Unsustainable fuel subsidies

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