JAKARTA, June 20: Indonesia will carry out a big increase in fuel prices on Saturday, settling months of agonising over the politically divisive issue that was damaging confidence in Southeast Asia’s biggest economy and sapping the state’s finances.
Fuel subsidies, which the government argues largely benefit the rich, cost around $20 billion last year and have been pushing the former OPEC member’s current account deeper into deficit as oil imports rise to meet the insatiable demand for cheap fuel.
‘The fuel hike will be announced on Friday at midnight and effective after it is announced,’ M.S. Hidayat told reporters on Thursday.
Even after the increases – expected to be 44 percent for petrol and 22 percent for diesel – Indonesia will still have some of the cheapest prices in the region.
The move follows approval by parliament this week of measures to give cash handouts to the poor for the next four months to shield them from the higher cost of fuel and the impact that will have on prices in general.
President Susilo Bambang Yudhoyono had insisted on aid for the poor before he would sign off on higher fuel prices. Still, thousands held protests around the country this week to demonstrate against the fuel price rises.
Yudhoyono had agonised for months over the question of fuel prices, worried about the political fallout ahead of presidential and general elections next year.
But he appears to have finally relented in the face of a chorus of warnings from investors and his own officials that failure to tackle costly subsidies could start to cut already softening economic growth.
Finance minister Chatib Basri told MPs in the week that the budget deficit could reach 4 percent of GDP if fuel subsidies were not cut. The initial budget had put the deficit at 1.6 percent of GDP.
Central bank governor Agus Martowardojo said month-on-month inflation would shoot up 2 percent this month as a result of costlier fuel but that the impact would be neutral by September or October.
The price rise comes as an increase in U.S. Interest rates is prompting investors to selloff emerging market assets, including the rupiah. Foreign investors hold about 40 percent of Indonesian stocks and close to a third of government bonds.
Higher fuel prices also pose political risks for Yudhoyono, who is in the last 1-1/2 years of his final term. Support for his ruling party has fallen sharply because of corruption scandals.
A key member of this ruling coalition, and Indonesia’s biggest Muslim party the PKS, has openly opposed his fuel policy in what political analysts see largely as an attempt to distract attention from its own graft scandal.
Under a pact agreed last year, Yudhoyono should expel PKS from the coalition for its intransigence but to do so could undermine his own political standing and would remove three ministers from his cabinet.
(agencies)
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