Indonesia: Time over for cheap gasoline?

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Jakatra gas pumpPressure on state finances and on the national currency caused by huge spending on fuel subsidies has forced the Indonesian government to announce a 45 per cent increase of petrol prices for later in 2013 in the middle of the discussion over a state budget revision. Former governments have tried to do the same, but in vain. Now it seems necessary.

With almost half of its population living on $2 per day, net oil importer Indonesia has adopted since the 1960s a policy of subsidising fuel, a measure that has always been a disputed issue for the government and policy makers. Many times authorities tried out how to raise gasoline prices but all attempts ended up with street protests and subsequently increasing budget deficits.

During the 1998 financial crisis, the Suharto government was the first that sought to increase gasoline prices and reduce state subsides, but this attempt caused – together with other economic problems – the long-term president to step down amid violent street protests throughout the country.

Similarly, his successor, Abdurrahman Wahid, had to withdraw his decision after he announced in 2000 an increase in fuel prices and the crowd took to the streets again.

The next president in line, Megawati Sukarnoputri, had the same issues with public protests when she decided to hike fuel prices in 2003, while the incumbent president Susilo Bambang Yudhoyono finally made a point and in 2005 ordered to lift the fuel price from 4,500 rupiah to 6,000 rupiah per liter. However, at the same time he had to compensate poorer households through cash transfers in order to mitigate the impact of this policy. Nevertheless, in 2008 Yudhoyono decided to cut the fuel price back to 5,000 rupiah and back to 4,500 rupiah in 2009 as he was drastically loosing public support.

In 2011, Indonesia spent over $15 billion on gasoline subsidies, or 13 per cent of total state expenditures, and around $17 billion in 2012. For 2013, the forecast stands at up to $20 billion, or 11 per cent of the national budget.

New plans announced by the government in 2012 to raise fuel prices again to 6,000 rupiah per liter resulted once more in street protests, as well as faced a strong opposition in parliament.

However, with the weak rupiah making oil imports increasingly expensive, and with the outlook of a record state deficit of $24 billion in 2013, the worst since 1997, the government started to rethink the subsidy scheme once again and recently announced a revision of the 2013 budget approved in October 2012, indicating that the price of low octane petrol will rise by 2,000 rupiah to 6.500 rupiah per liter.

Even though Indonesia has one of the cheapest fuel prices in Asia – one liter of premium grade petrol currently costs 4,500 rupiah or 46 US cents, while in Malaysia it costs 98 US cents and in Singapore $1.7 – the decision is is expected to trigger renewed protests and is likely to give the newly appointed Minister of Finance, Muhamad Chatib Basri, a strong headache.

However, Basri said that the new policy “will come into effect after the discussion for state budget revision is completed”.

Although the measure will most likely have a negative impact on voters’ perception with regards to the 2014 presidential elections, country analysts say it is necessary to curb the rising budget deficit that is foreseen to climb to between 2 and 2.5 per cent of the GDP.

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Reading Time: 2 minutes

Pressure on state finances and on the national currency caused by huge spending on fuel subsidies has forced the Indonesian government to announce a 45 per cent increase of petrol prices for later in 2013 in the middle of the discussion over a state budget revision. Former governments have tried to do the same, but in vain. Now it seems necessary.

Reading Time: 2 minutes

Jakatra gas pumpPressure on state finances and on the national currency caused by huge spending on fuel subsidies has forced the Indonesian government to announce a 45 per cent increase of petrol prices for later in 2013 in the middle of the discussion over a state budget revision. Former governments have tried to do the same, but in vain. Now it seems necessary.

With almost half of its population living on $2 per day, net oil importer Indonesia has adopted since the 1960s a policy of subsidising fuel, a measure that has always been a disputed issue for the government and policy makers. Many times authorities tried out how to raise gasoline prices but all attempts ended up with street protests and subsequently increasing budget deficits.

During the 1998 financial crisis, the Suharto government was the first that sought to increase gasoline prices and reduce state subsides, but this attempt caused – together with other economic problems – the long-term president to step down amid violent street protests throughout the country.

Similarly, his successor, Abdurrahman Wahid, had to withdraw his decision after he announced in 2000 an increase in fuel prices and the crowd took to the streets again.

The next president in line, Megawati Sukarnoputri, had the same issues with public protests when she decided to hike fuel prices in 2003, while the incumbent president Susilo Bambang Yudhoyono finally made a point and in 2005 ordered to lift the fuel price from 4,500 rupiah to 6,000 rupiah per liter. However, at the same time he had to compensate poorer households through cash transfers in order to mitigate the impact of this policy. Nevertheless, in 2008 Yudhoyono decided to cut the fuel price back to 5,000 rupiah and back to 4,500 rupiah in 2009 as he was drastically loosing public support.

In 2011, Indonesia spent over $15 billion on gasoline subsidies, or 13 per cent of total state expenditures, and around $17 billion in 2012. For 2013, the forecast stands at up to $20 billion, or 11 per cent of the national budget.

New plans announced by the government in 2012 to raise fuel prices again to 6,000 rupiah per liter resulted once more in street protests, as well as faced a strong opposition in parliament.

However, with the weak rupiah making oil imports increasingly expensive, and with the outlook of a record state deficit of $24 billion in 2013, the worst since 1997, the government started to rethink the subsidy scheme once again and recently announced a revision of the 2013 budget approved in October 2012, indicating that the price of low octane petrol will rise by 2,000 rupiah to 6.500 rupiah per liter.

Even though Indonesia has one of the cheapest fuel prices in Asia – one liter of premium grade petrol currently costs 4,500 rupiah or 46 US cents, while in Malaysia it costs 98 US cents and in Singapore $1.7 – the decision is is expected to trigger renewed protests and is likely to give the newly appointed Minister of Finance, Muhamad Chatib Basri, a strong headache.

However, Basri said that the new policy “will come into effect after the discussion for state budget revision is completed”.

Although the measure will most likely have a negative impact on voters’ perception with regards to the 2014 presidential elections, country analysts say it is necessary to curb the rising budget deficit that is foreseen to climb to between 2 and 2.5 per cent of the GDP.

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