Dion Bisara & Faisal Maliki Baskoro – The government should raise fuel prices instead of putting further strain on the state budget with additional fuel and power subsidies, analysts said.
Chatib Basri, an economist from University of Indonesia, said the budget already could not sustain the huge energy subsidy bill, saying it "was like burning your money."
"It is not a question of how long of we can sustain this. Right now, we already cannot afford it," said Chatib, who is also a staff member at the Coordinating Ministry for the Economy.
The government has proposed raising power and fuel subsidies 44 percent this year to Rp 196.2 trillion ($22.8 billion). Officials cited surging oil prices and a failure to curb subsidized fuel use for the addition Rp 60 trillion heaped on the budget.
"That's just not right. An addition of Rp 60 trillion for energy subsidies is the same as wasting money on the rich," Chatib said. "Rp 196 trillion is just too much. With that amount of subsidies, what is left for infrastructure and welfare?"
Such an increase in subsidy spending would push the national deficit from Rp 124.7 trillion, or 1.8 percent of gross domestic product, to Rp 178.1 trillion, or 2.5 percent of GDP.
With the government piling further pressure on the state budget and refusing to raise fuel prices, Chatib said, it could hurt global investors' confidence in Indonesia.
"The 2.5 percent deficit-to-GDP ratio is high, and much of that deficit is attributed to subsidies. This is not good for investors' confidence," he said, adding that investors wanted to see more of deficit spending going toward infrastructure or long-term investments that could support growth.
Energy subsidies account for 14.7 percent of the 2011 revised budget of Rp 1,327.6 trillion. That compares with Rp 137.9 trillion in capital spending, including infrastructure, which makes up about 10.5 percent.
In a draft of a budget revision, the government has prepared two scenarios calling for increases in the price of subsidized fuel, which currently costs Rp 4,500 per liter. One option raised the price by Rp 500 per liter, with the other raising it by Rp 1,000 per liter. According to government figures, both scenarios would result in a total deficit of Rp 166.8 trillion, or 2.3 percent of GDP.
Indonesia is on the brink of an investment-grade rating, but its high subsidy spending consistently has been cited as one of the main hurdles standing between it and another upgrade. Standard & Poor's said in April that one future consideration would be a subsidy rationalization, which could reduce fiscal vulnerabilities from external shocks.
Sofjan Wanandi, chairman of the Indonesian Employers Association (Apindo), echoed Chatib's assessment that subsidy spending was "burning money". "In the next five years, we have to get rid of the subsidies or we won't be able to develop our infrastructure," he said.
Sofjan said businesses were capable of absorbing a rise in subsidized fuel prices of up to Rp 1,000 per liter this year. "It should be done, and the government must make sure the money saved goes to infrastructure," he said.
The government has estimated Indonesia needs Rp 1,400 trillion in infrastructure spending in the next five years to sustain economic growth.
Purbaya Yudhi Sadewa, head economist at the Danareksa Research Institute, said the government should directly subsidize people in need rather than subsidizing fuel. "With the current scheme, benefits are skewed toward the rich," he said.
According to a World Bank report in March, the richest 10 percent of Indonesians enjoy Rp 135,000 of fuel subsidies per capita, while the poorest 10 percent receive just Rp 23,000 per capita.