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.