Indonesia: High oil prices put new strains on state budget

  • Surging global oil prices have put fresh strains on the state budget as the government seeks to balance higher subsidy spending with fiscal consolidation plans.
  • International oil benchmark Brent exceeded USD120 a barrel, double the USD63-per-barrel assumption in the 2022 state budget, as the Ukraine crisis exacerbated a rise in oil prices that had stemmed from the global economic recovery from the pandemic.
  • In the 2022 state budget, the government allocated IDR455.62tr for economic recovery programs and IDR77.5tr for liquefied petroleum gas (LPG) and diesel subsidies, with the assumption that oil prices would stand at USD63 per barrel.
  • The Finance Ministry has claimed that Indonesia will gain a net benefit from high oil prices, with every USD1 increase supposedly raising revenue by IDR3tr and spending by IDR2.6tr, netting a IDR400bn surplus.
  • However, Komaidi pointed out that the ministry’s estimate did not account for compensation paid to state-owned oil giant Pertamina for distributing subsidized fuel.
  • Such funds are technically categorized as “compensation” and not “subsidies”. The situation is also complicated by the fact that the country has been a net oil importer since 2004.
  • Around 60% of the national oil demand is met by imports. Komaidi estimated that if the compensation was taken into account, state spending on fuel subsidies would be IDR3.5tr-IDR4tr for every USD1 increase in oil prices, wiping any windfall for the state budget.
  • Pertamina has raised the prices of its unsubsidized fuels, which account for 15% of national fuel consumption, in response to rising crude oil prices, but it has so far maintained the price of subsidized fuels.
  • Pertamina spokeswoman Fajriyah Usman said that the company would maintain the price of subsidized fuel Pertalite, which accounts for 50% of the nation’s fuel consumption, and that the company was in talks with the government over the compensation plan.
  • The rise in oil prices has raised questions about whether policymakers will revise the state budget.
  • House of Representatives Budget Committee (Banggar) chairman Said Abdullah said budget adjustments would likely be discussed at the mid-year review of the budget, which is usually held in June or July.
  • He said the House would support government plans to amend the budget but suggested that the government simply reallocate the existing funds, as this path could allow the executive to bypass the legislature using its special COVID-19 emergency powers.
  • “If needed, a budget amendment would require at least one month, but the government needs to act fast. The House would not want to slow the government down,” Said told The Jakarta Post.
  • Djoko Siswanto, secretary-general of the National Energy Council (DEN), said that the effect of surging oil prices on the budget would be more apparent near the end of 1H22.
  • He said the effects would remain manageable as Pertamina had only raised the prices of nonsubsidized fuels, but he acknowledged that a prolonged war in Ukraine might require the state budget to be altered.
  • “The oil price assumptions and the subsidies, among many other things, will have to be reviewed if the war lasts until June. But I hope it will not be that way,” he said.

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