In­done­sia dou­bles trans­port bud­get on $18b fuel gains

The Pak Banker - - INTERNATIONAL BUSINESS/SPORTS -

In­done­sia will save about $18 bil­lion from the big­gest over­haul of its decades­old 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 to­day. 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 to­day.

"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.

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 (GIAA), the na­tion's state air­line, rose 8 per­cent, the most in five weeks, while taxi op­er­a­tor PT Blue Bird (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, en­ergy min­is­ter said.

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