Jakarta. The government must eliminate energy subsidies to help finance infrastructure development to achieve sustained high economic growth, the International Monetary Fund said in a series of reports released on Friday. The reports found that one-third of total central government spending over the past decade went to fuel subsidies, an allocation they deemed “inefficient, inequitable and environmentally unfriendly.” They also concluded that fuel subsidies left the government vulnerable to oil price volatility. And the criticisms did not end there. The reports further warned that the government’s recent proposals to cap fuel consumption in an effort to limit subsidy spending “may not be the best way to reduce subsidies, as such an approach has high administrative costs, could possibly create a black market for fuel products and would require a mechanism for identifying and reaching target groups.” The IMF did, however, applaud July’s electricity price hikes as “a step in the right direction.” But the reports stressed Indonesia’s need for improved infrastructure, saying that a failure to raise money for infrastructure projects could limit the country’s economic growth. In recent competitiveness rankings published by the World Economic Forum, Indonesia’s infrastructure ranked 82nd globally. Meanwhile, the National Development Planning Agency (Bappenas) has estimated that the government needs to spend Rp 2,000 trillion ($216 billion) on infrastructure development between now and 2014. Hoping to free up funds for infrastructure, the government has recently shown an eagerness to cut subsidies. But efforts have proceeded slowly. In March, it announced plans to eliminate all fuel and electricity subsidies by 2014 to ease the strain on the state budget. Still, it allocated Rp 57.46 trillion ($6.21 billion) for fuel subsidies and Rp 54.5 trillion for electricity subsidies in the revised 2010 budget. Luckily, economists think current moderate oil prices give the government flexibility to reduce subsidies gradually without paying too high a price. “There is a window of opportunity in the next one or two years, as energy prices will not increase too much,” said Helmi Arman, an economist at Bank Danamon. “This allows the government to lower subsidies gradually and phase in fuel price increases. That’s better than a steep increase, which would spur inflation.” Standard Chartered economist Fauzi Ichsan said that during a phase-out period, the government should ensure that the poor benefit the most. “The government should make a more targeted subsidy scheme, unlike now, when the rich also receive subsidies,” he said. Political opposition, though, has proven a big obstacle to slashing subsidies. The business community, for instance, was particularly averse to any electricity rate hike greater than a few percentage points. However, Harry Azhar Azis, deputy chairman of House Commission XI, dealing with finance and development planning, on Friday said infrastructure spending must take priority. “I think we can make room for Rp 10 trillion next year by eliminating electricity subsidies for the rich,” he said. But Harry acknowledged the challenges. “The House will discuss the political impact as well,” he said.
