JAKARTA: The government has sent mixed signals over a plan to restrict sales of subsidised fuel starting on Aug 17, as it grapples with fighting air pollution in Jakarta while hoping to save trillions of rupiah in subsidy spending.

Experts believe the move, which currently remains under deliberation, could play into inflation and reduce people’s purchasing power, thereby risking shock to the economy.

Coordinating Maritime Affairs and Investment Minister Luhut Pandjaitan first revealed the plan on July 9 on his Instagram account, saying the government would make subsidised fuel available only to eligible customers, citing that it could help lighten this year’s budget amid declining revenue.

The government would also ensure that fuel sold in Jakarta meets the Euro 4 emissions standard of containing no more than 50 parts per million (ppm) of sulfur, from around 500 ppm currently.

The government has been mulling over restricting purchases of subsidised fuel since 2022 as the fuel subsidy overshot the budget allocation amid a surge in oil prices and a weakening exchange rate.

However, it later delayed the plan out of fear that it could limit purchasing power, especially after it opted to hike subsidised fuel prices in 2022, which had remained unchanged for years, to reign in the ballooning subsidy.

Coordinating Economic Minister Airlangga Hartarto told reporters on July 11 that the government had not yet made a decision regarding the restriction and stressed that deliberations were still ongoing.

Meanwhile, Energy and Mineral Resources Minister Arifin Tasrif said that the government was still working on specifying which vehicles would still be able to purchase the subsidised fuel, but assured that there was no such plan to make it off limits in mid-August.

Agus Cahyono Adi, spokesperson for the Energy and Mineral Resources Ministry, clarified that the government was working on a pilot programme to introduce “low sulfur solar” fuel at several gas stations in the country that is set to start on Aug 17.

The fuel is intended for people who are not eligible for fuel subsidies and would come at a higher price. The plan would also be expanded to gasoline products in the future, as the government has a long-term plan to phase out dirty and subsidised Pertalite fuel.

Minister Arifin, however, admitted that producing much lower sulfur fuel could incur additional costs and the government would need to see the readiness of its refinery.

Eddy Soeparno, deputy chairman of House Commission VII overseeing energy policy and a member of president-elect Prabowo Subianto’s campaign team, emphasised the urgency of fuel-subsidy restriction to be more targeted.

“It is a necessity, not an option. About 80% of fuel subsidies, around 130 trillion rupiah or about US$8.03bil, is used by ineligible people. Imagine the savings,” Eddy told The Jakarta Post last Friday.

Abra Talattov, head of the Centre of Food, Energy and Sustainable Development at the Institute for Development of Economics and Finance (Indef), said that a significant portion of the fuel subsidy was going to high-income individuals.

A simulation by Indef showed that 74% of the total fuel subsidy, around 200 trillion rupiah, goes to the top-60% income group.

The government has projected that the country’s fiscal deficit will reach 2.7% of gross domestic product (GDP) this year, just a tad below the maximum 3%-of-GDP cap permitted by the 2003 state finance law, citing increases in subsidy and social-aid spending.

Abra said having a deficit close to the cap might limit Indonesia’s fiscal room to weather external shocks. “I think the statement from Luhut is a ‘push’ for President Joko Widodo to make an immediate decision, so it would not be a bad legacy for the incoming government,” Abra said last Saturday.

Restricting sales of subsidised fuel, however, could risk a surge in inflation, which would add an extra burden to prolonged food inflation, he said, and this could resemble “a double shock” to the economy.

He suggested that the government provide a clear transition period and evaluate the impact along the way.

 - ANN