Fiscal Leakages

1
Fiscal Leakages Poverty ImpactsThe Case of
Indonesias Fuel Subsidy
Presentation for Frontiers in Practice Reducing
Poverty Through Better Diagnosis Session
Analyzing Fiscal Impacts on Poverty
Reduction March 23, 2006, 145-315 (JB1-080)
Presented by Kai Kaiser Economist Public Sector
Group (PRMPS)
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Background

• Domestically Regulated Price for Fuel
• Gasoline
• Diesel
• Kerosene
• Domestic Prices Increasingly Below International
  Market Prices
• By 2005, less than 1/3 of (rising) international
  prices
• 10 for kerosene
• Significant pressures on overall Indonesian
  central government budget
• By 3Q 2005 estimates of 0.9 of the GDP, gt25
  Central Budget
• Rp138.6 trillion (US13.8 billion)

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Key Issues

• Fiscal Sustainability of Policy
• Building macro-pressures in 2005
• 1998 increases in fuel prices were associated
  with political crisis/regime change
• Fuel Subsidy Was Pro-Rich
• Incidence Analysis through National
  Socio-Economic Household Survey (SUSENAS)
• 60 to top 40
• Notable Fiscal Leakages due to fuel smuggling
  abroad
• Reports by Supreme Audit Board (BPK) on order of
  USD 0.9 billion
• But poverty impacts of fuel subsidy reform still
  significant
• Pressures to rapidly design implement massive
  unconditional cash transfer program (UCTP), i.e.,
  all bottom 3 deciles
• Governance Capacity Issues
• History of challenges, e.g., social safety net
  programs

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Fuel Subsidy Was Pro-Rich
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Pro-Rich Subsidies Likely Crowded Out Other
Pro-Poor Expenditures
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But Still Significant Impacts on Poor of Fuel
Subsidy Removal
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Policy Actions

• Government Communicated/Socialized
• Media public dialogue
• Analytical work to demonstrate pro-poorness of
  hikes
• Key contributions by WB DfID supported Indopov
  team
• Bank careful to take limited public profile
• Fuel Price Hikes Implemented
• May 2005
• 29 percent weighted average (not kerosene)
• October 1, 2005
• 114 percent weighted average (286 percent
  kerosene)
• Large Scale Rapid Compensation Program
• Cash Transfers for 3 months immediately after
  second price hike

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Fuel Price Hike Compensation in Practice

• Massive Unconditional Cash Compensation Program
• Rp100,000 (10) per month
• Disbursement to 15.5 million families, equal to
  around 62 million people, or 30 of the
  population who earn less than Rp175,000 a month
• Designed and implemented in 3 months
• Implemented through Post Offices
• Averted going directly through government
  bureaucracy
• Rapid External Appraisal
• Two NGOs/research institutes
• Significant media scrutiny
• Not perfect, but working

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Compensation Targeting Scenarios
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Net Poverty Impacts
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On-Going Challenges

• Refining Social Protection Programs
• Monitoring Evaluation
• Improved Mechanisms/Targeting, Conditional
  Mechanisms
• Alternative Fuels for Poor
• Especially wrt to inelastic kerosene demand
• Promoting Pro-Poor Expenditures
• Effectively using Fiscal Space Generated for FY
  2006ff

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• Q A

Further Reading World Bank, INDONESIA FUEL
SUBSIDY REALLOCATION Poverty and Social Impact
Analysis (PSIA). Supporting Annex to Second
Development Policy Loan (Report No. 34439-ID,
Nov 18, 2005) Frontiers in Practice, Overview of
Indopov The Indonesia Poverty Analysis Program