The government has maintained the price of subsidized diesel and biodiesel at Rp 5,150 (34 US cent) a liter, even though its economic price is actually Rp 18,150 per liter. Meanwhile, the price of subsidized RON-90 Pertalite is kept at Rp 7,650 a liter, compared to its economical price of Rp 17,200. Subsidies could reach Rp 19 million per car per year and Rp 3.7 million per motorcycle per year. Without fuel price increases, energy subsidies are expected to double this year to Rp 502 trillion from the initial budget.

The government, however, won’t dare increase the price of subsidized fuel, fearing political backlash. Sources said that President Joko “Jokowi” Widodo had summoned high-ranking officials from the National Police, the Indonesian Military (TNI) and the State Intelligence Agency (BIN) asking their opinion about possible fuel price increases, but all the invited officials did not recommend increasing subsidized fuel prices. (See What we’ve heard)

Jokowi said recently that the government had dipped deeper into its pockets to subsidize car and motorcycle owners and warned the people that if the government could no longer afford it, it would have to increase fuel prices. He said that energy subsidies this year, which were expected to swell to Rp 502 trillion, were worth enough to build the new capital city, Nusantara, which he said needed only Rp 466 trillion to build.

During a meeting with chief editors at the State Palace earlier this month, the President said the government would not increase subsidized fuel prices until the end of this year while hoping that crude oil prices would eventually fall. The government, Jokowi said, does not want to burden the people at a time when the price of other basic commodities was also on the rise.

Presidential Chief of Staff Moeldoko said earlier this week that the government was considering changing the subsidy mechanism to target more poor people, from subsidizing commodities such as fuel to channeling cash subsidies directly to them. That would be less costly for the government, he said.

To prevent another spike in subsidies, the government has opted to limit the consumption of subsidized fuel. Without limitation, consumption of subsidized fuel would easily surpass the budget’s quota of 14.9 million kiloliters of diesel and 23 million kl of Pertalite this year. The government tasked state-owned oil and gas holding company Pertamina with limiting the consumption of subsidized fuel. Pertamina then asked eligible car owners and motorists to register themselves through the MyPertamina app, which triggered outcry among motorists.

What’s more

The Indonesia crude price (ICP) reached US$117.62 per barrel in June 2022, up from 109.61 per barrel in May, far higher than the government’s 2022 budget assumption of $63 a barrel. The government initially allocated Rp 134 trillion ($9.33 billion) for energy subsidies in the 2022 state budget, of which Rp 77.5 trillion is for fuels and LPG and Rp 56.5 trillion for electricity subsidies. According to the Energy and Mineral Resources Ministry, for every $1 increase in the reference crude oil price, the government will have to bear an additional Rp 2.65 trillion in fuel subsidies, Rp 1.47 trillion in LPG subsidies and Rp 295 billion in electricity subsidies. 

With rising global energy prices, the government revised up the energy subsidy allocation in the budget this year to Rp 283.7 trillion. On top of that, the government has to pay Rp 293.5 trillion in compensation to Pertamina and state-electricity-company PLN for not increasing subsidized-fuel prices and electricity rates in the past two years.

Because of the soaring energy subsidy, total spending in the state budget this year will be 2 percent higher, amounting to Rp 3.17 quadrillion. Despite the higher spending, according to Finance Minister Sri Mulyani Indrawati, the state budget will remain safe as state revenues are expected to exceed the target in the budget by 7 percent to amount to Rp 2.43 quadrillion. Thus, the budget deficit this year will amount to Rp 732.2 trillion, or 3.92 percent of the GDP. This is lower than last year’s budget deficit of Rp 775.1 trillion, or 4.57 percent of the GDP.

What we’ve heard

According to a source at the State Palace, President Joko “Jokowi” Widodo recently invited several top figures from the National Police, the Indonesian Military and the State Intelligence Agency (BIN) to discuss the possibility to increase subsidized fuel prices.

The discussion was said to have ended with no conclusion as they told the President that it was not a feasible move. They said the political and social risks were just too high to increase the price of subsidized fuel now. They warned the President that subsidized fuel price increases could trigger social unrest.

Another source said the public would never be ready to face a hike in subsidized fuel prices, but that should not be an excuse to postpone any price adjustment of subsidized fuel. He said it needed the courage of the President to make the decision.

“We have to remember, Indonesia has long been a net importer of oil. Meanwhile, oil prices are projected to stay high until 2023. Average oil prices are already at US$100 to $110 per barrel for some time and they will likely stay unchanged in the next three years. This is a danger to our fiscal endurance and the public must be educated about this,” he said.

An inside source revealed that President Jokowi started to worry even more about the financial burden caused by the soaring energy subsidy budget rather than the warning about social unrest, which could be managed. Therefore, he warned the public about the urgency to maintain the health of the state budget and budget resiliency.

“If you pay attention, Jokowi’s political communication recently revolved around one thing: that the state budget can no longer withhold the gigantic energy subsidy burden. And the subsidy has never reached the right target,” he explained.

Then again, he added, the government did not have the courage to execute its mission because axing energy subsidies had a very high political risk.

“We have to remember this is Jokowi’s last term. He certainly does not want a hard landing on his regime.

Disclaimer

This content is provided by Tenggara Strategics in collaboration with The Jakarta Post to serve the latest comprehensive and reliable analysis on Indonesia’s political and business landscape. Access our latest edition to read the articles listed below:

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1. National Police credibility on the live over death of junior cop
2. Kalla to play kingmaker in 2024 presidential race
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4. Contentious articles in the revised Criminal Code unchanged

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1. Haj scams mar in ‘furoda’ pilgrimage program
2. Garuda suffers US$ 4.17 billion loss, struggles to meet travel demand
3. Indonesia sees record high trade surplus, built upon CPO exports

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