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JAKARTA – Despite the threat of political opposition and public protests, Indonesian President Joko Widodo this week raised fuel prices in a move he said will free up revenue for infrastructure improvements and social spending.
The price of petrol is hiked by 31 per cent to Rp8,500 (US$0.70) and diesel by 36 per cent to Rp7,500 (US$0.62). This pushes public fuel costs at the pump close to market levels, given a fall in oil prices of more than 30 per cent in the past six months.
Public transport prices will be raised to reflect the fuel price change, Transport Minister Ignasius Jonan said on Tuesday, while taxi companies will likely in turn raise prices after discussions with the government. With higher transport and logistics costs will come higher prices for food and consumer goods, and in turn concerns about inflation.
In a move is meant to head off inflation as the fuel price rise echoes through the economy, the central bank this week announced a .25 per cent interest rate increase – up to 7.75 per cent – despite Indonesia’s economy down to its lowest growth in five years at just over 5 per cent. But many now predict a rise of up to two points in the inflation rate to about 7 per cent following the fuel move.
Speaking to The Edge Review, Juda Agung, Executive Director of Bank’s Economic and Monetary Policy Department, said that the Bank would try and ward off any inflation stemming from the fuel price increase.
“We will continue to be watchful for wider developments in the economy,” Agung said.
The narrowing price gap between lower quality subsidized fuel – sold only by state-owned oil producer Pertamina – and more expensive brands will likely mean greater sales for the higher quality fuel, and will likely see Indonesia reduce oil imports and lower its current account deficit.
“Higher fuel prices will limit the growth of oil imports, which have far outpaced oil exports in the past three years. The current account deficit should ease towards 2.7% of GDP in 2015, from around 3% this year,” said DBS Bank.
While the price increase of $0.16 does not seem like much, it comes hard on the heels of a previous 16 cent rise in May 2013 and is significant in a country where tens of millions of people live on less than the equivalent of $2 per day. While most car owners are wealthier than this and will be better placed to handle the more expensive fuel, the knock-on effects- such as higher food costs – will be felt disproportionately by the poor.
Long lines formed at fuel stations on Monday night as consumers bought their last tankful of subsidized fuel, while small scale protests against the price lift took place in Jakarta and elsewhere across the country
But the short term pain, the government says, will be offset in the long term by greater spending on roads, electricity, healthcare and schools. The savings will give Jokowi, as the new President is known, an estimated $11bn to re-allocate when he goes back to parliament to renegotiate a 2015 budget passed by the previous President, Susilo Bambang Yudhoyono.
Jokowi’s hopes of redrafting the budget were boosted by an apparent truce this week between feuding parliamentary coalitions. Previously, the Ted and White coalition which backed defeated Presidential candidate Prabowo Subianto in the July election and which holds a majority of house seats, threatened to undermine Jokowi’s reforms.
But a new-found amity is promised after Jokowi’s Awesome Indonesia Coalition bloc signed a limited power-sharing deal with the Red and White coalition on Monday, prompting ANZ Research to say that “the likelihood that Indonesia’s Parliament will be more receptive to passing the Jokowi agenda has also increased.”
Jokowi’s long-term aim is to cut fuel subsidies entirely, which could rile the country’s shady oil and gas mafia – described as a group of politically connected business people who make money from the subsidy scheme and from Indonesia’s energy imports, which have been driven up in recent years by growing demand for cheap fuel on the domestic market as an rapidly growing middle class shuns motorbikes in favour of cars.
This week’s appointment of Amien Sunyardi, a former official at Indonesia’s Corruption Eradication Commission, to head up energy regulator SKKMigas, is being taken as another signal that the government wants to tidy up the oil and gas sector.
Sectors such as rubber have struggled with falling prices in recent years – a development made worse for Indonesian growers by the country’s poor infrastructure, which makes it cheaper for rubber glove factories in Sumatra to import Malaysian rubber, than to source rubber from Indonesian growers.
Aziz Pane, chairman of Indonesia’s Tyre Manufacturers Association, said that his group had been calling on successive governments to allocate more money to improving Indonesia’s infrastructure, which means cutting the fuel subsidy.
“But they have all been afraid of the oil mafia,” he told The Edge Review.Show