Deni Ghifari, Jakarta – The Finance Ministry is not ruling out the option of reducing fuel subsidies, should the state budget be unable to shoulder the pressure of high oil prices, as the Middle East conflict chokes supply.
Finance Minister Purbaya Yudhi Sadewa said in a media briefing on Friday that the government had not discussed a possible subsidy cut yet, but his office had mapped out scenarios.
"When the budget cannot bear [the subsidy] at all, there's no other way; we have to share part [of the burden] with the people, meaning there'd be a fuel [price] increase, provided that the oil [price] goes really high," said Purbaya.
Subsidized fuels are sold at fixed prices in the country thanks to the state budget covering the difference to typically higher market prices. An oil market price assumption is postulated in the budget plan, where the number serves as guidance for subsidy spending that year.
The minister revealed that, currently, "the worst-case scenario" was domestic crude averaging US$92 per barrel throughout the year, far above the $70 projection set in the macroeconomic assumptions of the 2026 budget.
The Brent crude oil price climbed 28 percent to $92.7 per barrel last week, and Qatari Energy Minister Saad al-Kaabi said the Gulf producers, responsible for a fifth of global supplies, might shut down within days, potentially driving crude prices to $150 per barrel, according to the Financial Times.
Asked whether subsidies would be cut as the global price is projecting a worse-case average figure, Purbaya neither confirmed nor denied the possibility.
A market price higher than the assumed level means the state must spend more than planned on subsidies. The Energy Shift Institute (ESI) estimates that every dollar increase in global oil prices would drive up the state's fuel subsidies bill by an extra Rp 7 trillion ($413.2 million) on top of the hundreds of trillions already earmarked.
To account for the extra expense, the government has to either cut spending elsewhere or issue more debt and, in doing so, push up the fiscal deficit that stands at 0.53 percent of gross domestic product just two months into the year.
The minister revealed that, all else being equal, oil averaging $92 per barrel would widen the fiscal deficit to 3.6 percent of the GDP, far above the legal limit of 3 percent.
"We will take steps to prevent that from happening. Where can we save funds? For instance, in the free nutritious meal program," said Purbaya, refusing to name a specific figure.
In interview with Reuters on Tuesday, the minister suggested that scaling back the program that aims to feed 83 million Indonesians could save around Rp 100 trillion in the 2026 budget.
However, he said in Friday's briefing that the budget allocated for food spending under the program would remain untouched, while savings might instead be realized in the connected kitchens' procurement, such as for motorcycles or computers.
Purbaya went on to say that his office had been mapping out other spending items that could be pushed back to next year, such as "bridges or schools".
The Iran war not only pushed up oil prices but is resulting in a weaker rupiah, which was trading at Rp 16,925 per dollar on Friday, far above the Rp 16,760 rate before the first airstrike was launched.
Given that crude is traded in dollars, a weaker rupiah means the archipelago pays more rupiah for a certain amount of oil.
The global energy price shock will force Jakarta to absorb either a fiscal or inflationary blow.
Purbaya made it clear that the budget would take a hit before any potential cut in energy subsidies, which would drive up fuel prices for consumers and have a broad inflationary impact on the economy.
Syafruddin Karimi, an economics professor at Andalas University, agrees that using the state budget as a buffer to keep domestic energy prices stable is justified as an initial crisis response.
"Nevertheless, this step is only wise if it's temporary, calculated and very selective in nature, he told The Jakarta Post on Friday. "Indiscriminate cuts in productive spending just to cover subsidies would just replace an inflation problem with a growth problem."
He argued that the correct approach is to focus on protecting vulnerable groups by minimizing mis-targeted subsidies. "The state has to absorb short-term shocks without sacrificing long-term discipline."
Economist Intelligence Unit (EIU) Asia analyst Tay Qi Hang told the Post on Friday that the government's decision for the short-term "is a sensible approach", because placing the budget as a buffer was "the less disruptive option economically and politically" vis-a-vis raising fuel prices, which would hit household spending power and risk triggering social unrest.
"Low inflation does give policymakers more room to reform subsidies, but the main constraint right now is household purchasing power and political stability, not inflation itself," said Tay, adding: "In practice, the government is more likely to tolerate higher fiscal pressure than risk a sudden inflation shock to households".
Meanwhile, the National Consumer Protection Agency (BPKN) has appealed to the public not to "panic-buy" fuel in anticipation of potential energy supply disruption.
"Fuel consumers should remain calm, be aware of the global situation, but avoid excessive purchases," BPKN chairman Mufti Mubarok was quoted by news agency Antara as saying in a statement on Saturday, following reports of increased purchases in regions including Jember in East Java, Medan in North Sumatra and Aceh.
Source: https://asianews.network/in-indonesia-fuel-price-hike-in-the-cards-if-budget-cant-bear-oil-subsidy