Black Hole Or Black Gold? The Impact Of Oil And Gas Prices On Indonesia's Public Finances

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Phasing Out Energy Subsidies in Indonesia

“…Surveys suggest that fuel consumption increases with income levels ( Figure 5, Panel A). As a result, more than 90% of fuel subsidies benefit the 50% of the richest households in Indonesia (Agustina et al, 2008). This is broadly in line with official views.…”

“…On the fiscal front, lowering the amount of fuel subsidies by one-fourth (this would correspond to a 15% rise in all subsidised energy prices) is estimated to generate savings of USD 2 billion per year (0.2% of GDP) (Agustina et al, 2008). This decrease would also lower the public account's vulnerability to movements in international energy prices (Figure 7).…”

“…In 2006 the kerosene subsidy per litre was 202% of the sales price (after tax) as opposed to 27% for gasoline and 39% for diesel (Agustina et al, 2008). The central government has been working towards reducing energy subsidies through energy price increases and other measures for several years.…”

Fiscal Policy for Inclusive Growth: An Overview

“…In Indonesia, more than 90% of fuel subsidies benefit half of the richest households. In India, the richest 10% of households receive seven times more in benefits than the poorest 10% (Agustina et al 2008 andAnand et al 2013).…”

“…This priority was perfectly understandable in light of Asia's low income levels in the past; however, more recently, new fiscal demands have emerged. Counter-cyclical fiscal stimulus made possible by adequate fiscal space proved invaluable in fending off recession during the global crisis of 2008-2009(ADB 2010. Going forward, a key fiscal challenge is that of leveraging fiscal policy for more inclusive growth.…”