Indonesian govt will raise subsidy to shield people from inflation, says Finance Minister Sri Mulyani

Finance Minister Sri Mulyani Indrawati is ready to increase budget spending to protect consumers – and Indonesia's economic recovery – amid surging inflation. - AFP

JAKARTA, May 16 (Jakarta Post/ANN): Finance Minister Sri Mulyani Indrawati is ready to increase budget spending to protect consumers – and Indonesia's economic recovery – amid surging inflation.

She conceded that energy subsidies were perhaps “not the best option” because the poor may not enjoy the benefits as much as the middle to upper class, but said political considerations needed to be taken into account as well.

“The [question] is actually [whether it is worth] the political and social upheaval at this very moment, especially after two-and-a-half years in a very, very dire situation,” Sri Mulyani told The Jakarta Post in an interview.

The minister ruled out for now another option previously considered by the government, namely to pass high energy input prices on to consumers and businesses through a hike in government-mandated energy prices.

Asked whether domestic energy price hikes were completely off the table, she said this would depend on how high oil prices might go.

Unlike some other emerging economies, Indonesia had the “fiscal space” to cushion Indonesians from the impacts of high global prices, the minister explained, referring to export revenue that allows the government to use state budget funds as an inflation shock absorber.

“I think this is more a political choice. So, it's not a technocratic choice in that we can always choose. There is always a calculation in terms of the price of each policy,” she added.

Indonesia’s inflation rose to three-year high of 3.47 percent in April as price controls were lifted on commodities like packaged-cooking oil and nonsubsidized gasoline of the Pertamax brand, and as the Ramadan festive month and increased mobility led to higher demand.

Despite some hailing inflation as a sign of recovering demand, Sri Mulyani chose to keep a watchful eye, arguing that it stemmed mostly from the supply side, induced by external factors like the war in Ukraine and an uneven global recovery.

Meanwhile, the economic recovery was still fragile, she said, adding that inflation – if not managed correctly – would threaten consumer spending, which is a key growth engine for Indonesia, and potentially hamper efforts to reach economic growth above 5 percent this year.

Subsidy impact on budget deficit

Sri Mulyani said increased subsidy spending would not derail her plan for fiscal consolidation, stressing that President Joko “Jokowi” Widodo had explicitly asked that the deficit be brought below 3 percent of GDP next year, as scheduled.

The consolidation plan ruled out the option to increase debt financing to accommodate higher spending, which would become more costly as monetary policy is tightened through higher interest rates in many countries.

Instead, the government is banking on a significant increase in state revenue amid surging prices for key export commodities from the country. Indonesia is a leading exporter of numerous commodities, including crude palm oil and coal.

The Harmonized Tax Law (HPP) passed last year is likewise expected to bolster state income. Sri Mulyani said the government would also cut “non-priority” spending.

“Because the revenue will increase dramatically, it can offset [higher subsidy spending]. So basically, by the end of the year, the expectation of the budget may not be worse off,” Sri Mulyani said.

Palm oil export ban

Sri Mulyani conceded that the state had forgone significant revenue as a result of the government’s ongoing export ban on palm oil products. “We know that this is a very, very costly measure."

However, she vowed the government would strive to find the right way to both protect domestic consumers [from high cooking oil prices] and manage the bumpy global environment.

Economist response

M Rizal Taufikurahman, who heads the Centre of Macroeconomics and Finance Institute for Development of Economics and Finance (INDEF), said on Wednesday that allowing price adjustments on subsidized energy commodities would dampen economic growth and disrupt the recovery.

The combination of higher electricity prices and higher prices for gasoline and liquified petroleum gas (LPG) would shave at least 0.12 percentage points off GDP growth, according to his estimates, as the higher prices would take a toll on household spending.

The impact would be amplified, he argued, by the government’s hike in value-added tax (VAT) by 1 percentage point to 11 percent in April. “The momentum of the economic recovery must be maintained.

The government would want to reconsider these [price] hikes,” Rizal said in an online briefing.

Meanwhile, economists from state-owned lender Bank Mandiri estimated that rising prices of subsidized fuel and electricity would bring the inflation to 4.6 percent, surpassing Bank Indonesia's upper limit of 4 per cent and likely prompting a 75-basis-point benchmark rate hike in the second half of this year.

“We know the rise in inflation is happening everywhere, not just in Indonesia, but the government needs to ensure the rise will not disrupt economic recovery this year,” Mandiri economist Faisal Rachman told the Post. - Jakarta Post/ANN


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