May 31, 2022
JAKARTA – Forget, for a while, our commitment to reform the energy sector in light of our national pledge to reduce carbon emissions. Instead, let us burn billions more dollars in cheap gasoline and other fossil fuels to sustain the post-pandemic recovery and tame inflationary pressures.
That is by and large the implicit message of the amendments to fiscal management that Finance Minister Sri Mulyani Indrawati proposed to the House of Representatives budget committee last week to cope with the energy and food crisis.
The government proposed to almost triple its energy subsidy for this year to Rp 443.6 trillion (US$30.5 billion) or 2.5 percent of GDP in an effort to maintain domestic fuel prices far below the skyrocketing international prices of oil and natural gas. Even the tariff of electricity, which is still generated mostly by coal and natural gas, will be maintained for the majority of consumers.
The government will also increase social assistance by Rp 18.6 trillion to Rp 431 trillion to cushion people from the inflationary impact of food and energy prices. But surprisingly, the planned fiscal deficit is projected to decline from an earlier estimated 4.85 percent to 4.5 percent of GDP without increasing the debts for the whole year. This decrease in the deficit target makes it easier for the government to return to the legal budget deficit ceiling of less than 3 percent of GDP next year.
How will the government finance all this extravagant spending on the social safety net and subsidies?
It is simply a matter of luck. The windfall from the commodity boom, especially coal, palm oil and several other minerals, will likely continue to increase state revenues by Rp 443 trillion to Rp 2.26 quadrillion this year, according to the government estimate.
The fiscal policy shows that the government will focus on strengthening the role of the state budget in absorbing the impact of skyrocketing food and energy prices, thereby maintaining the level of the people’s purchasing power, yet checking inflation and abating the risk of capital outflows related to the anticipated acceleration in the United States Federal Reserve’s money-tightening policy.
We agree with the government’s fiscal stance that buffering the people’s purchasing power will help maintain the post-pandemic recovery. The point is that if domestic fuel prices are fully adjusted to international prices, the cost to the economy could be even greater, due to increasing inflation, which could lead to lower consumption, forcing Bank Indonesia to raise its interest rates and ultimately, resulting in greater foreign-capital outflows from government bonds.
It is worth remembering that our current inflation rate, which is already above target, has not yet factored in expected steep price increases in two other staple food commodities due to worldwide supply shortages. We depend on imports for 100 percent of wheat and almost 65 percent of soybean consumption.
So, the name of the game is “for the sake of survival” in an emergency situation. But we reaffirm our suggestion that most price subsidies should be distributed through a well-targeted social assistance program, rather than being commodity-based.