Mon, 23 Aug 2010

From: The Jakarta Globe

By Muhamad Al Azhari & Dion Bisara
Jakarta. Since its release last week, analysts have lauded the 2011 state budget draft for cutting subsidies to make way for development spending, but some in the business community fear the cuts may be too much, too fast.

Subsidies have been slashed 8.2 percent in the draft to Rp 184.8 trillion ($20.5 billion), down from Rp 201.3 trillion.

“There are two benefits to reducing subsidies,” said Edimon Ginting, the Asian Development Bank’s senior economist for Indonesia. “One, the government can increase spending on infrastructure, which is now insufficient and hampers competitiveness.

“Two, the government can allocate more funds to education, health and social programs, so that economic growth can be followed by balanced social progress.”

Earlier this month, the ADB suggested that Indonesia gradually abolish fuel subsidies and allocate the freed funds to help low-income citizens.

Energy subsidies, which take the lion’s share of all subsidies, were cut 7.1 percent in the draft budget, down to Rp 133.8 trillion from 144 trillion.

Most of the reduction is in electricity subsidies, resulting in the unpopular 18 percent increase in the price of electricity this year and a planned increase of 15 percent next year. In the draft budge, electricity subsidies are cut 25.6 percent to Rp 41 trillion, from Rp 55.1 trillion.

President Susilo Bambang Yudhoyono, who will undoubtedly face criticism for rising energy costs, defended the subsidy cuts in a speech last week, saying they would free up money for development projects. He said the government would ensure the remaining subsidies benefited the poor, not the rich.

The draft budget calls for a 28 percent increase in infrastructure spending, including Rp 121.7 trillion for improving electricity output and more for transportation.

“Just imagine if the government spent Rp 200 trillion on subsidies - we’d have a lot less to spend on infrastructure,” Finance Minister Agus Martowardojo said on Friday.

Gundy Cahyadi, an analyst at OCBC Bank in Singapore, welcomed the proposed subsidy cuts and the accompanying rise in infrastructure spending.

“If the government can succeed in continuing to consolidate its subsidy spending and spend the extra money in other areas, we think Indonesia’s growth prospects should be fairly strong in the medium term,” he said.

Helmi Arman, a Jakarta-based economist with Bank Danamon, said the cuts to the electricity subsidies, which include a subsidy for oil used for power generation, would help reduce the state’s vulnerability to rising oil prices.

“Gradual energy subsidy reductions are the way to go,” Helmi said. “It’s better to implement gradual reductions now while global energy prices are still well anchored. Measured price increases now are better than abrupt increases later.”

Consumer fuel subsidies, intended to defend prices against rising oil prices, rose 4.4 percent this year to Rp 92.8 trillion, up from Rp 88.9 trillion.

Kurtubi, an independent oil analyst, said the government could reduce subsidies without triggering increases in electricity prices if it encouraged state power provider PLN to use gasoline and coal for electricity generation rather than diesel, which it mostly uses now.

Despite the widespread praise for the subsidy cuts, the business community is feeling uneasy about the potential cost increases that loom.

Sofjan Wanandi, chairman of the Indonesia Employers Association (Apindo), welcomed the cuts as a way to boost infrastructure spending, but urged caution. “We don’t want the cuts to end up burdening businesses, especially industry, because right now we are barely competitive,” he said.

Sofjan previously warned that domestic industries would lose their competitive advantage if electricity prices rose a further 15 percent next year.

He said the government should improve electricity distribution systems and related infrastructure before applying the rise, especially as local industries were struggling to cope with a surge of imported products.

Elsewhere in the draft budget, non-energy subsidies were cut 10.9 percent, bringing them from Rp 57.3 trillion to Rp 51 trillion.