Indonesia energy


Administered energy prices to remain unchanged in 2018-19

March 14th 2018 | Indonesia | Electricity | Pertamina


On March 12th the Ministry of Finance confirmed that the government aims to keep administered electricity and fuel tariffs unchanged for the next two years. This will cost the government Rp8.1trn (US$590m). The proposal is currently being discussed in the House of People's Representatives (DPR, the legislature).  


The move signals a moderate shift in the administration's economic priorities, which have thus far been to reduce energy subsidies and direct government expenditure elsewhere. Upon taking office in 2014, the president, Joko Widodo (known as Jokowi), undertook large-scale reform of the subsidy regime by lowering petrol subsidies, but those for electricity tariffs and diesel remained in place. Support for fuel prices was also not strictly abolished; instead, the government introduced a mechanism whereby it regularly adjusts the administered price of low-octane fuel (known as Premium)—available only in petrol stations operated by state-owned Pertamina—in accordance with movements in the market price. Despite rising oil prices, the cost of Premium has not changed, as Pertamina is absorbing the additional cost rather than the government. 

Jokowi's administration also pushed through three small increases in electricity tariffs last year, after postponing the changes twice in 2015 and 2016. The government has denied that the move to fix energy costs is so that it can shore up public support ahead of the 2019 elections. Nevertheless, as oil prices recover from their lows in 2014, a return of heavily subsidised fuel cannot be ruled out. Traditionally, petrol subsidies have proved expensive for the government and, consequently, have been made at the cost of investing in areas such as infrastructure and public services. Subsidy schemes in Indonesia are largely populist and have not proven to alleviate poverty in the past. Therefore, this move will unnerve foreign investors who viewed Jokowi as a reformer and considered the fuel-subsidy cut in 2015 a bold and positive move towards healthier balance sheets and sustainable growth. 

Impact on the forecast

We revise up our forecasts for government expenditure on subsidies and reduce our projections for spending on capital and public works in 2018‑19. However, we still expect the budget deficit to narrow in the next two years.  

Source: The Economist Intelligence Unit