The Indonesian government needs to redirect spending from the fuel subsidy to public investment to accelerate growth and make it more sustainable and inclusive, the Jakarta Post quoted World Bank's latest quarterly report as saying on Wednesday.
"With the recent upward trend in global oil prices, Indonesia' s budget deficit could range between 2.5 and 3.1 percent of GDP -- nearing or even surpassing the 3 percent threshold allowed by law - - if the government did not raise subsidized fuel prices this year to ease strain on the state budget," said Shubham Chaudhuri, lead economist for World Bank office in Indonesia.
Fuel subsidies were "fiscally unhealthy", but beyond that, there were "opportunity costs" for infrastructure development, education spending and social safety nets, he added.
"Even without global oil prices going up, fuel subsidies still need to be cut because there are other developmental needs. So, it' s not only about protecting the budget, but also about creating faster and more equitable growth," Chaudhuri told a limited press briefing on Tuesday.
The House of Representatives has passed a bill that allows the government to raise subsidized fuel prices from 4,500 rupiah (50 U. S. cents) per liter, but only if the benchmark of Indonesia's Crude Price (ICP) six-month average is above 15 percent over the assumed 105 dollars per barrel ICP in the revised 2012 state budget.
In the past six months, the average ICP stood at 116.5 dollars, or almost 11 percent higher than the state budget ICP assumption, with economists estimating that the price deviation would reach 15 percent by May at the earliest -- allowing the government to raise subsidized fuel prices by June.
"Our projection, given the ICP tracking of Brent futures ( global oil prices), is that by June or July we expect the threshold to be breached," Chaudhuri said.