2008-2009 DATA CONSULT. All rights reserved.
INDONESIAN COMMERCIAL NEWSLETTER
April 2011

FOCUS


ISSUES OF SUBSIDIES AND OIL FUEL (BBM) PRICE HIKE


Every year, in drafting the state budget the government needs to rack its brains to calculate the right amount to be set aside from the state budget for subsidies especially energy subsidies.

In setting the amount of subsidies on energy including electricity and BBM   subsidies, the government is calculating the impact not only economically but also politically. Energy policy has always become a political issue as it concerns the welfare of the majority of the people. It is not easy, therefore, for the government to make a decision on energy subsidies.

The amount of subsidies has tended to increase from year to year determined mainly by the oil prices in the world market.  In the years  from 2006 to 2011 , the budget for  energy subsidies has increased Rp129.8 trillion or an annual increase of 17.2% per year - from Rp107.4 trillion  (3.2 percent of the GDP)  in 2006 to Rp237.2 trillion  (3.3 percent  of the GDP)  in 2011.

In 2011, subsidies account for 9.8% of the state spending, down from 30% in 2008 when the global financial crisis began to hit the world.

The oil prices peaked in 2008 contributing to the world economic slowdown and global financial crisis. That year subsidy budget was set at Rp 275 trillion or almost 30% of the total state spending. The subsidies included Rp139 trillion on BBM and Rp 83.9 trillion on electricity and the remaining Rp 52.3 trillion on non energy sectors including fertilizers and food.

BBM Subsidy

BBM subsidy is provided to control the selling price of BBM in the country. BBM price stability is vital not only economically but also politically as BBM is one of very basic needs of the majority of the people. The government, therefore, is interested in keeping the prices of BBM low or within the buying power of the low-income people.  The prices of BBM are also determined by the oil prices in the world market and the rupiah value.

Currently, subsidies are provided only on certain types of oil fuel including kerosene, gas oil, premium, and liquefied petroleum gas (LPG) in 3-kg canisters. In 2006-2011, BBM subsidies grew Rp 65.5 trillion or 15.1 percent per year - from Rp 64.2 trillion (1.9 percent of the GDP) in 2006, to Rp 129.7 trillion (1.8 percent of GDP) in 2011.

The increase in the BBM subsidies followed the soaring oil prices in the world market. In the 2006-2011 periods, the  Indonesian crude price (ICP) raised US$ 30.7 per barrel (47.8 percent) - from US$ 64.3 per barrel in 2006 to US$ 95 per barrel in 2011.

Increase in the BBM consumption also contributed to the rise in the subsidies. In 2011, the domestic consumption of subsidized BBM was estimated to reach 40.5 million kiloliters or an increase of 2.7 million kiloliters from 37.8 million kiloliters in 2006. Increase in the number of motor vehicles in the streets and unsuccessful implementation of the program of limiting BBM consumption contributed to the rise in BBM consumption.

The government has to curb the increase in subsidies from year to year that greatly burdened the state budget. For that purpose, in the 2006-2011 periods, the government has taken steps such as:
"        conversion of subsidized kerosene into  (LPG)  by phases  starting 2007;
"        increase in the use of alternative energy  and diversification of energy;
"        banning certain motor vehicles  from  using subsidized BBM  or limitation of the use of subsidized BBM;
"        Control of the use of subsidized BBM through close distribution system by phases. Other measures have also been taken such as by adjusting the prices of subsidized BBM.

Adjustment of prices of subsidized BBM

Adjustment of the retail selling prices of subsidized BBM is the last resort taken by the government if the subsidy burden is too heavy on the state budget and would disrupt the sustainability of the state budget in short or mid terms.

In the 2006 - 2011 periods, the, the government has four times adjusted the prices of BBM - in May 2008, early December 2008, mid December 2008, and January 2009.

In May 2008 the average prices of subsidized BBM were raised 28.7 percent, after the ICP surged to US$ 104.8 per barrel in January-May as against the budget target of only US$ 57 per barrel for that year. 

Later when the IPC shrank to US$38.5 per barrel, the prices of subsidized BBM was cut three times  - 8.3 percent early December 2008 and 10.9 percent in mid December 2008,  and 8.1 percent in January, 2009.

In 2010, until the end of the first half, the retail price of subsidized BBM did not change.

Prospects of BBM price hikes, 2011

Entering the year 2011 the oil prices rose again compared to the average price in 2010.  Based on data at the ministry of energy and mineral resources, until May, 2011 the ICP averaged US$110 per barrel, as against only US$ 74 per barrel in 2010.

If the trend continued the BBM subsidy would provide a heavy burden to the state finance. In the revised 2011 state budget, the ICP target is set at US$ 95 per barrel. If the ICP would continue at its level as in the first five months of the year,   there would be a dangerous swell in the subsidies.

The government's attempt to encourage households and small industries to use LPG instead of kerosene for fuel has been quite successful, but the program to cut the use of oil fuels in the transport sector is not as successful. The transport sector is the largest consumer of oil fuels. The price difference between subsidized BBM and non subsidized BBM is too high.

The government, therefore, is considering raising the prices of BBM if the oil prices increased in the world market. Even lawmakers favored an increase in the prices of BBM as they are aware of the impact of too heavy subsidy burden on the state finance. Generally lawmakers, more interested in drawing the sympathy of public, have always been against raising the BBM prices the government needs to make further adjustment in the prices of subsidized BBM However, the government is not expected to raise the prices until the end of 2011. BBM price hikes are expected only in 2012.


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