President Joko Widodo announced yesterday that subsidized fuel prices would be raised by approximately thirty percent, a move that is expected to save the Indonesian government nearly US $8 billion through the end of 2015.
Jokowi, who just returned from his first international summit overseas, announced the increase in a nationally televised press conference last night. “From time to time, we as a nation are faced with difficult choices,” Jokowi said. “The country needs funds to build infrastructure, education, and for healthcare, but such funds have not been available because they were wasted to subsidize fuel prices.”
Prices for subsidized gasoline went up from Rp. 6,500 a litre to Rp. 8,500, while prices for diesel rose to Rp. 7,500 from 5,500, effective midnight last night. The fuel price hike, a crucial step towards the Widodo administration’s goal of reducing the US $20 billion per year energy subsidies and reforming the national economy, was generally welcomed by economists, but immediately sparked small protests and long queues at petrol stations around Indonesia.
“The move is encouraging since it suggests that [Jokowi] is serious about economic reform in Indonesia, and is even prepared to take steps that may prove unpopular in the short run,” said Gareth Leather of Capital Economics. The move is also expected to stoke inflation, as the prices of goods that depend on transportation will inevitably go up along with the price of fuel. Finance Minister Bambang Brodjonegoro said he expected inflation to rise approximately two percent, to 7.3 percent this year after the fuel price rise, and that the inflationary impact would be felt through February of 2015.
In an effort to mitigate the impact of the fuel price rise on the country’s poorest families, the Widodo administration has promised that cash aid will be available to some 15.6 million people from Tuesday. Government subsidies of fuel take up some twenty percent of the annual government budget, handcuffing government spending and exacerbating the current-account trade deficit, but reducing them has been a politically sensitive issue and past efforts to do so has sparked violent protests and contributed to the downfall of the long-serving autocrat Suharto in 1998. Finance Minister Bambang Brodjonegoro said Monday night that the government would begin working with the parliament on where to reallocate US $8 billion in savings within the 2015 budget.
Sources: Liputan 6, Reuters, Bloomberg News, Wall Street Journal,