Indonesia's subsidized fuel 'off-limits' to private cars

Founder and chairman CT Corp Chairul Tanjung smiles as his sits in front of his portrait at a book shop during his book launch in Jakarta July 2, 2012. [Photo / Agencies]

Indonesia should slap a nationwide ban on the use of subsidized fuel by Indonesia's 11 million private cars, a move that would save the government $8.6 billion this year and erase a widening fiscal deficit, a presidential adviser said.

President Susilo Bambang Yudhoyono is struggling to find a way to deal with runaway fuel subsidy costs that now account for more than 30 percent of state spending and are draining funds that should be used for much-need infrastructure in Southeast Asia's largest economy.

Despite the massive cost, government officials have made clear that raising fuel prices is not an option for the moment, fearful of the impact on inflation and a repeat of the social unrest that past price hikes have triggered.

"We recommended halting the subsidy for rich people by taking out the subsidy from private vehicles," said Chairul Tanjung, chairman of Yudhoyono's main economic advisory group.

The advisory committee's proposed cuts would not cover motorcycles and public transportation, including buses and taxis. Most Indonesians cannot afford their own cars.

Tanjung, a 51-year-old billionaire and founder of CT Corp estimated the bold measure would cut consumption of subsidized fuel by 52 percent. He spoke to Reuters on the resort island of Bali after lengthy meetings there with the president on fuel subsidies and trade.

The president will discuss the recommendations in a cabinet meeting next Thursday, when a final decision could be announced.

Critics say the plan would be difficult to enforce and that previous measures, such as banning the use of subsidized fuel for government cars, have done little to ease the crushing burden on the national budget. Last year, the subsidy bill was $22 billion - nearly 4 percent of total economic output.

The committee estimated the proposed plan would save the government 84 trillion rupiah ($8.64 billion) this year, from a cost of more than 300 trillion if nothing is done.

The finance minister said earlier this month the subsidy bill would likely drive the fiscal deficit to more than 2 percent of gross domestic product and could force the government to cut spending in other programmes.

Many economists, including senior officials from the International Monetary Fund and World Bank, have urged the government to scrap all subsidies and hike fuel prices to free up funds for infrastructure, education and health care.

But with general and presidential elections looming next year, and memories fresh of violent protests over fuel-price rises in 2005 and 2008, Yudhoyono has indicated he would only boost pump prices as a last resort.

Tanjung, whom Forbes says is the 5th richest Indonesian with a net worth of $3.4 billion, argued that the rise in fuel prices for private vehicle owners would not have a significant impact on inflation.

"This actually will not directly impact inflation because you are taking the subsidy only from rich people," he said.

The World Bank estimates the average car owner saves around $100 a month from the cheaper fuel, while a motorcyclist's benefit is $10 and those riding on public transport only $1.