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NEWS UPDATES Asean Affairs        4  May 2011

Indonesia urged to stop fuel subsidies

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The International Monetary Fund (IMF) has urged Indonesia to reconsider its priorities as it tries to spur Indonesian economic growth and create more jobs.

Milan Zavadjil, the IMF’s senior representative in Jakarta, said the government should direct its resources toward upgrading the country’s infrastructure rather than fuel subsidies.

“Action to reduce subsidies is important. It’s not only because of the increasing global price of oil, but it is also such an unproductive way of spending the government’s resources,” Zavadjil said on Tuesday as the IMF released its regional economic outlook.

Continued spending on fuel subsidies would leave the state budget vulnerable to changes in oil prices, he continued, leading to increased borrowing requirements and bigger budget deficits.

“The funds would be better spent in infrastructure or social protection,” he said.

The Finance Ministry said last week that fuel subsidies could increase by Rp 4 trillion to Rp 6 trillion (US$468 million to $702 million) this year if oil prices, which were $112.45 per barrel in New York on Tuesday, continued to rise. The government set aside Rp 95.9 trillion for fuel subsidies in the 2011 state budget, which assumed oil prices at $80 per barrel.

Zavadjil said he believed the government was committed to reducing fuel subsidies, which he admitted would be politically difficult. The government has stated it plans to eliminate subsidies for electricity and fuel by 2014 to relieve the burden on the state budget.

Rather than throw more money at keeping fuel prices low, Zavadjil said, the government would be better served by instituting social protection policies that guarantee health facilities for the poor, pension packages and unemployment benefits.

“In Indonesia, it could mean reintroducing a conditional or unconditional cash transfer program,” he said.

Hatta Rajasa, the coordinating minister for the economy, said the government wanted to direct the fuel subsidies to the people who needed them most rather than fund affluent citizens’ spending.

“In making these changes, we will need to pay extra attention and be prudent. It will not be easy,” Hatta said.

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