The World Bank Fiscal Leakages & Poverty Impacts The Case of Indonesia’s Fuel Subsidy Presented by: Kai Kaiser Economist Public Sector Group (PRMPS) Presentation for: Frontiers in Practice Reducing Poverty Through Better Diagnosis Session: Analyzing Fiscal Impacts on Poverty Reduction March 23, 2006, 1:45-3:15 (JB1-080)

The World Bank 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, >25% Central Budget –Rp138.6 trillion (US$13.8 billion)

The World Bank 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

The World Bank Fuel Subsidy Was Pro-Rich

The World Bank Pro-Rich Subsidies Likely Crowded Out Other Pro-Poor Expenditures

The World Bank But Still Significant Impacts on Poor of Fuel Subsidy Removal

The World Bank 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 percent weighted average (not kerosene) –October 1, percent weighted average (286 percent kerosene) Large Scale Rapid Compensation Program –Cash Transfers for 3 months immediately after second price hike

The World Bank 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

The World Bank Compensation Targeting Scenarios

The World Bank Net Poverty Impacts

The World Bank 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

The World Bank 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 ID, Nov 18, 2005) Frontiers in Practice, Overview of Indopov: The Indonesia Poverty Analysis Program