Govt proposes huge fuel subsidy hike

Dadan Wijaksana, The Jakarta Post/Jakarta

The fuel subsidy may jump by 334 percent of its initial figure due to soaring oil prices, the government said on Tuesday as it proposed a revision to the 2004 state budget.

A fuel subsidy is necessary because the country also imports fuel to meet national demand.

Minister of Finance Boediono said the government might have to spend a whopping Rp 63 trillion (US$7.08 billion) for the fuel subsidy -- compared to Rp 14.5 trillion as budgeted initially -- as the oil price assumption had been revised upward to $36 per barrel from $22 per barrel to better reflect current developments in international oil prices.

Oil prices have been soaring upon concerns over disruptions to supply and strong demand from energy-hungry countries like China and India, reaching to near $50 per barrel last week.

The government has said it would not raise fuel prices at home despite soaring world prices to ensure political stability during election year. Fuel prices were last raised in January 2003.

However, high oil prices have renewed concerns about the costly fuel subsidy, as the revised figure almost equals the Rp 69.6 trillion development spending for this year, and because the subsidy has been enjoyed largely by car owners of the upper income bracket -- not to mention the rampant smuggling of subsidized fuel products to neighboring countries.

Some experts have said the fuel subsidy policy should be abandoned immediately, as it would lead eventually to a fiscal disaster and affect the overall economy.

"This is a consequence of the government applying a method of subsidy that basically allows the haves to enjoy it. It's said that even those who drive a Mercedes Benz can benefit from it," House Budget Commission chairman Abdullah Zainie said.

"(The House) has been formulating a straight subsidy scheme that will serve only those people in need of it. It's not going to be easy, as it has to be backed up by solid research and data on the poor, while a sound control mechanism has to be set up to minimize abuse. It's difficult, but feasible."

The House will decide within a month whether to accept the government revision of the 2004 state budget.

Meanwhile, Boediono said the expanded fuel subsidy would not have a serious impact on the state budget, as deficit was projected to increase only slightly, from 1.2 percent to 1.3 percent of the gross domestic product.