May 31, 2022
JAKARTA – Forget, for a time, our commitment to reforming the energy sector in light of our national commitment to reducing carbon emissions. Instead, let’s burn billions more in cheap gasoline and other fossil fuels to support post-pandemic recovery and tame inflationary pressures.
That’s basically the implicit message of the budget management amendments Finance Minister Sri Mulyani Indrawati proposed last week to the House Budget Committee to address the energy and food crisis.
The government has proposed to nearly triple its energy subsidy for this year to 443.6 trillion rupees ($30.5 billion) or 2.5% of GDP in a bid to keep domestic fuel prices well below the spike international oil and natural gas prices. Even the price of electricity, which is still mainly produced by coal and natural gas, will be maintained for the majority of consumers.
The government will also increase social assistance from 18.6 trillion rupees to 431 trillion rupees to shield people from the inflationary impact of food and energy prices. But surprisingly, the projected budget deficit is expected to fall from an earlier estimate of 4.85% to 4.5% of GDP without increasing debts for the whole year. This reduction in the deficit target makes it easier for the government to return to the legal budget deficit ceiling of less than 3% of GDP next year.
How is the government going to finance all this extravagant spending on the social safety net and subsidies?
It’s just a matter of luck. Windfall from the commodity boom, particularly coal, palm oil and several other minerals, is likely to continue to boost state revenue from Rs 443 trillion to Rs 2.26 quadrillion this year, according to government estimate.
Fiscal policy shows that the government will focus on strengthening the role of the state budget to absorb the impact of soaring food and energy prices, thereby maintaining the level of purchasing power of the population, while controlling inflation and mitigating the risk of capital outflows linked to the anticipated acceleration of the US Federal Reserve’s monetary tightening policy.
We agree with the government’s budgetary position that protecting people’s purchasing power will help maintain the post-pandemic recovery. The fact is that if domestic fuel prices are fully adjusted to international prices, the cost to the economy could be even higher, due to increased inflation, which could lead to lower consumption, forcing Bank Indonesia to raise interest rates and ultimately leading to larger outflows of foreign capital from government bonds.
It should be recalled that our current inflation rate, which is already above target, has not yet taken into account the sharp price increases forecast for two other food staples due to global supply shortages. . We depend on imports for 100% of wheat consumption and nearly 65% of soybean consumption.
So the name of the game is “for the sake of survival” in an emergency situation. But we reaffirm our suggestion that most price subsidies should be distributed through a well-targeted social assistance program, rather than being commodity-based.