Indonesia increases social assistance ahead of fuel price hike

August 31, 2022

JAKARTA – The government is set to introduce three welfare schemes worth $1.62 billion (Rs 24.17 trillion) with the aim of boosting the purchasing power of the people in a context of risk of inflationary pressure, following an expected increase in the price of subsidized fuel.

Although not clear that the government would soon increase the prices of subsidized fuels, including Pertalite petrol and solar diesel, Finance Minister Sri Mulyani Indrawati explained that the additional welfare fund was part of of the energy subsidy diversion strategy, as instructed by President Joko Widodo. .

She explained that social assistance would be divided into three types, namely direct cash transfers (BLT), wage subsidies and a regional transfer budget allocation for public transport.

“First aid will be distributed to 20.65 million beneficiary groups in the form of direct cash transfers worth a total of Rs 12.4 trillion. It will be disbursed four times, Rp 150,000 per person, by the Ministry of Social affairs,” Sri Mulyani said at a press conference on Monday.

The second aid program would consist of wage subsidies worth Rp. 600,000 per person, intended for 16 million workers earning a maximum salary of Rp. 3.5 million per month.

In this regard, she added, the Ministry of Manpower and Transmigration will soon issue official instructions for the disbursement of the wage subsidy.

“Thirdly, the Ministry of Interior and Ministry of Finance will also issue a new regulation to allocate 2% of regional transfer funds – which includes the general allocation fund [DAU] and revenue sharing funds [DBH] – to protect the public transport sector, such as motorcycle taxis, as well as fishermen at regional level.

Furthermore, Sri Mulyani pointed out that all additional social assistance would start being distributed this week and is expected to “relieve pressure on the community and reduce poverty amid inflationary pressures.”

Regarding the urgency of additional aid, the Minister of Energy and Mineral Resources, Arifin Tasrif, recently agreed that policymakers would seek to offset the effects of the expected increase in the price of fuel subsidized by a increase in social assistance expenditure.

He said the government believes the two strategies should be deployed in tandem to protect consumers.

“Should [Pertalite] fuel prices must be raised, social assistance must be disbursed first. It is one of the main [policies] that the [government] getting ready,” Arifin told reporters on Friday.

He said the increase in the price of subsidized fuel would be calculated in detail but did not specify when it would take place.

Fuel price hike to trigger inflation

Mohammad Faisal, executive director of the Center of Reform on Economics (CORE) Indonesia, estimated an additional inflation of 3.6%, assuming that the price of Pertalite should increase to Rp 10,000 per litre. He predicted that inflation would reach a range between 7 and 9% by the end of the year.

“The ideal option is to control the distribution of subsidized fuel. [But] if the price of subsidized fuel is to rise, protecting low-income households must be a priority,” he said when contacted on Monday, adding that the government must effectively disburse the aid package to cushion the impending rise in fuel prices.

Similarly, Samuel Securities Senior Economist Fikri C. Permana said Aug. 19 that food prices could remain stubbornly high due to weather-related disruptions in food production. He expected the inflation rate to rise to 5.9% this year and 4.8% next year if the government raised the price of Pertalite by 30%.

Ajib Hamdani, chairman of the economic policy analysis committee of the Indonesian Employers’ Association (Apindo), suggested that the government raise the price of subsidized fuel when inflation is better contained at 3%, but admitted that given the state’s current fiscal conditions, subsidized fuel prices could increase in the fourth quarter of this year.

The government could raise fuel prices by about 30% to manage the fiscal strain of a burgeoning subsidy budget, a lawmaker from House of Representatives Committee VII overseeing energy resources has told reporters. and minerals.

The government has already tripled its energy subsidy allocation for 2022 to 502 trillion rupees – about 16% of total state spending – to keep subsidized fuel prices and some electricity tariffs unchanged amid rising world energy prices.

Ministry of Finance officials have also said earlier that the amount may be insufficient due to rising fuel demand and the state may have to budget an additional Rs 200 trillion in subsidies for the whole year if no decision is made. is taken to increase the price of subsidized fuel.

The additional spending will inflate the subsidies and compensation budget by 40% to 700 trillion rupees. While the government says its fiscal consolidation remains on track, subsidy spending will take another slice of the state’s windfall revenue on commodities.