Category: Living

Indonesia raised subsidised fuel prices by about 30% on Saturday, as the government moves to rein in ballooning subsidies despite a risk of mass protests.

The price of subsidized gasoline was raised to 10,000 rupiah ($67 U.S. cents) a litre from 7,650 rupiah, while that of subsidised diesel rose to 6,800 rupiah a litre from 5,150 rupiah, energy minister Arifin Tasrif said.

“I actually wanted domestic fuel prices to remain affordable by providing subsidies, but the budget for subsidies has tripled and will continue to increase,” President Joko Widodo told a news conference.

“Now the government has to decide in a difficult situation. This is the government’s last option,” said Jokowi, as the president is known.

Southeast Asia’s largest economy had already jacked up its 2022 energy subsidies to 502 trillion rupiah ($34 billion), triple the original budget, pushed by rising global prices of oil and a depreciating rupiah currency.

If prices were not raised, the budget would have ballooned to 698 trillion rupiah, said Finance Minister Sri Mulyani Indrawati.

She estimated total energy subsidies would range between 591 trillion and 649 trillion rupiah for this year following the price hike, assuming the average crude price stays between $85 and $100 a barrel the rest of the year.

High energy subsidies had restrained Indonesia’s inflation, at 4.69% in August, allowing the central bank to delay raising interest rates until last month, well behind regional and global peers.

Hariyadi Sukamdani, head of the Indonesian Employers Association, said price pressure from the fuel price hike would not be too much, predicting inflation will top 6% at the end of the year.

“If prices of goods are too expensive, people won’t buy. We can’t raise prices too much,” he said.

Businesses are using unsubsidised fuels, but the price hike will affect logistics costs, Hariyadi said.

Still, accelerating inflation could put pressure on Bank Indonesia (BI) to tighten monetary policy more quickly. The bank holds a two-day policy meeting ending on Sept. 22.

Bank Mandiri economist Faisal Rachman estimated inflation could accelerate to between 6% and 7% and BI could raise the policy rate to 4.25% this year from 3.75% now.

Faisal forecasts 5% economic growth this year despite the fuel price increase, supported by commodity exports and post-pandemic mobility, adding that the government’s cash distribution could help cushion some of the impact on consumption. The economy grew 5.44% in the April-June quarter.

The government has allocated an additional 24.17 trillion rupiah for cash handouts to help the poor cope with the policy’s impact, Jokowi said.

Fuel prices are politically sensitive in Indonesia, and the changes will have major implications for households and small businesses, as subsidised fuel accounts for more than 80% of state-owned oil giant Pertamina’s sales.

The last fuel price hike was in 2014, months after Jokowi took office, aiming to free up fiscal space. That sparked protests across the archipelago.

The opposition Labour Party has arranged a protest involving thousands of workers for Tuesday, chairman Said Iqbal, who also heads a trade union, told Reuters. He called on parliament to pressure the government to cancel the price hike.

“This will hurt purchasing power,” he said. “Wages have not increased for three years and inflation is bound to rise sharply.”

Small protests against any price hike, mostly led by students, had erupted in the recent days in several cities.

After the price hike announcement, Pertamina said it was committed to ensuring adequate fuel supplies nationally. Cars were seen queuing in some stations in the capital Jakarta after the announcement.

Pertamina, Asia’s biggest gasoline importer, had deferred some of its gasoline deliveries for September ahead of the price hike, due to an expected drop in fuel demand, traders said.

Decades ago Indonesia was a major oil exporter, becoming a member of the Organization of Petroleum Exporting Countries in the 1960s, but its oil output declined and it turned to net oil importer in the 2000s. Indonesia is still an exporter of gas.

Indonesia will reallocate 24.17 trillion rupiah ($1.62 billion), or nearly 5%, of its fuel subsidy budget to social spending, including cash handouts to 20.65 million households, its finance minister said on Monday.

The move comes amid reports that the government has been considering raising subsidised fuel prices to manage rising fiscal pressure due to high global energy prices.

Southeast Asia’s largest economy has already tripled its 2022 energy subsidy allocation from its original budget to 502 trillion rupiah – about 16% of total spending plans, but authorities have said more money could be needed if fuel prices were not increased throughout the year.

Finance Minister Sri Mulyani Indrawati said the reallocation of spending will be enacted this week and was decided after discussing the fuel subsidy policy with President Joko Widodo.

“The people will get social assistance in order to increase their purchasing power,” Sri Mulyani told an online news conference, speaking alongside Bank Indonesia Governor Perry Warjiyo.

She did not take questions and did not mention fuel price hike plans.

The government would also provide cash handouts to 16 million workers who make less than 3.5 million rupiah per month, she said.

Regional governments would be instructed to use a portion of their fiscal transfer from the central government to subsidise transportation fares, she added.

Lawmakers from parliament’s energy committee last week told Reuters the government may raise fuel prices by 30% to 40% and that such a move will add 1.9 percentage points to 2022’s inflation rate.