Aditya Suharmoko, Jakarta – The World Bank has criticized the government's continuing refusal to cut the onerous fuel subsidy despite evidence the allocation has only benefited wealthy people.

"The fuel subsidy has been poorly targeted; it only promotes consumption and does not help the poor," the World Bank's newly appointed country director for Indonesia, Joachim von Amsberg, said in a discussion Tuesday.

He said energy subsidies were two-and-a-half times higher than those for investment in social development. "These resources are sufficient to finance agricultural, infrastructure and social development," he said.

The government has persisted in not raising fuel prices to ease the subsidy burden, especially ahead of next year's general elections in which President Susilo Bambang Yudhoyono will run for a second term.

Assuming global oil prices hover around US$95 a barrel, the government will need to allocate about Rp 130 trillion (US$14.16 billion) for energy subsidies in the revised 2008 state budget, according to the House of Representatives' budget commission.

The allocation is nearly three times higher than the Rp 45.87 trillion currently allocated in this year's budget. According to the World Bank, at least 40 percent of the fuel subsidy has been enjoyed by rich people.

Standard Chartered Bank senior economist Fauzi Ichsan said the government would do better to raise fuel prices and allocate fuel subsidies to boost spending and infrastructure development – two key drivers for spurring higher economic growth.

"The government can have a counterpolicy to compensate for raising the fuel prices, such as increasing the amount of cash transfers for poor people to cushion the impact of higher living costs," he said.

In regard to this year's economic outlook, both the World Bank and Fauzi said the country was likely to prove resilient from the possible global economic slowdown because its economy was mainly driven by domestic consumption, not exports.

The country's trade composition is mostly concentrated in commodities, whose prices are expected to be relatively strong, said von Amsberg.

"The impact of the US recession on Indonesia through international trade will be limited; if there is any impact, it will be through the financial markets," Fauzi said.

The World Bank and Fauzi have forecast the country's GDP growth at 6 percent this year, lower than the government's 6.4 percent target and the central bank's estimation of 6.2 percent.

Fauzi said the inflation rate would be between 6.5 percent and 7 percent.

World Bank's Latest Overview on Indonesia

Strengths:

• Domestic momentum from credit expansion and growing infrastructure investment.
• Relatively smaller trade shares (i.e. more focus on domestic economy) with trade concentrated in commodities, in which prices are expected to continue relatively strong.
• Reduced government debt exposure (below 35 percent of GDP).
• Little exposure in the banking system to subprime debts.

Weaknesses:

• Higher food prices feeding through into higher inflation and social insecurity.
• A high subsidy burden on the budget from controlled domestic fuel prices.
• High government borrowing needs.