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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Energy Policy, Volume 58, July 2013, Pages 117–134
There is an urgent need for phasing out fuel subsidies in Indonesia due to a severe budget deficit and a worsening of income distribution. Fuel subsidies, of which almost 72% are enjoyed by the 30% of the richest income groups, have consumed on average 63.8% of the total subsidies between 1998 and 2013. This paper aims at evaluating the relationship between existing fuel subsidies and fiscal balance and at analysing the poverty impact of phasing out fuel subsidies. Applying a CGE-microsimulation, this study found that removing 25% of fuel subsidies increases the incidence of poverty by 0.259 percentage points. If this money were fully allocated to government spending, the poverty incidence would decrease by 0.27 percentage points. Moreover, the 100% removal of fuel subsidies and the reallocation of 50% of them to government spending, transfers and other subsidies could decrease the incidence of poverty by 0.277 percentage points. However, these reallocation policies might not be effective in compensating for the adverse impacts of the 100% removal of fuel subsidies if economic agents try to seek profit through mark-up pricing over the increase of production costs.
Indonesia has not been a net oil-exporting country since 2003 and has had decreasing oil production and increasing consumption. Its crude oil production has decreased by roughly 3% per year while overall fuel consumption has increased by roughly 4% per year during last 15 years (OPEC, 2008 and OPEC, 2012). Indonesia is suffering fiscal pressures due to the decrease in oil revenues in the terms of tax and non-tax revenues1 and rapid increase in fuel subsidies.2 This is because fuel prices in Indonesia are not determined by market mechanisms but administratively by the government. These prices are frequently set lower than the international market prices; thus, the government has to fill the price gap with subsidies.3 Oil revenues and fuel subsidies, therefore, always dominate the nation's economic policy agenda when the international oil prices sharply fluctuate. The international oil prices have been unpredictable during the last 10 years. Fig. 1 shows the fluctuation of the 2005 price index of crude oil. The price was 25.95 USD/Barrel (January 2001), 42.89 USD/Barrel (January 2005), 131.52 USD/Barrel (June 2008), 64.65 USD/Barrel (July 2009) and 101.17 USD/Barrel (November 2012). Son (2008) remarked that Indonesia spent 5% of its gross domestic product (GDP) on energy subsidies. In 2008, Agustina et al. (2008) confirmed that the Indonesian government was forced to spend around 27.93% of its total budget on energy subsidies and 80% of this was allocated for fuel subsidies. The government currently plans to allocate nearly 17% of budget to fuel subsidies in 2013. Other developing and emerging economies, where governments have significant influence over domestic prices, have increased fiscal costs, responding to the large increase in international fuel prices during 2003–2006. Baig et al. (2007) observed that, in 2005, fuel subsidies (as a percentage of GDP) cost around 5.8% in Jordan, 9.2% in Yemen, 13.9% in Azerbaijan and 4.1% in Egypt. This condition forced governments to fully pass-through the international fuel prices to the domestic retail prices to reduce fiscal costs. The average price pass-through during 2003–2006 in the net oil importer countries was 1.09 (gasoline), 0.91 (kerosene) and 1.15 (diesel oil) (Baig et al., 2007). Massive fuel subsidies reduce fiscal space so governments have fewer sources to promote economic growth through investment in infrastructure and human capital and also to provide better social protections for low income groups through better targeted subsidies and other social expenditures. Fuel subsidies also worsen income distribution in Indonesia because most of the fuel subsidies are enjoyed by the non-poor groups, rather than by poor groups. Table 1 shows that, in 2008, more than 41% of gasoline subsidies benefitted the top richest income groups in Indonesia. The top 30% of the richest income groups enjoyed almost 72% of gasoline subsidies. On the other hand, kerosene subsidies were distributed more equally to all households compared to gasoline subsidies. Thirty per cent of the lowest income groups consumed 16% of kerosene subsidies and only 4% of gasoline subsidies. This is because most of those in this group rarely own a motor vehicle, so their gasoline consumption is very low. Generally, the richest income group received fuel subsidies of approximately IDR 111,533/month/capita while those for the lowest income group were approximately IDR 10,787/month/capita. In 2001, the