Indonesia, which introduced a new fuel subsidy scheme on Jan. 1, will re-deploy at least 120 trillion rupiah (USD9.5 billion) in savings to the transport and other sectors which will see a doubling in their capital expenditure budget this year, according to Energy and Mineral Resources Minister Sudirman Said.
“What happened is shifting the subsidy from consumption into more productive spending,” the minister said. “Because of the policy this year 2015, the public works, the transportation sector and the agriculture will double the capital expenditure budget.”
On Jan. 1, Indonesia abolished its gasoline subsidy, established new base prices and placed a cap on kerosene and diesel fuel subsidies. Tackling the enormous fuel subsidy bill, which represented 17% of central government expenditures in 2013, has been a priority of President Joko Widodo since his election in late 2014.
The price of premium gasoline is now IDR7,600 (USD0.60) and diesel fuel is now IDR7,250 (USD0.57). The diesel subsidy is fixed at IDR 1,000 (USD USD0.08) per litre, while the base price will be monitored monthly.
Indonesian consumers, which have enjoyed lower fuel prices due to government subsidies in the past, a legacy of former President Suharto, will now need to be prepared for prices to change along with changes in global crude oil prices and fluctuations in the U.S. dollar-Indonesian rupiah exchange rate. Indonesia is particularly vulnerable to fluctuating fuel prices because it is a net importer of oil products.
Reducing the fuel subsidies in this way means that the government could spend about 75% less on fuel subsidies, according to Finance Minister Bambang Brodjonegoro. For 2015, IDR276 trillion (about USD22 billion) has been earmarked for fuel subsidies.
Lifting the subsidy also means that foreign companies such as Total and Shell will be able to sell 88 RON gasoline in Java, Madura and Bali. Outside of those islands, however, only state-owned Pertamina will be able to sell the fuel, according to Ahmad Bambang, trading and marketing director for Pertamina.
Besides ending the gasoline subsidy, the government has also given Pertamina two years to phase out 88 RON gasoline which will be replaced with 92 RON gasoline, according to Said.
