ASSESSING THE ENERGY SUBSIDY REFORM IN INDONESIA THROUGH DIFFERENT SCENARIOS

Ahmadi Murjani

doi:10.32479/ijeep.9223

Abstract

This paper provides a comprehensive study on energy subsidy reform simulations in Indonesia by employing two new approaches, namely, the Almost-Ideal Demand System Iterated Linear Least-Square and SUBSIM. Periods of low and high oil prices are also accounted in this paper; further, it reveals that in 1999, when oil prices were low, this reform was possible due to Indonesia’s status as a net oil exporter and precise selected-reformed energy goods; however, the major concerns were the unsupporting welfare situations and the depreciation of the rupiah after the Asian Financial Crisis in 1997. In 2012, the evidence shows that despite high oil prices and Indonesia being a net oil importer, this reform saved more for the government and made significant welfare impacts. Overall, this paper suggests that this reform is feasible when at least some factors, i.e., stable national exchange rate, conducive welfare situations, availability of potential recipients’ database, and functioning government, are well-established. Keywords : Almost-Ideal Demand System; Energy goods; Simulation; Subsidy reform; Indonesia. JEL Classifications: D12, H53, I38, Q48 DOI: https://doi.org/10.32479/ijeep.9223

Highlights

The energy subsidy in Indonesia has been poured since the 1960s (Beaton and Lontoh, 2010; Vagliasindi, 2013)
To handle the identification of elasticity of demand for subsidized energy goods as well as to simulate the energy subsidy reform in Indonesia, this paper generally prepares two methods that consist of Almost-Ideal Demand System (AIDS)-ILLS and SUBSIM simulations
Energy subsidy reform simulation This paper provides some simulations based on four reform strategies: (1) Removing the entire subsidy and counterbalancing the impact on the poverty rate using the universal mitigation

Summary

Introduction

The energy subsidy in Indonesia has been poured since the 1960s (Beaton and Lontoh, 2010; Vagliasindi, 2013). An official documentation (i.e. The Financial Notes of Indonesian Ministry of Finance) on the energy subsidy in Indonesia noted that this subsidy began in 1977 as a fuel subsidy. The magnitude of the energy subsidy throughout its time frame became alarming when the Asian Financial Crisis hit Indonesia in 1997. The depreciation of the rupiah followed by high inflation exerted a higher fiscal strain on the government’s budget. Export oil at that time and imported it. It is no wonder that oil imports during rupiah depreciation ushered in severe fiscal consequences in relation to the balance of payment

Methods

Results

Conclusion