FEATURE STORY

Indonesia Economic Quarterly: Redirecting spending

April 4, 2012

Redirecting spending to more productive areas could potentially lead to higher and more inclusive growth.

April 4, 2012

KEY FINDINGS FROM THE REPORT

  • International developments continue to shape Indonesia’s near-term economic outlook, but the focus of attention has shifted. In late 2011 the primary concern was the deteriorating and uncertain outlook for the global economy and financial markets. The recent sharp rise in global oil prices has added a new dimension to the situation, raising the projected cost of Indonesia’s fuel subsidies. 

  • Responding to these developments, the Government brought forward the submission of its draft revised 2012 Budget to Parliament. This included a welcome proposal to increase the subsidized fuel price from April 2012. After much debate Parliament allowed the option of a fuel price increase of IDR 1,500 to IDR 6,000 per liter subject to the condition that the average, over six months, of the Indonesian crude oil price is 15 percent above the Budget assumption of USD 105 per barrel.

  • Without a fuel price adjustment and assuming oil prices of USD 120 per barrel, the World Bank estimates that Indonesia’s budget deficit in 2012 could move up to 3.1 percent of GDP. If oil prices stay high and the fuel price adjustment is implemented in the third quarter of 2012 the World Bank projects a deficit of 2.5 percent of GDP. These projections compare with a revised Budget deficit level of 2.2 percent (with an oil price assumption of USD 105 per barrel).

  • Despite both domestic and international risks, Indonesia’s economic fundamentals are solid. The World Bank growth projection for 2012 is 6.1 percent, based on continued support from domestic drivers of growth, and moves up to 6.4 percent in 2013.

  • It is not only the fiscal cost of fuel subsidies that is a concern but also the opportunity cost of the spending. Furthermore, most of the benefits of fuel subsidies go the wealthier segments of the population. According to the 2009 household survey, 40 percent of the direct benefits to households from gasoline subsidies go to the richest ten percent of households, and less than 1 percent to the bottom 10 percent.

  • The future of Indonesia’s growth and development is dependent on the Government’s continued progress in redirecting and improving the quality of its spending. Effective spending on infrastructure and education, along with measures to improve the business climate, could potentially boost Indonesia’s growth rate up to 7 percent or higher. These measures, along with an effective social safety net that caters to the poor and vulnerable, can help better distribute the benefits of this growth to the entire population.

  • The report also highlights that gender equality is the right and smart thing to pursue in Indonesia, where maternal mortality remains high and women still earn less than men in all sectors. Recent research shows that if Indonesia’s society were to compensate people based on their skills and abilities, not by their gender, per worker productivity could increase by up to 14 percent, with significant implications for economic growth and poverty reduction.
  • Further World Bank analysis on these topics can be found in the following reports: