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Government proposes cuts to fuel subsidies in 2025

Jakarta Globe - May 24, 2024

Alfi Dinilhaq, Jakarta – The Indonesian government has announced plans to reduce fuel subsidies and compensation starting in 2025. This reform is expected to save the national budget Rp 67.1 trillion ($4.17 billion).

The proposal is detailed in the 2025 Macroeconomic Framework and Fiscal Policy Principles (KEM & PPKF) document.

The KEM & PPKF 2025 document highlights that transforming energy subsidies and compensation must consider the economic conditions and purchasing power of the population.

"The main goal of transforming energy subsidies and compensation is not merely budget efficiency but to promote a more equitable role of the state budget (APBN) in supporting sustainable development for the greatest welfare of the people, especially the poor and vulnerable," the document states.

Currently, the prices of subsidized diesel fuel (Biosolar) and Pertalite are below their economic value, leading to compensation costs borne by the APBN. Biosolar is priced at Rp 6,800 per liter, while Pertalite is sold at Rp 10,000 per liter.

The rising consumption of Biosolar and Pertalite increases the subsidy and compensation burden, primarily benefiting wealthy households. Additionally, vehicle exhaust emissions contribute 32-57 percent of air pollution.

Thus, the goal to reduce the consumption of subsidized fuels aims to make energy subsidies and compensation more accurate, fair, optimal, and environmentally sustainable.

"Policies are needed to control fuel consumption. By implementing equitable consumption control, it is estimated that the volume of Solar and Pertalite consumption can be reduced by 17.8 million kiloliters per year," the document states.

This fuel subsidy and compensation reform is part of a broader energy reform that includes the 3-kilogram gas cannister subsidy and tariff adjustments for non-subsidized electricity customers in the upper-middle-income household category (3,500 VA and above) and government sectors. It also involves controlling subsidies and compensation for subsidized fuels.

Electricity customers with 3,500 VA and above are considered middle to upper-income households. Providing compensation to this tariff category contradicts the principle of equitable distribution of the APBN, making tariff adjustments for these customers appropriate.

"The policy of adjusting tariffs for households with 3,500 VA and above and government sectors is relatively easy to implement, as was done in 2022 with minimal and manageable social and economic impacts," the document states.

The Finance Ministry recorded a total energy subsidy expenditure of Rp 269.6 trillion by the end of 2023. This marks a 6.85 percent increase compared to the previous year's expenditure of Rp 252.8 trillion.

The Ministry detailed that the spending on fuel and gas subsidies amounted to Rp 95.6 trillion, reflecting a decrease of 17.3 percent. Conversely, electricity subsidies in 2023 surged by 22.2 percent, reaching Rp 68.7 trillion.

In 2023, the government subsidized 16.5 million kiloliters of fuel and 7.7 million metric tons of liquid petroleum gas. Additionally, electricity subsidies were provided to 40 million households, fertilizer subsidies amounted to 6.1 million tons, and interest subsidies for KUR (micro-loans) were given to 4.6 million creditors.

Source: https://jakartaglobe.id/business/government-proposes-cuts-to-fuel-subsidies-in-202