Indonesia hikes fuel prices to rein in ballooning subsidies

The price of subsidized gasoline was raised to 10,000 rupiah ($67 U.S. cents) a liter from 7,650 rupiah, while that of subsidized diesel rose to 6,800 rupiah a liter 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 make a decision 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.

Politically sensitive

Fuel prices are politically sensitive in Indonesia, and the changes will have major implications for households and small businesses, as subsidized 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 Labor 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. ($1 = 14,895.0000 rupiah)