Fuel subsidy to be aimed at halting smuggling

JAKARTA (JP): Minister of Finance Mar'ie Muhammad said here yesterday that the government's future fuel price subsidization policy would be designed to limit the smuggling of oil products from the country.

Mar'ie said that subsidizing fuel prices on the domestic market provided opportunities for smugglers to illegally export fuel products -- especially diesel oil -- to neighboring countries with higher fuel prices.

"Our diesel oil products are very cheap, and it's a good target for smuggling," he said during a House of Representatives deliberation of the revised state budget proposal for 1998/1999.

The revised budget, balanced by law, is set at Rp 147.22 trillion, an increase of 45.6 percent over the current budget ending March 31.

The original draft budget for 1998/1999 announced by the President on Jan. 6 projected a budget of Rp 133.5 trillion.

Mar'ie explained that controlling smuggling was a difficult task since Indonesia was a country with vast coastal areas.

"I have to be honest about this," he said in his response to a House proposal to maintain the fuel subsidy.

Some House members requested the government to direct its fuel subsidy to low-income people, who have been severely affected by the ongoing economic crisis.

The draft budget allocates Rp 7.45 trillion to subsidize fuel prices in the 1998/1999 fiscal year.

The fuel subsidy has recently gained the spotlight following the government's agreement to adhere to the International Monetary Fund's 50-point economic reform program which includes gradually adjusting fuel prices to international standards from April 1.

Mar'ie also said the fuel subsidy would cause market distortions and inefficiency in the economy.

"All these factors would be considered in directing the subsidy policy," he said.

He added that the government would consider the House request. "The fuel subsidy will not be abandoned totally," he said.

He stressed, however, that the subsidy policy would not be implemented in such a way as to detract from economic efficiency.

Indonesia last raised fuel prices in 1993 when it set the price of automotive diesel oil at Rp 380 per liter, industrial diesel oil at Rp 240 per liter, kerosene at Rp 280 per liter, premium gasoline at Rp 700 per liter, super gasoline at Rp 840 per liter, avgas at Rp 420 per liter and marine fuel at Rp 240 per liter.

Mar'ie also explained that the 1998/1999 draft budget was part of the government's macroeconomic strategy to deal with the economic crisis.

Adjustment

Mar'ie told the House members that the government was prepared to adjust the various assumptions in the budget if it failed to achieve its targets which included a zero percent economic growth, 20 percent inflation rate and an exchange rate of Rp 5,000 to the U.S. dollar.

"So far, there has been no indication that the assumptions would not be met," he said.

He stressed that the government would not raise the salaries of government civilian and military employees due to the crisis.

"But if the government's finances improve, we would consider such a request (to raise salaries)," he said.

Mar'ie also reiterated the government's plan, announced Tuesday, to raise domestic bank minimum capital requirements to Rp 1 trillion by the end of 1998, Rp 2 trillion by the end of 1999 and Rp 3 trillion by the end of 2003 in order to further stabilize the banking industry.

Currently, the minimum capital requirement is Rp 150 billion for foreign exchange banks and Rp 50 billion for non-foreign exchange banks.

He explained that the new requirements were aimed to promote mergers in the banking industry. "The government has called on the sector to merge for a long time. In fact, we arranged a fiscal incentive two years ago," he pointed out.

Mar'ie said there had been positive signs that Indonesia's letters of credit, which recently were being rejected by overseas banks, had started to roll in again.

He explained that proposals by foreign governments and international institutions to help solve the credit problem was a big help.

He said the government's guarantee of bank obligations to creditors and depositors also helped improve confidence in accepting Indonesian letters of credit.

New extension of credit would help exporters start their businesses again, which has been recently hampered by difficulties in obtaining imported raw materials due to the credit snag.

Mar'ie also said to boost the country's non-oil and non-gas exports, the government would continue providing export credit facilities which included rediscount post-shipment and pre- shipment facilities.

He also stressed that the government had no plans to reschedule servicing its foreign debts despite calls from the House.

"In any condition, the government is working to maintain its credibility in the international community," he pointed out.

The draft budget allocated a total of Rp 37.8 billion in servicing the state's foreign loans. (08)