To Control the Price of Subsidized Fuel, the Fiscal Space is Threatened to Narrow

JAKARTA - The Head of the Center for Macroeconomics and Finance at the Institute for Development of Economics and Finance (INDEF) M. Rizal Taufikurahman assessed that the policy of holding subsidized fuel prices in the midst of geopolitical pressure was indeed effective as a buffer step in the short term.

However, he added that the policy has the potential to increase the government's fiscal burden, and this is because the world oil price, which is above the assumption of the state budget, ultimately makes market pressure shifted to the state budget.

"With global oil prices tending to be above the APBN assumptions, the government is essentially shifting market pressure to the APBN. In the long run, this creates spending rigidity because energy subsidies have the potential to erode fiscal space for productive sectors, while delaying price adjustments that ultimately cannot be avoided," he told VOI, Thursday, April 9.

Rizal said from the perspective of the state budget, the impact was quite large, namely every increase in the price of oil by 1 US dollar per barrel is estimated to add an energy subsidy burden of around Rp. 10-13 trillion.

According to him, in the midst of a deficit condition that is close to the 3 percent limit to GDP, this policy is indeed able to hold the inflation rate in the short term.

However, he added that the risk of financing pressure increased, both through debt addition, an increase in the yield of State Securities (SBN), and the potential for a decline in fiscal credibility if it is not balanced by strong consolidation.

In addition, Rizal said that setting fuel prices below market prices tends to encourage inefficient energy consumption.

"The risk of overconsumption and wrong targeting of subsidies is large, especially if the able group still enjoys subsidies. In the context of Indonesia as a net importer of energy, this actually weakens external resilience through increased imports and pressure on the exchange rate," he said.

However, he emphasized that from a social and political perspective, this policy is considered quite rational in the short term because the detention of fuel prices can maintain people's purchasing power, stabilize inflation expectations, and dampen potential social unrest, especially amid pressure on the middle class and slowing domestic consumption.

According to him, the main challenge is to ensure that stability is not paid for by excessive accumulation of fiscal risks.

Therefore, he said, this policy needs to be followed by more fundamental reforms, and the government is encouraged to improve the distribution of subsidies to be more data-based, tighten distribution, and accelerate the energy transition to reduce dependence on imports.

"On the other hand, fiscal discipline remains the key to ensuring that policies to maintain purchasing power do not weaken the resilience of the state budget in the medium term," he said.