The International Monetary Fund : Energy Subsidies Not As Helpful

Energy subsidies are bad because too many people are using fuel, thus creating more air pollution, an NYU professor says. ( Photo)

The Indonesian government should replace its existing inefficient energy subsidy bill with direct cash transfers to help the country’s poor from being impacted by rising energy costs, the International Monetary Fund said in a report released on Wednesday.

The Washington-based IMF, which helped provide billions of dollars to Indonesia more than a decade ago, said that Indonesia should use the energy bills as a buffer in case risk from China’s hard lending and Euro crisis continue to intensify.

“This [the energy cost] would create greater fiscal room to spend on pressing infrastructure, health, and education needs. It would also enhance economic equity,” said Sanjaya Panth, the IMF mission chief for Indonesia.

Thomas J. Sargent, William R. Berkley Professor of Economics and Business at New York University, and a 2011 Nobel laureate in economics, said that a direct payment scheme would be the most efficient way to target one who needed it most.

“Using artificially suppressed prices is a very bad way to subsidize … It destroys price signals and there would be too much pollution because too many people are using the fuel,” Sargent said in Jakarta on Wednesday. He warned that when Europe and China suffers, it impacts trade.

“So, what the countries in periphery can do is try to be prudent, and the country can save so it can have flexibility in its fiscal policy,” he said. “From what I’ve seen, that’s what Indonesia is trying to do.

The IMF forecast Indonesia’s economic growth to slow to 6 percent this year, lower than its earlier projection of 6.1 percent, with global demand to remain weak. The IMF forecast is less than the projection made by the government. The Indonesian government targeted GDP growth rate at 6.5 percent this year. In the first half of this year, the economy grew by 6.3 percent.

The largest economy in Southeast Asia would grow 6.3 percent next year or below its government target of 6.8 percent, the IMF said, as the country’s fundamentals are still robust.

“Corporate and financial sector balance sheets are healthy, and the sharp reduction in the public sector debt burden has provided the authorities with room to respond if further stimulus is needed,” Panth said.

Such stimulus would be needed if growth in China — one of the main destinations for Indonesia commodities — slowed down. The IMF estimated that a reduction of 1 percent in China’s growth could lower Indonesia’s GDP growth by up to half a percentage point. Further deterioration in Europe would mean that foreign investors would leave local capital markets, especially the bond market.

The IMF report said the the government’s budget deficit at 2.3 percent of GDP in 2012 is supportive to growth, yet not burdening the country with excessive debt. However, it noted that the allocation and administration of government spending needs to be improved, especially regarding subsidies.

The government has allocated Rp 274.7 trillion ($29 billion) for energy subsidies next year, which is equivalent to 18 percent of the budgeted spending. The energy subsidy is forecast to reach Rp 306 trillion this year, more than the Rp 202 trillion set in the revised state budget. JG


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