Energy subsidies for SOEs are projected to increase to 1.5% of GDP

Jakarta – This year, the energy subsidies to state owned enterprises (SOE) such as Pertamina and PLN is projected to swell to 1.5 percent of gross domestic product (GDP), reports said Friday (24/6). This amount is greater than the amount of energy subsidies received by the two SOEs last year of 0.7 percent of GDP.

The World Bank in its latest report ‘Indonesia Economic Prospects (IEP), June 2022: Financial Deepening for Stronger Growth and Sustainable Recovery’ said that energy and electricity subsidies are enjoyed by the upper class.

The report said upper middle class households consume between 42 and 73 percent of subsidised diesel and 5 to 29 percent of subsidised LPG. These subsidies mostly benefit middle and upper class households. If these two subsidies were removed, it could save one percent of GDP at 2022 prices.

“This subsidy can be replaced with social assistance that is more targeted at the poor, vulnerable, and the middle class candidates at a lower cost, which is 0.5 percent of GDP. Thus, the government gets an additional net fiscal savings of 0.6 percent of GDP,” said the World Bank report.

Furthermore, the World Bank also projects explicit energy subsidies to increase from 0.8 percent to 1.1 percent of GDP in 2021 to 2022. While implicit subsidies paid to PLN and Pertamina as compensation for electricity and fuel sales under market price, are projected to increase from 0.7 percent to 1.5 percent.

The subsidies and compensation provided by the government are calculated based on the difference between the retail selling price (HJE) and the economic price. The current HJE Pertalite is IDR 7,650 per litre, while the economic price is IDR 12,556 per litre assuming the price of crude oil is in the range of USD 100 per barrel.

“Energy subsidies can contain inflation due to cost-push inflation in the short term, given that commodity prices remain stable, this subsidy policy will not be sustainable in the long term,” said the World Bank.

Rising energy prices trigger household electricity rates for the rich to rise

Starting July 1, the government will officially raise electricity tariffs for the upper class, such as R2 and R3 or 3,500 VA and above, according to the Director General of Electricity at the Ministry of Energy and Mineral Resources (ESDM) Rida Mulyana in a written statement Tuesday (14/6).

The rate increased to IDR 1,699 per Kwh or an increase of 17.64% from the previous IDR 1,444.70 per Kwh. Mulyana said that the increase in electricity rates was carried out after measuring the development of four macro assumption indicators for national electricity tariffs.

These four indicators are the rupiah exchange rate which is currently perched at the level of IDR 14,356/USD (originally assumed to be IDR14,350/USD), the benchmark price of Indonesian crude oil (ICP) at USD 104/barrel (originally assuming USD 63/barrel), inflation at 53% (original assumption 0.25%), and the reference coal price >70 USD/ton.

The realisation of these macroeconomic indicators is taken within a period of three months (February to April 2022) which is then used in the implementation of the tariff adjustment in the third quarter of 2022.

According to Mulyana, the adjustment or increase in electricity tariffs for this class can be increased because there are already rules regarding the provisions for adjustment rates in accordance with Minister of Energy and Mineral Resources Regulation No. 28/2018. (Hartatik)

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