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May 27, 2017

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PDI-P has to bite the bullet or face fuel-subsidy time bomb

Jakarta -- The Indonesian Democratic Party of Struggle (PDI-P), so far a staunch supporter of the hugely wasteful government spending on the fuel subsidy, will have to bite the bullet if its candidate wins the July presidential election to lead the next government.

Stubbornly resisting the urgent need to reform the energy policy could set off a fuel-subsidy time bomb, causing fiscal distress and market turbulence and eventually social and political upheaval as well.

The PDI-P would be well advised to realize that its leader, Megawati Soekarnoputri, refused to raise fuel prices a few months before the presidential election in 2004 despite the steep rises in oil market prices, apparently with high hopes of being reelected.

But she lost miserably to Susilo Bambang Yudhoyono, who was immediately forced to increase fuel prices twice in 2005 in the face of an unmanageable fiscal deficit. This simply shows that the wasteful fuel subsidy has nothing to do with gaining voter support because the subsidy benefits mostly private-car owners.

It would be better for the PDI-P, so far seen as the most likely party to win the presidential election, if it drastically changed its stance on the fuel subsidy early in the upcoming deliberation of the draft 2015 state budget that President Yudhoyono will propose to the House of Representatives in mid-August.

The latest World Bank report cites the ballooning fuel subsidy and the big risks of widening trade and current-account deficits, with their multiple ramifications on the rupiah exchange rate and inflationary pressure, as the biggest downside risks to Indonesia's economy this year and in 2015.

The World Bank estimates that the steady increase in fuel consumption and a weakening rupiah will increase the fuel subsidy to 267 trillion rupiah (US$23.4 billion) this year (2.6 percent of gross domestic product), far higher than the 211 trillion rupiah budgeted for this year.

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