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NEWS UPDATES Asean Affairs             26  July 2011

SBY warns of subsidy cuts to infrastructure

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President Susilo Bambang Yudhoyono vowed on Monday to boost spending on infrastructure next year at the cost of subsidy cuts on programs including fuel and electricity to trim the budget deficit.

“I don’t want this government work plan and the state budget proposal to be merely mechanical, every year just the same with a few modifications here and there,” Yudhoyono said before a cabinet meeting to discuss the 2012 state budget. “It must be based on priorities and agendas we’ve set beforehand.’’

Economists and international financial institutions such as the World Bank and the International Monetary Fund have urged Indonesia to prioritize infrastructure development to achieve economic growth.

They argue that Indonesia has been constrained by high subsidy expenditure, especially for fuel and power, and those costs accounted for around 15 percent of this year’s state budget.

“Reducing the subsidies could create fiscal space for other purposes, the most important being for infrastructure,” said Eric Alexander Sugandi, an economist at Standard Chartered Bank in Jakarta. “The government has to make sure that those funds are disbursed.”

Last week the House of Representatives agreed to spend an additional Rp 33 trillion ($3.8 billion) on fuel subsidies, as the government failed to control subsidized fuel consumption.

According to data from downstream oil and gas regulator BPH Migas, subsidized fuel consumption in the first six months reached 19.6 million kiloliters, or 51 percent of the 38.5 million kiloliter quota set in the state budget. The government then raised this year’s quota to 41 million kiloliters in the revised budget approved by lawmakers last week.

The revised 2011 budget raised energy subsidies across the board, earmarking Rp 127.9 trillion for fuel and Rp 65.6 trillion for electricity subsidies — a 61 percent increase over last year’s budgeted electricity funds. The revised budget totals Rp 1,320.8 trillion, up from original forecasts of Rp 1,229.6 trillion.

Milan Zavadjil, the IMF’s resident representative for Indonesia, said subsidy spending only weakened the country’s budget, limiting government capacity to spend on infrastructure development and social works.

In the revised budget the government has earmarked Rp 136.9 trillion for spending on infrastructure projects such as roads, bridges and ports. That was 0.6 percent less than the original sum of Rp 137.8 trillion.


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