JAKARTA. Failing to adjust the price of subsidized fuel in the short term would herald a negative effect, not only upon state finances but also upon other macroeconomic fundamentals and would, consequently, weaken the nation’s capacity to respond to external shocks, Bank Indonesia (BI) Governor Darmin Nasution has warned.“Subsidized fuel is a major cause of our current-account deficit. The delay in adjusting the price of subsidized fuel will have an immense effect, injuring other economic sectors as well,” Darmin said on Wednesday at a CEO forum held by Kompas daily.The central bank governor said the fuel subsidies weakened the country’s already shaky external balance, which he identified as “the main weakness of Indonesia’s economy since the New Order era”. Indonesia posted a US$5.3 billion current-account deficit in the third quarter, or 2.4 percent of its gross domestic product (GDP), recovering slightly from the $6.9 billion (3.5 percent of GDP) that it posted the previous quarter, BI data shows. Southeast Asia’s largest economy has posted a current-account deficit for three consecutive quarters this year, primarily because of surging capital goods imports and rising oil imports due to soaring fuel consumption. Darmin argued that, if the government continued to let the fuel subsidies burden the country’s external balance, then it could hinder Indonesia’s ambition to sustain its high economic growth in the long run. “China, irrespective of the recent slowdown, will sustain its economic growth over the next 20-30 years because it does not have such structural weaknesses,” he explained.Besides stressing the country’s external balance, fuel subsidies were bad for the economy as they would only boost energy consumption, Darmin said, adding that it would also widen inequality among Indonesians as the policy was not in effect pro-poor. “Why? Because the fuel subsidies are mostly enjoyed by the upper-middle class,” he said.Fuel subsidies have always been a politically sensitive subject in Indonesia, whose subsidized fuel prices are the lowest in Southeast Asia. A government proposal to raise fuel prices from Rp 4,500 per liter to Rp 6,000 per liter in April was turned down by lawmakers following a series of violent protests throughout the country.As a result of the rejected price hike, government spending on energy subsidies is expected to soar to more than Rp 300 trillion by the end of this year, significantly higher than the Rp 225 trillion allocated in the 2012 state budget. A move to resolve this issue, however, was made in October following approval of the 2013 State Budget Law, which stipulates that the government can adjust energy subsidies without approval from the House of Representatives if there is any deviation in macroeconomic indicators deemed to affect the state’s finances.Finance Minister Agus Martowardojo admitted that the government was “late” in adjusting the price of subsidized fuel. “If only we had adjusted it some time ago, perhaps we would not have a worrying current-account deficit of more than 3 percent,” Agus told reporters on WednesdayHe hinted, however, that the government was not planning to increase fuel subsidies very soon, citing Indonesia’s narrowing current-account deficit and its “manageable” balance of payments. (The Jakarta Post)
BI warns of contagious impact of fuel subsidy
JAKARTA. Failing to adjust the price of subsidized fuel in the short term would herald a negative effect, not only upon state finances but also upon other macroeconomic fundamentals and would, consequently, weaken the nation’s capacity to respond to external shocks, Bank Indonesia (BI) Governor Darmin Nasution has warned.“Subsidized fuel is a major cause of our current-account deficit. The delay in adjusting the price of subsidized fuel will have an immense effect, injuring other economic sectors as well,” Darmin said on Wednesday at a CEO forum held by Kompas daily.The central bank governor said the fuel subsidies weakened the country’s already shaky external balance, which he identified as “the main weakness of Indonesia’s economy since the New Order era”. Indonesia posted a US$5.3 billion current-account deficit in the third quarter, or 2.4 percent of its gross domestic product (GDP), recovering slightly from the $6.9 billion (3.5 percent of GDP) that it posted the previous quarter, BI data shows. Southeast Asia’s largest economy has posted a current-account deficit for three consecutive quarters this year, primarily because of surging capital goods imports and rising oil imports due to soaring fuel consumption. Darmin argued that, if the government continued to let the fuel subsidies burden the country’s external balance, then it could hinder Indonesia’s ambition to sustain its high economic growth in the long run. “China, irrespective of the recent slowdown, will sustain its economic growth over the next 20-30 years because it does not have such structural weaknesses,” he explained.Besides stressing the country’s external balance, fuel subsidies were bad for the economy as they would only boost energy consumption, Darmin said, adding that it would also widen inequality among Indonesians as the policy was not in effect pro-poor. “Why? Because the fuel subsidies are mostly enjoyed by the upper-middle class,” he said.Fuel subsidies have always been a politically sensitive subject in Indonesia, whose subsidized fuel prices are the lowest in Southeast Asia. A government proposal to raise fuel prices from Rp 4,500 per liter to Rp 6,000 per liter in April was turned down by lawmakers following a series of violent protests throughout the country.As a result of the rejected price hike, government spending on energy subsidies is expected to soar to more than Rp 300 trillion by the end of this year, significantly higher than the Rp 225 trillion allocated in the 2012 state budget. A move to resolve this issue, however, was made in October following approval of the 2013 State Budget Law, which stipulates that the government can adjust energy subsidies without approval from the House of Representatives if there is any deviation in macroeconomic indicators deemed to affect the state’s finances.Finance Minister Agus Martowardojo admitted that the government was “late” in adjusting the price of subsidized fuel. “If only we had adjusted it some time ago, perhaps we would not have a worrying current-account deficit of more than 3 percent,” Agus told reporters on WednesdayHe hinted, however, that the government was not planning to increase fuel subsidies very soon, citing Indonesia’s narrowing current-account deficit and its “manageable” balance of payments. (The Jakarta Post)
