WB recommends cut in fuel subsidy

WB recommends cut in fuel subsidy

The Jakarta Post, Jakarta

The World Bank has recommended that the government cut fuel
subsidies as they have done nothing to alleviate poverty.

World Bank senior economist for Indonesia Jehan Arulpragasam
said that the rationale behind the subsidies was questionable as,
in general, they benefited the rich five times more than they did
the poor, and had created distortions in the fuel market.

"The main issue here is whether such public spending could be
used for other, better means of poverty reduction," he said.

Arulpragasam explained that the distortion in fuel prices had
lead to widespread fuel smuggling to neighboring countries, and
worsening air pollution problems due to the public's excessive
consumption of fuel.

"It could also create discouragement toward investment in the
oil and gas sector," he explained.

The new government of Susilo Bambang Yudhoyono is under
pressure to cut down costly fuel subsidy spending as oil prices
have surged to record levels. The oil hike has inflated the 2004
fuel subsidy allocation from the planned Rp 14.5 trillion to Rp
59.2 trillion, a huge sum when looked at in the light of the Rp
70 trillion allocated on development spending.

The government has decided not to raise fuel prices during the
remainder of this year as people prepare to celebrate the year-
end festivities at Idul Fitri, Christmas and the New Year. But
officials have acknowledged that fuel prices might have to be
increased next year in line with developments in the
international oil price in a bid to ease the pressure on the
state budget.

The World Bank estimates that a 10 percent increase in fuel
prices could lead to a 0.6 percent rise in the overall inflation
rate.

World Bank officials, however, did not specify what level of a
fuel subsidy cut would be tolerable, saying that this would be a
political decision.