the age-old dilemma of energy subsidies in Indonesia; Government adds US$20 billion to 2022 budget

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Moreover, the poverty line set by Indonesia is generally low (just over 1.00 USD per day), which is well below the threshold used by the World Bank (at 1.90 USD per day). In other words, if we used the World Bank threshold on Indonesia, then we would see a significant increase in the country’s poverty rates. And so, poverty is actually a bigger problem in Indonesia than official government data shows. With this in mind, even slight inflationary pressures can plunge millions of Indonesians into utter poverty. Therefore, state aid in the form of cheap energy (in a context of rising inflation) effectively helps to preserve the purchasing power of citizens.

On the other hand, various international organizations have repeatedly voiced criticism of Indonesia’s energy subsidy policies over the past two decades, for a number of reasons:

  • Energy subsidies create market distortions because they keep fossil fuel prices artificially low (which is why the prices of virtually all goods and services in society are kept artificially low). It also encourages overconsumption and pollution. And, in the case of Indonesia, where infrastructure development is generally insufficient, this also leads to traffic congestion (which also leads to economic costs);
  • Many doubt that energy subsidies are effective in reducing inequality and poverty, as most of the benefits accrue to wealthier households who already have high levels of consumption. A few years ago, the World Bank concluded that the richest decile of Indonesian households consumed around 40% subsidized gasoline, while the poorest decile consumed less than 1%. The World Bank therefore believes that direct benefit transfers are much more efficient. However, we must add here that cheap fuel also allows various (food) products and services to be cheaper because transportation costs are lower. Thus, indirectly, we see a significant benefit for the poorest households obtained from low energy prices;
  • Spending on energy subsidies (for consumption purposes) implies that there are missed opportunities in terms of public financing for productive purposes (such as social protection, health, education and infrastructure);
  • At some point, energy subsidies for fossil fuels must be phased out because the availability of fossil fuels is limited, which means they are becoming more and more expensive. The longer governments wait before cutting subsidies, the more it will hurt once the subsidies are removed. However, this point is no longer really valid because there have been great advances with renewable energy sources. Therefore, long before fossil fuels run out, there will be a shift to renewables. However, to facilitate this change, it may be best for governments to focus on subsidizing renewable energy sources.

These energy subsidies have also become political tools. We have often seen that the Indonesian government becomes more generous in terms of energy subsidies before the general elections. Meanwhile, the cut in energy subsidies is bound to be met with protests in the streets (encouraged by political opponents of the ruling parties).

Meanwhile, the above points imply price reductions for the end user. But there are also production subsidies in the form of tax incentives or the cost recovery system.

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