Saturday, March 16, 2013

INDONESIA Must Defuse the Subsidy Time Bomb

As the global price of oil rises, Indonesia’s ability to afford its fuel subsidies will be severely tested.

The government is already under severe pressure to keep the budget deficit from ballooning and to reverse a growing trade deficit.

Subsidies are draining away funds that could be better used securing the country’s long-term economic future and improving people’s livelihoods.

Last year, the government spent Rp 211.9 trillion ($21.8 billion) on fuel subsidies, and if nothing changes it could end up spending over Rp 300 trillion this year. By comparison, the government has earmarked Rp 216 trillion for infrastructure development.

It is clear the government has little reasonable choice but to raise fuel prices, and it is best to do it sooner rather than later.

The risk of not doing so was spelled out by Suryo Bambang Sulisto, the chairman of the Indonesian Chamber of Commerce and Industry (Kadin), who noted the country’s economic future was at risk.

“Kadin has encouraged the government many times to eradicate the fuel subsidy entirely,” Suryo said. “That will save this country from stagnation and boost our growth in the long term.”

He is right. The subsidies create a false economy by holding down costs artificially. They also encourage smuggling and promote corruption.

Put down the last time it attempted to raise fuel prices, the government naturally is adopting a cautious approach to the politically sensitive issue.

Therefore all political parties need to get behind the government and convince the Indonesian people that subsidies simply cannot afford to continue.

There has been some discussion that private cars should no longer be able to access subsidized fuel. Perhaps this could be implemented?

The country is sitting on a ticking time bomb. If it goes off, the economic consequences would be dire.

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