Govt to shoulder higher fuel subsidy in 2003 budget

The Jakarta Post, Jakarta

The government would have to allocate a much greater amount of money to cover the fuel subsidy this year because of higher prices of oil in the international market, says a senior government official.

This could threaten the 2003 state budget deficit target.

Director General of Oil and Gas at the Ministry of Energy and Mineral Resources Iin Arifin Takhyan said on Wednesday that expenses for the fuel subsidy this year would double to around Rp 25.6 trillion (US$3.08 billion) compared to Rp 13 trillion allocated under the current budget.

Iin said the government only had the capacity to cover up to Rp 20 trillion.

"This means that we'll have a higher deficit," he told reporters.

The government initially planned to further eliminate the subsidy on various fuel products early this year. The Rp 13 trillion fund was meant only to cover the subsidy for kerosene, a fuel used mainly by low-income families for cooking.

But widespread protests from the public in January, forced the government to delay the cut in the subsidy.

The current state budget assumed an average oil price of $22 per barrel, but because of various uncertainties in the global market including the recent war in Iraq, the oil price in the international market during the first half of the year was much higher at an average level of $26.15 per barrel. According to one estimate, the average oil price in the second semester would average $24 per barrel. By maintaining the subsidy and because of the higher international oil price, the state budget would consequently have to cover a higher subsidy.

Officials from the Ministry of Finance could not be reached to confirm whether the 2003 state budget would suffer a higher deficit than the planned 1.8 percent of gross domestic product.

Minister of Finance Boediono has been trying hard to limit the budget deficit in a bid to help create a healthy fiscal condition, a necessary factor to help speed up the country's economic recovery.

Boediono has targeted this year's deficit to be contained at below 1.8 percent of GDP, so that next year's deficit could be further cut to around 1 percent of GDP.

There is a possibility that the deficit would not deviate much from the targeted figure considering that the rapid appreciation of the rupiah and lower central bank interest rate would reduce the government's expenses in servicing domestic and overseas debts. In addition, the higher international oil prices should also provide the government with higher oil revenue.