Fiscal Costs of Fuel Subsidies
Incomplete fuel subsidy reforms have resulted in fiscal costs and challenges for fiscal
management‒particularly during periods of rising commodity prices. Despite declining as
a share of tax revenue, Indonesia’s fossil fuels subsidies remain sizeable compared to structural
peers (Figure 1). In 2022, fuels, electricity, and LPG subsidies accounted for 22.3 percent of total
central government expenditure, a notable increase from the historical average of 13.2 percent
between 2017-21. These subsidies represent 87 percent of total subsidies. This spending
includes both explicit and implicit subsidies such as compensation payments for the assigned
SoEs. As a percentage of central government spending, subsidies for fuel products account for more than three-quarters (76 percent) of total energy subsidies in 2022‒comprised of gasoline (44 percent), diesel (30 percent), LPG (26 percent), and kerosene (0.3 percent). Electricity subsidies accounted for 24 percent of total energy subsidies in 2022. While energy subsidies may support poor and vulnerable households by making energy prices cheaper and less volatile, they are costly and inefficient when poorly targeted. When global commodity and
energy prices rise, the government faces mounting fiscal pressure as the subsidies bill rises, hence posing a substantial burden on public finances and risks to fiscal sustainability. The surge in global commodity prices in 2022 had a significant impact on fuel subsidy outlays (Figure 5). Between 2021 and 2022, international crude oil prices increased by 44 percent while the Indonesian rupiah depreciated by 9.3 percent against the US dollar during the
same period. These developments had a negative impact on the country’s fiscal balance since Indonesia is a net oil importer. In 2022, fuel and electricity subsidies rose to 2.8 percent of GDP (Rp 551.2 trillion) (MoF 2023), up from 1.7 percent of GDP in 2021 (Figure 2).
BTW, that 20-40 ct/kWh for diesel-generated electricity includes huge #FossilFuelSubsidies.
Indonesia uses 22% of central government budget (or 2,8% of GDP) on subsidising energy, and 1/3 of that to keep diesel artificially cheap.
Solar minigrids make sense
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