budget of US$1.62 billion from energy subsidies to social care packages provided to families and workers. The social assistance would be divided into three types, namely direct cash transfers (BLT), wage subsidies, and a regional transfer budget allocation for public transportation. A budget of Rp12.4 trillion in direct cash transfer for 20 million families, Rp9.6 trillion for salary assistance to 16 million low-wage workers, and Rp2.17 trillion to subsidize public transport costs. These social aid schemes are aimed at strengthening the people’s buying power amid the risk of inflationary pressure caused by the hike and will be distributed through PT Pos Indonesia to accelerate distribution. According to the Minister of Energy and Mineral Resources Arifin Tasrif, social aid is needed to balance the effect of fuel price hikes, as those strategies should be aligned to protect consumers. Minister of Finance, Sri Mulyani Indrawati, explained the additional social aid fund was a part of the energy subsidy-diversion strategy, as instructed by President Joko Widodo. Furthermore, Sri Mulyani underlined that all of the additional social aid would begin to be distributed this week and was expected to “relieve pressure on the community and reduce poverty amid inflationary pressures.” Summing up, the given social aid by the government is hoped can ease the burden of society from pressure on various price increases and can be used wisely for basic needs.



CNBC Indonesia


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