Subsidised Fuels Limitation in Indonesia Pushed by IMF and World Bank

JAKARTA, KOMPAS.com - Indonesia’s parliament on Tuesday approved a bill to stop private cars using subsidised fuels early next year, a move that will cut public spending but increase pressure on inflation.

The policy, which will be implemented from March next year starting in Jakarta, has been pushed by the International Monetary Fund and the World Bank as a means of unlocking funds for infrastructure development.

“There are many people who are well-off but still benefit from fuel subsidies. This is unfair and off target,” said United Development Party lawmaker Romahurmuziy, who is on parliament’s energy commission.

“The richest 25 percent of the people here consume 77 percent of fuel subsidies. Subsidies should be geared toward those who are not well-off.” 

Private car owners will have to pay market prices of around 5,600 rupiah (62 cents) for a litre of higher-grade fuel, instead of 4,500 rupiah at the subsidised price. Subsidised fuel will be available only for public transport and motorcycles, the ride of choice for scores of millions of Indonesians.

However, the government warned that the scheme could boost inflation in the Jakarta area by as much as 0.15 percentage points next year. Inflation accelerated in November, with the consumer price index up 6.33 percent year on year, from 5.67 percent in October, putting pressure on interest rates.

The new rules for private cars will be applied to the rest of Java and Bali islands in the second half of 2011, and the rest of the country by 2013. Indonesian Transportation Society figures show there are about 10 to 12 million private cars and about 55 million motorcycles in Indonesia.

“As there are about five to six million private cars in greater Jakarta alone, the new policy could result in a significant reduction of private car usage in the area,” analyst Heru Sutomo said.

Finance Minister Agus Martowardojo said the new policy would likely cut the use of subsidised fuel by about nine percent to about 38 million kilolitres next year. Fuel subsidies which help make Indonesia’s retail gasoline prices among the cheapest in the world are forecast to cost some 89 trillion rupiah (9.8 billion dollars) in 2010.

Analysts say the money could be better spent on education, hospitals and infrastructure like roads and ports to boost growth and investment in Southeast Asia’s biggest economy. Environmentalists also argue the subsidies are wrong-headed given problems with air pollution and greenhouse gas emissions associated with the explosive growth in private vehicle ownership in the country.