Indonesia raises fuel prices to ease subsidy burden on budget

Indonesia raised some fuel prices as the government balances the risk of inflationary pressures against a ballooning energy subsidy bill.

The price of Pertalite, the most commonly used gasoline, will increase more than 30% to 10,000 rupiah ($0.67) a liter, while the cost of non-subsidized fuel Pertamax will rise about 20% to 14,500 rupiah, energy minister Arifin Tasrif said on Saturday. The changes are effective as of 2:30pm in Jakarta.

“State funds must be prioritized for people in need,” President Joko Widodo said at the same briefing, adding that more than 70% of fuel subsidies is used by wealthier people who own cars. “At this time, the government must make a decision during a difficult time. This is our last option: to reallocate fuel subsidies.”

The subsidy cut is a shift in strategy for the government, which repeatedly said it would use its budget as an inflation “shock absorber.” That strategy has proven challenging as Jokowi has also pledged to return the deficit to within its legal limit of 3% of gross domestic product by 2023 from an estimated 3.92% of GDP this year.

Energy subsidies are still set to increase by 137 trillion to 151 trillion rupiah, depending on the average crude price by the end of the year, Finance Minister Sri Mulyani Indrawati said at the briefing. That’s on top of the 500 trillion rupiah allocated in the latest budget. She previously said that stronger-than-expected consumption of subsidized fuel would increase the bill by 198 trillion rupiah without price hikes.

Street protests

Past fuel price hikes have triggered massive public protests. Even with heavy subsidies, Indonesians are already contending with their worst inflation in seven years, with food and transport costs soaring.

Pertalite was pegged at 7,650 rupiah per liter in April when it was designated as the government-subsidized fuel. Its prices in Jakarta were last raised in March 2018 by 4% to 7,800 rupiah per liter, before declining in 2019.

Bank Indonesia unexpectedly raised its policy rates by 25 basis points to 3.75% last month as it warned price pressures were spreading to more areas in the economy, and inflation could breach its 2%-4% target until 2023.

Analysts expect further rate hikes may be in the pipeline, as higher fuel prices could tip inflation past 7% this year, above the central bank’s forecast of 5.24%.