Indonesia will save about $18 billion from the biggest overhaul of its decades-old fuel subsidy system, allowing the government to double spending on transportation, agriculture and public works.
The government will save 230 trillion rupiah ($18 billion) in total from the fuel subsidy change and 60 percent of that will be spent on infrastructure, Finance Minister Bambang Brodjonegoro told reporters Monday. The government plans to double spending on transportation from last year, said Energy and Mineral Resources Minister Sudirman Said in a Bloomberg Television interview with Angie Lau.
“What happened is shifting the subsidy from consumption into more productive spending,” the energy minister said, adding savings will increase in coming years. “Because of the policy this year 2015, the public works, the transportation sector and the agriculture will double the capital expenditure budget.”
President Joko Widodo scrapped the subsidy for gasoline on Jan. 1 and capped the amount of aid for diesel, joining India and Malaysia in taking advantage of plunging oil prices to wean their nations off government subsidized fuel. Indonesia had been subsidizing fuel since the first oil price shock in the 1970s and kept prices at less than $0.20 per liter until 2005, according to a World Bank report published in March.
Historic Shift
The budget for public works such as roads, housing and irrigation will be more than twice the original allocation, while more money will be set aside for farmers and the agriculture sector, the energy minister said. Building infrastructure for the oil and gas industry and electricity will also be part of the government’s focus this year, he said.
“These remarks indicate a historic turning point – where Indonesia puts itself in a position to finally save money from unproductive subsidies and shift it to invest in future growth,” said Wai Ho Leong, a Singapore-based economist at Barclays Plc.
PT Garuda Indonesia , the nation’s state airline, rose 8 percent, the most in five weeks, while taxi operator PT Blue Bird gained 2.1 percent to a record close.
Dismantling the subsidy program is a political hot potato – protests accompanied past price increases and riots spurred by soaring living costs helped oust dictator Suharto in 1998.
The government spent 240 trillion rupiah on fuel subsidies in 2014, Brodjonegoro said. The country’s budget deficit may be cut to below 2 percent of gross domestic product in 2015, from a level of 2.26 percent last year, he said. The government can build many ports, bridges and roads with the savings and inject 30 trillion rupiah into state enterprises, Brodjonegoro said.
“The challenge would be of course the response from the public, but I have confidence that if we communicate well, then they will understand” and in the longer term it is going to be a much better budget structure, the energy minister said.
