House askes SBY to mull fuel hike

Dadan Wijaksana, The Jakarta Post/Jakarta

The incoming government should consider raising fuel prices at home later this year in a bid to cut losses caused by the burgeoning cost of the nation's fuel subsidy that could cripple state finances, the House of Representatives state budget commission said.

The recommendation emerged during a meeting late on Wednesday between the commission and Minister of Finance Boediono to conclude the revision of the 2004 state budget.

The revised state budget allocated a whopping Rp 59.2 trillion (about US$6.55 billion), a 307 percent increase from Rp 14.5 trillion earmarked in the original state budget, to cover the fuel subsidy, which has inflated due to the current surge in crude oil prices.

The revised budget assumed an oil price average of $36 per barrel for this year, compared to the $22 per barrel rate previously assumed. Currently oil prices are at around $45 a barrel.

The new subsidy, however, was slightly lower than the Rp 63 trillion figure proposed by the government in August when it first started budget revisions.

The commission said in order to reduce the cost of the subsidy from Rp 63 trillion to Rp 59.2 trillion, the government should consider three options: Raising fuel prices starting in November, reducing domestic fuel consumption volumes, and launching tough efficiency measures.

The meeting had not finished at 10.30 p.m.

The fuel subsidy maintains fuel prices at home at low levels by international standards, keeping fuel and transportation costs affordable for the country's poor. Cheap gasoline and kerosene, however, also encourages people to consume greater amounts of fuel, cutting back the margins that can be exported overseas.

High oil prices have raised concerns over the impact of the huge subsidy on the state budget and the overall economy.

Some analysts have suggested the government start cutting down the subsidy and raise fuel prices to avoid a possible fiscal disaster, and also target the subsidy to the poor.

At present both rich and poor can take advantage of cheap fuel prices and some subsidized fuel products are also smuggled to neighboring countries.

The subsidy's critics say the huge subsidy fund would be better allocated for financing economic development programs.

Susilo Bambang Yudhoyono, who is widely expected to become the next president on Oct. 20, has said during his election campaign he would have no option than to cut back on the subsidy if oil prices remained stubbornly high. He also vowed to ensure that such policies would not have a severe impact on low income people.

It remains unclear whether Susilo's new government and new lawmakers in the House of Representatives would agree to the recommendations of the current budget committee.

Meanwhile, the budget commission earlier in the day completed debates on the 2005 state budget draft, including allocation for the fuel subsidy, which has been earmarked at Rp 19 trillion.

The amount of allocated for the subsidy, much less than earmarked for this year, was based on assumptions that oil prices would fall to around $24 a barrel next year. Many critics have said this assumption is unrealistic because crude prices have been averaging at about $45 a barrel during the past couple of months.

The new government and lawmakers are also expected to revise this budget.

Eyebox

State Budget for 2004 (revision), 2005 --------------------------------------------------- Assumptions 2004 (revised) 2005

--------------------------------------------------- Growth (%) 4.8 5.4 Inflation (%) 7.0 5.5 Exchange rate (Rp/S) 8,900 8,600 3-month SBI (%) 7.5 6.5 Oil price ($/barrel) 36 24 Oil output (mbd) 1.072 1.125 ---------------------------------------------------- Source: Ministry of Finance