In Brief

Energy subsidies in Indonesia are threatening to get out of hand. What is very worrying is that Finance Minister Sri Mulyani recently warned that total energy subsidies (which include both fuel and electricity subsidies) might reach Rp 300 trillion (around $US 32.5 billion) next year. This would amount to a 50% increase over the level for the current 2008 fiscal year which is now expected to reach Rp 200 trillion (around $US 22 billion).

Minister Sri Mulyani made her warning on the basis of an assumption that international oil prices might remain around $140 per barrel. Even making the optimistic assumption that oil prices will fall somewhat, it will be hard to contain total energy subsidies in the 2009 fiscal year to less than (say) Rp 230 trillion. This would be around 20% of total forecast government spending in 2009 (currently predicted to be around Rp 1,150 trillion, or close to $US 130 billion). To be spending as much as 20% of the government budget on energy subsidies is no fiscal joke. And some members of parliament have openly speculated that the share of government spending going to energy subsidies could go much higher.

Two points need to be borne in mind in considering the situation. One is that the headline figure to watch is the size of the “energy subsidy”. The “fuel subsidy” and the “electricity subsidy” are included within the total level of the energy subsidy. A focus on just the fuel subsidy or the electricity subsidy alone masks the true size of the problem.

The second is that essentially, the problem concerns prices. Close to four decades ago the international development community spent time discussing the importance of “getting prices right”. It seems that we need to revive discussion of this central issue in development policy.