Unsustainable fuel subsidies

One of the most difficult decisions facing the new government will be how to deal with an increasingly exorbitant fuel subsidy situation. Under the shadow of all-time high crude oil prices, as well as the fact that Indonesia has become a net oil importer, fuel subsidies are now projected at a staggering Rp 59.2 trillion (US$6.5 billion) up from earlier targets of Rp 14.5 trillion.

Heavily subsidized fuel prices in Indonesia are amongst the lowest worldwide and the question is no longer if, but when the government will be forced to take action.

Affordable fuel prices are vital for the day-to-day survival of probably two-thirds of Indonesia's entire population and fuel subsidies are unlikely to be entirely discontinued for years, if not decades to come.

At the same time however, low fuel prices continue to benefit Indonesia's wealthy citizens and encourage massive smuggling. Maintaining fuel subsidies at their present level is no longer a budgetary option. On the other hand, drastic fuel price increases would not only result in widespread social unrest but also cause significant cost-of-living and across-the-board business operating expense increases.

While prevailing social and economic conditions preclude drastic fuel subsidy cuts, available options include the following courses of action. First, the introduction of a special "fuel subsidy surtax" should be seriously considered. Since heavily subsidized premium gasoline prices unfairly benefits upper-class and other private vehicle owners, the introduction of a selective vehicle surtax could be easily introduced without undue popular resistance.

Luxury sedans based on criteria such as market price, fuel consumption, etc. should be taxed to the maximum possible whereas lower rates would apply to other privately owned cars or commercial vehicles. Surtax collections could be easily implemented based on car registration numbers, whereas public transportation or other selected vehicles could be exempted altogether.

With regard to diesel fuel consumption, a detailed user survey would be needed in order to determine socially and economically justified exemptions.

Potential diesel fuel surtax targets should also include private or company power generators and taxed or exempted on the basis of realistic and acceptable criteria.

JOSEPH LOUIS SPARTZ Jakarta