government carried out the first initiative on deregulating the domestic fuel prices to reduce fiscal costs, to improve the allocation of appropriate budgetary targets for the poor, and to promote industrial competitiveness. It was enacted by the Presidential Decree No.45/2001 that principally determined retail prices depending on the type of consumers. While prices for households’ consumption, land and water transportations, and small enterprises (henceforth the retail fuel prices) were regulated by the government, the retail fuel prices for industries and fisheries were set at 50% of international prices. Moreover, mining sectors under the Kontrak Karya, oil-gas industries under the revenue sharing contract, foreign-flagged vessels and vessels with overseas destinations had to pay 100% of international market prices. In 2003, the government fully deregulated fuel prices for industries, fisheries, mining sectors, foreign-flagged vessels and vessels with overseas destinations (henceforth the industrial fuel prices) in which the domestic fuel prices are delivered to the market in accordance with the international prices. This policy was regulated with No. 31 K/20/MEM/2003 and 31/KMK.01/2003. Nevertheless, the government still regulated the retail fuel prices for households’ consumption, land and water transportation, small enterprises, and, as of 2005 included small fisheries and public and social services. These are regulated under the presidential regulation No. 55/2005, later revised as the presidential regulation No. 9/2006. A high fuel demand as a consequence of a rapid growing of middle class in Indonesia has forced the government to spend a significant amount of money to subsidise the disparity between international and domestic prices when there is a big gap between the two. During 2000–2009, the government then irregularly adjusted the retail fuel prices following the fluctuation of international oil prices to reduce the fiscal burden of fuel subsidies. Until now, the fuel subsidies have remained an unresolved problem. While Indonesia had on many occasions found it necessary to adjust domestic fuel prices through reducing fuel subsidies, the drastic reduction of fuel subsidies in 2005 resulted in misery for the poor. In addition to increasing the cost of energy, it also indirectly increased non-fuel prices (e.g. increasing the cost of living, food, transportation, etc.). Reduction of fuel subsidies affected households’ welfare as well as poverty depending on the importance of energy and private transport costs in total household consumption and the fuel intensity on the production of goods and services. Since the poor as well as low income groups rarely have an enough saving for consumption smoothing to response the increase of price levels, they will easily fall into poverty (a deeper poverty). According to the Central Statistical Agency (henceforth BPS), the number of poor people increased from 16% to 17.8%, the equivalent of 3.95 million people (1.8% of population) during 2005–2006.4 To mitigate the negative impact of phasing out of fuel subsidies, the government implemented the Program Kompensasi Pengurangan Subsidi-BBM (compensation programme for fuel subsidy reduction) in 2005 and 2008. This programme included cash transfer, health insurance, education subsidies and also rural infrastructure development. Removing fuel subsidies affects low income groups as it decreases their purchasing power, while reallocating fuel subsidies to infrastructure spending can remove infrastructure bottlenecks and create job opportunities. Moreover, reallocating fuel subsidy to education and health spending can equip the poor to be more competitive and creative. Many studies such as Jung and Thorbecke (2003), Fan et al. (2000), Davis et al. (2001) and Roberts (2003) have confirmed that spending on education, health and infrastructure effectively reduces poverty all over the world. Clements et al. (2007) found that the 2005 Indonesian reduction in fuel subsidies, in the short run, increased price levels and reduced household consumption, particularly for the poor. However, in the long-term, given the contribution of subsidy reduction to fiscal sustainability (a precondition for durable economic growth and poverty reduction), the subsidy reduction was beneficial to the poor. Although reallocating fuel subsidies either into infrastructure developments or human capital investments or social expenditures might increase poverty in the short run, it may decrease it in the long run, due to improvements in infrastructure, increases in human capital and a better provision of social protections. This paper then aims at addressing the following three main questions: first, what is the relationship between existing fuel subsidies and fiscal balance? Second, how