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2015/FMP/WKSP1/018 Session: 5

Indonesia Subsidies Policy

Submitted by: Indonesia

Workshop on Fiscal Management Through Transparency and Reforms

Bagac, Philippines9-10 June 2015

Indonesia Subsidies Policy

APEC Workshop on Fiscal Management through Transparency and Reforms

June 9-10, 2015

Dr. ParjionoDirector

Center for Regional and Bilateral Policy

The Ministry of Finance

Outline

Fiscal Policy

Subsidy Reform

Challenges

Fiscal Policy

Macroeconomic Stability

Strengthen Budget

Structure

Real Sector and Investment

Support

Achieve Macroeconomic Stability

Main focus to improve current account profile

Better fiscal profile through larger fiscal space

Sustainable revenue source

Quality of spending –more productive expenditure

Manageable fiscal deficit

Provide better targeted incentives for investment

Provide tax incentives for manufacturing industries, esp. downstream sectors and higher value added industries

Provide incentive for infrastructure investment, including PPP financing and optimization of SOEs as development agents

Establish One Stop Service (OSS) Center at BKPM Office as an integrated services to provide quick, simple, transparent, integrated license services

Recent Fiscal Policy

4

Indonesia government’s medium-term fiscal approach – To focus on:(1) Macroeconomic stability, (2) Strengthen budget structure, (3) Real sector and investment support

Assumptions: 2014 2015 2016

Period Realized Revised Budget Preliminary Budget

Growth (%) 5.1 5.7 5.8 – 6.2

Inflation (%) (YoY) 8.4 5.0 4.0 (+/- 1.0)

3-month-SPN 5.8 6.2 4.0 – 6.0

IDR/USD (average) 11,878 12,500 12,800 – 13,200

Indonesia Crude Price (ICP) (USD / bbl) 97 60 60 - 80

Lifting

Oil Lifting (thousand bbl / day) 794 825 830 - 850

Gas Lifting (thousand bbl / day oil equivalent) 1,224.3 1,221 1,100 – 1,200

Oil & Gas Lifting (thousand bbl / day oil equivalent) 2,017.8 2,046

The Budget – Macroeconomic assumptionsFollowing the latest economic developments….

Source: Ministry of Finance, April 2015

Stable Household Consumption

Subsidy Reform

Govt Budget Savings

Strong Investment through rising infrastructure spending

Growth

Government/ Bank Indonesia Policy

Tariff adjustment / Oil Price / FX Movement

Inflation Foreign Exchange3-month-SPN

Fed Rate Hike Expectations

ECB QE

Current Account Profile

Capital Outflow

Correlation to global rates

Stable Inflation

ICP / Lifting

World oil supply to rise

Uncertainty remains

Old Oil Wells

Lower volatility -food component

Key determinants of revised macroeconomic assumptions

5

2015 Budget in Brief

• Healthy, Productive, and High Quality BudgetGoals

• Momentum for Fiscal Policy Breakthrough2015

• Fuel Subsidy Reform

• Government Institutions Spending Retrenchment PolicyGreater

Fiscal Space

More Money for Productive Programs

Fiscal Vulnaribility

Decrease

Subsidy Reform

2015 Subsidy: Fuel Subsidy Reform to enhance quality of spending

Subsidy for 2015

Subsidy

Rp. 74.3 TNon Energy Subsidy

Rp. 137.8 T Energy Subsidy

Direction:1. Price stability of basic needs2. Maintaining the purchasing power,

esp. the poor3. Availability of staples supplies4. Increasing competitiveness and

financial access of the SME’s

Fuel Subsidy Reform

Fuel Subsidy Adjustment

Fixed Subsidy for Diesel Fuel

Subsidy Removal from Premium

Bold and Sustained Fuel Subsidy Reform …to achieve healthier, fairer, and more sustainable state budget

Social safety net

Infrastructure Development

Maintaining

purchasing power

Deficit control

qualitySpending

Fiscal sustainability

The saving from fuel subsidy reformof subsidy removal for gasoline andfixed subsidy for diesel: Rp 211,3 T.

Rp 276 T

Rp64,7T

2015 Revised Budget

Reallocation

9

6500

5500

8500

750076007250

73006900

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Gasoline Diesel

Subsidized fuel price hike*

Market price policy**

Subsidized fuel price hike *

Fixed subsidy policy**

• As of Nov 18, 2014

• As of Jan 1, 2015 and Recent Price

Energy Subsidy 2004 - 20152015: Energy Subsidy

Energy Subsidy137.8 T

Rp.64.7 TFuel Subsidy

Rp. 73.1 Power Subsidy

Energy Subsidy for 2015

The Expected Benefits

1. Lower inflationary pressure

2. Widening fiscal space

3. Enhance credit rating

First time ever: the infrastructure expenditure is higher than the energy subsidy(2015 revised budget)

Educational Budget % of total spending

Source: MoF Indonesia

Electricity Subsidy Budget Allocation

57.6

90.4 94.6

100.0 103.8 101.8

68.7 73.1

-

20.0

40.0

60.0

80.0

100.0

120.0

APBN-P Real APBN APBN-P

2010 2011 2012 2013 2014 2015

Billion Rp

2015 Non Energy Subsidy

Non Energy Subsidy 2004 - 2015

Non Energy Subsidy for 2015

Challenges

Challenges

• ability for government to continue passing through price changes

• helping consumers cope with price volatility.

• APEC Role?

Thank You