Indonesia braces for 50% fuel price hike

Just as grumbling and groaning from the nation of Malaysia had died down after the RM0.20 fuel price hike was effected, its neighbour is bracing itself for an even steeper price hike – likely to be around 50% – in November.

President Joko Widodo, which only just took office on Monday, will likely make the highly unpopular move in a bid to mend Indonesia’s dire financial situation, which is exacerbated by a US$23 billion fuel subsidy bill. While the subsidy keeps pump prices low, it drains funds from other critical sectors like infrastructure and agriculture, healthcare and education.

An advisor to Jokowi, which remains anonymous, told Reuters that the new President has plans to increase the price of petrol by 46% and diesel by 55%, which is estimated will save the government as much as US$13 billion next year. “It’s safe to say they are likely to do it within the first two weeks of taking office,” the advisor said. Indonesian pump prices are amongst the lowest in the region, with a litre of petrol costing 6,500 rupiah (US$0.55) and a litre of diesel costing 5,500 rupiah (US$0.45).

Fuel price hike is a highly sensitive issue in a nation that has long enjoyed subsidised fuel and where cost of living is increasing with a forecast inflation rate of 5.3% this year; in 1998, a 70% price hike led to riots, which escalated and eventually toppled the then president Suharto from his 31-year reign. Supporters of Widodo are nervous that something similar could happen to the new President.

But Widodo has sought to mend relations with the head of the opposition, Prabowo Subianto, after a bitterly fought election in July; when they met last Friday, Prabowo pledged qualified support for his rival. During the joint news conference that followed, Prabowo said, “I will ask (my supporters) to support Joko Widodo and the government he will lead…When there are things that we judge to not be for the benefit of the people… we will not hesitate to criticise.”

If anything, the opposition would likely criticise the sudden, sharp increase in fuel price, favouring a more gradual reduction of subsidy. Back in August, Widodo had requested for his predecessor to effect the price hike before he took over the reins, but President Yudhoyono did not yield to the president-elect’s request.

So, perhaps it is better for Widodo to make unpopular and controversial moves early in his term rather than later. Fauzi Ichsan, Managing Director of Standard Chartered Indonesia believes that Jokowi’s strategy is to strike while the iron is hot. “…Jokowi will still have the political capital to hike fuel process sharply,” said Fauzi. “His economic team can turn around and say, ‘look, we inherit such a bad budget and the only way Jokowi can realise his infrastructure programmes is to hike fuel price sharply’.”


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