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Indonesia govt starts implementing fixed fuel subsidy mechanism

JAKARTA (rambuenergy.com) – The Indonesian government has decided to implement fixed subsidy mechanism that will allow the subsided fuel price to move up and down in line with the global oil price. Under the new mechanism the subsidy is fixed or unchanged.

Coordinating Minister for the Economy Sofyan Djalil told a press conference on Wednesday that under the new mechanism, the government has set fixed subsidy of Rp1,000 per liter. The remaining price is set by market mechanism.

He said given the fall of oil price, the subsidized premium fuel price is set at Rp7,600 per liter, dropped from Rp8,500 per liter set previously.
As for diesel fuel, the price is set at Rp7,250 per liter, down from Rp7,500 per liter previously.

Minister Sofyan Djalil said the price of the low-octane premium fuel or RON 88 is fully determined by market price and is no longer subsidized by the government. Diesel fuel is subsidized by Rp1,000 per liter.

“The new mechanism will be effective from 00.00 (24.00, Dec. 31),” Minister Sofyan Djalil was quoted by detik.com.

The government’s decision was a follow-up of the government’s early plan to implement a fixed subsidy mechanism, aiming at reducing huge amount of subsidy funds set aside by the government. Over the past few years, the government has spent hundreds of trillion of rupiah to subsidize fuel and electricity price.

The Joko Widodo government has determined to shift the fund to a more productive purpose, including building infrastructure and public facilities.

Under the previous mechanism, subsidy is applied based on the set volume of fuel. As a result, the amount of subsidy could balloon if the subsidized fuel consumption is higher than the set quota.

Analysts have expected that the plunge of oil price could pave the way for the government to implement the fixed subsidy system as early as possible, between January and February. Lower oil price may also create an opportunity for the government to completely remove the subsidy.

The government changed the subsidy mechanism during a coordinating meeting held on Tuesday (Dec. 30). Sofyan told reporters on Tuesday that the falling of oil price in the global market paved the way for the government to implement fixed subsidy mechanism. The government will also cut the fuel subsidy to below Rp50 trillion and use the money as efficient as possible.

In the 2015 State Budget (APBN), the government and the House of Representative (DPR) has set subsidy fund of Rp276 trillion, comprised of Rp108.28 trillion for Premium fuel subsidy, Rp80.27 trillion for diesel and biodiesel fuel subsidy, Rp6 trillion for kerosene subsidy and Rp 55.12 trillion for LPG subsidy.

The Joko Widodo government is currently preparing to revised the 2015 State Budget. The proposed revision will be submitted and discussed with the Parliament, expected in January, before enacting it into 2015 State Budget Law. (*)

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