Indonesia takes the bull by the horns on fuel prices as subsidies soar.

Indonesia takes the bull by the horns on fuel prices as subsidies soar.
Indonesia takes the bull by the horns on fuel prices as subsidies soar.

The move is likely to spark protests and further fuel price pressures, although analysts said action was needed to ensure fiscal discipline.

WHAT HAS DECITED FUEL PRICES?

Indonesia has raised the price of its most popular 90-octane gasoline, known as Pertalite, to 10,000 rupiahs ($0.6714) per liter from 7,650 rupiahs. The finance minister said state energy company Pertamina’s production costs for this type of fuel were 14,450 rupiahs per litre.

The price of diesel rose from 5,150 rupiahs to 6,800 rupiahs per litre, for a production cost of 13,950 rupiahs.

Jokowi, as the president is popularly known, also raised the price of 92-octane petrol, known as Pertamax, to Rs 14,500 per liter from Rs 12,500. Pertamina does not receive compensation for lost sales from Pertamax.

WHY RAISE FUEL PRICES NOW?

The government has already tripled its spending on energy subsidies this year compared to the original budget, to 502.4 trillion rupiah ($33.83 billion), to keep subsidized fuel prices and some tariffs unchanged. electricity in a context of high world energy prices.

This has resulted in widening the price disparity between subsidized and unsubsidized fuels, prompting consumers to turn to cheaper fuels.

Some economists have said higher fuel prices this year will reduce the risk of overspending in 2023, when the government needs to cut its budget deficit below 3% of .

WHY ARE RISING FUEL PRICES CONTROVERSIAL?

Fuel prices are a politically sensitive issue in Indonesia and with subsidized fuels accounting for over 80% of Pertamina’s sales, the changes will have major implications for households and small businesses.

Large companies are not allowed to purchase subsidized fuels for their operations.

Previous price hikes led to mass protests in the archipelago, including when Jokowi last raised fuel prices in 2014.

The current price hike comes at a time when food prices are already trending up. August inflation was 4.69%, above the central bank’s target range for three consecutive months.

The government this week began handing out money from a $1.6 billion supplementary social welfare fund to ease price pressures for the poor.

Elections are expected to take place in 2024.

WHAT WILL BE THE IMPACT OF THE MEASURES ON INFLATION AND GDP?

Pertamina estimated that a 30-40% increase in fuel prices could add 1.9 percentage points to inflation in 2022, but this assumed a larger increase in some prices.

Some economists and business groups believe that inflation could rise to around 6% by the end of the year, which would put pressure on the central bank to tighten monetary policy more quickly.

Bank Indonesia (BI) raised interest rates on Aug. 23 for the first time since 2018, in a move analysts said was expected to pave the way for the news of the fuel price hike. BI is still well behind most of its peers in its rollback from pandemic-era stimulus measures and economists expect further increases.

The potential reduction in purchasing power and rising interest rates could harm economic growth. The government is targeting GDP growth of 5.2% in 2022.

WHAT HAPPENS TO THE GRANTS BUDGET NOW?

Finance Minister Sri Mulyani Indrawati said that even with rising fuel prices, government spending on energy subsidies would continue to swell.

She estimated that the allocation of energy subsidies this year will be between 591 trillion rupiah and 649 trillion rupiah after the price increase, assuming the price of Indonesian crude moves between $ 85 and $ 100 a barrel for the rest. of the year.

The government could defer about 100 trillion rupiah in grant payments to 2023, pending parliament’s approval, Sri Mulyani said.

It did not give an assessment of how rising prices would affect the budget deficit outlook for 2022. Its latest forecast was a budget deficit equivalent to 3.92% of GDP.

($1 = 14,895.0000 rupiah)

The article is in French

Tags: Indonesia takes bull horns fuel prices subsidies soar

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