large is the impact on poverty when fuel subsidies are removed? Third, how effective are reallocation policies in protecting low income groups from the adverse impacts of removing fuel subsidies? This paper contributes to the debate on the fiscal and poverty impact of phasing out fuel subsidies in Indonesia by offering a comprehensive picture of the oil industry and development of the fuel price system and also by providing an overview of the linkages between the existing retail fuel price systems and the fiscal costs, and the poverty impact of phasing out fuel subsidies. The results of analysis will thus be of benefit to Indonesia's policy makers in designing a better method of removing fuel subsidies that can guarantee both the long run fiscal sustainability and have the minimum adverse impact on the low income groups. In the following section, this paper briefly reviews the current condition of oil production and fuel consumption in Indonesia and subsequently introduces the history of fuel price regimes in Indonesia for 1970–2012. Section 4 discusses the existing fuel subsidies and fiscal balance. Section 5 reviews the need for deregulation of retail fuel prices and the literature review of the poverty impact of phasing out fuel subsidies. A review of the research methodology of a CGE microsimulation analysis and the simulation scenarios is given in Section 6. Section 7 analyses the poverty impact of removing fuel subsidies and reallocating the saved money to protect the poor from the adverse impacts. Finally, the concluding section of the paper will summarise the key findings and discuss policy suggestions for possible reallocation policies to reduce adverse impacts.
نتیجه گیری انگلیسی
There is an urgent need for phasing out fuel subsidies in Indonesia due to a worsening of income distribution and a severe budget deficit as the costs of fuel subsidies rise. The causes of this rise include declining oil production, a high crude oil price, and a massive increase in fuel consumption led by the rapid growth of the middle class, and reluctance by the government to reform the retail fuel prices. The success of gradual deregulation of industrial fuel prices during 2001–2003 should inspire the ruling government to adopt a non-populist policy of phasing out fuel subsidies to achieve long run fiscal sustainability, to promote efficient of fuel consumption and to improve income distribution. A gradual reform of phasing out fuel subsidies is needed to prepare households for the situation when international fuel prices have 100% pass-through into the domestic market since Indonesian oil reserves are predicted to only last another 15–20 years. It is also needed to increase the fiscal space for promoting economic growth as well as for providing more targeted and better social protection. Fuel subsidies make up on average 18% of total government spending, while since 2004 the share of development expenditure to total spending in Indonesia has been lower than the share of fuel and energy subsidies. Fuel subsidies, mostly enjoyed by middle and upper class, also consumed an average of 63.8% of the total subsidies during 1998–2013. Transferring fuel subsidies from middle income to poor households would improve income distribution and accelerate more equal economic growth. Furthermore, if the government had been successful in cutting fuel subsidies by 51% in 2011, there would have been no budget deficit in that year. A promising strategy for reforming the fuel subsidies combines gradual fuel subsidy reduction with compensation and reallocation policies. The CGE microsimulation results show that reducing fuel subsidies by 25% increases poverty incidence by 0.259 percentage points. However, if the saved money is fully allocated to government spending and transfers, the adverse impact can be cancelled out; even the poverty incidence will be reduced by 0.27 percentage points. In addition, removing 100% of fuel subsidies and then reallocating 50% to government expenditures, government transfers and other subsidies does not have an adverse impact on household welfare; the poverty incidence even slightly decreases by 0.071 percentage points (SIM9) and 0.277 percentage points (SIM10). However, this reallocation budget might not effectively compensate for the adverse impacts of the 100% removal of fuel subsidies if the economic agents try to seek gains through mark-up pricing surpassing the increase in production costs. Hence, the government should perform price surveillance that can be used to determine how much prices should be increased in respond to the removal of fuel subsidies. Moreover, the budget reallocation should focus on government spending rather than on government transfers due to the effectiveness of the former in reducing poverty.