Indonesia agrees to increase energy subsidies to counter global inflation

The Indonesian government decided to make new amendments to this year’s budget, with the aim of raising energy subsidies, with the price of black crude and gas rising sharply since the beginning of 2022, due to the recovery in demand for oil and fear of a shortage of supplies due to the Russian attack on Ukraine.

Today, Thursday, May 19, the Indonesian parliament approved a government request to increase energy subsidies by about $23.8 billion, to maintain price stability unchanged amid a global rise in inflation rates.

An additional 74.9 trillion rupiah ($5.09 billion) energy subsidy and 275 trillion rupees additional compensation were also approved for state energy company Pertamina and utility company BLN.

Electricity price hike

Despite the increase in energy subsidies, Indonesia’s Finance Minister Sri Mulyani said that his country’s government is considering raising electricity tariffs for some homes that consume more energy.

The government raised its estimate of the average price of crude oil in the budget amendments to an average of $100 a barrel this year, compared to its previous assumption of $63 a barrel, according to Reuters.

The Russian-Ukrainian war contributed to the rise in oil prices near the barrier of 140 dollars a barrel, before returning to decline to trade at the level of 110 dollars a barrel on average, a large difference from the prices of last year.

energy support
Petrol station owned by the state company Pertamina in Indonesia

“There is a possibility that global growth will not be as strong as it is now, with expectations that it will be affected by the closures in China, and the United States being affected by very high interest rates, which will reduce demand for basic commodities and relieve pressure on prices,” Mulyani added.

Due to the increase in infection with the Covid-19 virus, China has imposed significant restrictions on movement, as the main financial center in Shanghai has been completely closed since April.

The fiscal deficit rises despite the increase in revenues

Indonesia’s government revenue jumped to 2.26 trillion rupiah, compared to 1.84 trillion rupiah in the previous budget thanks to the rise in commodity prices.

The increase in energy price subsidies contributes to raising the expected fiscal deficit in Indonesia’s budget to 4.5% of GDP, compared to 4% previously.

Last year’s fiscal deficit was 4.65% of GDP, below the government’s forecast of 5.7%.

Maybank Indonesia economist Myrdal Gunarto described the budget adjustments as very good to support purchasing power.

He expected the country’s inflation rate in 2022 to reach 3.99%, and economic growth to exceed 5%.

The Indonesian government aims to grow by 5.2% this year, but it fears the tightening of global monetary policy, and the return of the spread of the Corona virus.

“We hope that the Bank of Indonesia – as responsible for the monetary authority – will be more moderate in terms of interest rate hikes, which will mainly respond to the global trend of higher interest rates,” Gunnarto said.

The Central Bank said that the path of monetary tightening that it is following will take into account the policy of government support and energy prices.

Indonesia announced a 3.7% GDP growth in 2021, compared to a 2% contraction in 2020.

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