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Indonesia not planning to reduce fuel subsidies yet

Publication Date : 15-08-2014


Indonesia is not going to see a reduction in its fuel subsidy bill just yet.

Several observers had expected this to be factored into the government Budget for next year, which president Susilo Bambang Yudhoyono is due to announce in Parliament this afternoon

.But presidential aide on economic affairs Firmanzah told The Straits Times calculations for a cut in fuel subsidy spending have not been worked into today's numbers.

"The process to draw up the 2015 government budget has been a long one, since January. It cannot be amended abruptly," he said.

His remarks are the strongest hint yet that the burden of any increase in the price of subsidised fuel, a politically contentious subject, would have to be shared by president-elect Joko Widodo, who takes office on Oct 20.

The budget announcements traditionally take place on the eve of Indonesia's independence day on Aug 17, but amendments to the numbers can be made before Parliament thereafter.

Dr Yudhoyono's outgoing team can, however, still lay the groundwork for a hike in the coming weeks when it discusses the handover of power with Joko's team.

These discussions are likely to start soon after the Constitutional Court rules on a challenge to election results by defeated candidate Prabowo Subianto next week.

Indications from the ongoing hearing are that the challenge will be rejected, paving the way for Joko to be confirmed as the next president.

Joko's advisers have, in recent days, publicly suggested that Dr Yudhoyono raise fuel prices next month to address a swelling fuel subsidy bill amid rising demand this year.

Indonesia spent about 200 trillion rupiah (US$17.67 billion) last year and plans to spend 250 trillion rupiah (US$21.4 billion) this year to keep fuel prices affordable to the majority of Indonesians.

There are hopes both the outgoing and incoming teams will work out a deal that would see the price of lowest-grade subsidised fuel rise from 6,500 rupiah (US$0.56) a litre to 7,500 rupiah (US$0.64)  or 8,000 rupiah (US$0.69) a litre.

Political economist Umar Juoro of Jakarta's Centre for Information and Development Studies says Dr Yudhoyono has to take the unpopular decision of raising fuel prices in spite of possible public criticism, in consultation with Joko, if he wants to leave a legacy of responsible economic decision-making.

"The move would certainly push costs higher and trigger inflation, but there is no other feasible choice," Dr Umar said.

He notes any price hike would do good in the long term as it would free up funds for education and social spending.

The outgoing government has taken steps to limit subsidised fuel use. On Aug 1, it stopped the sale of subsidised fuel in central Jakarta and on toll roads at certain hours.

But any fuel hike announcement will also likely come next month to avoid disruption to the formal handover, economists say.

OCBC Bank economist Wellian Wiranto said in a report the gains for Dr Yudhoyono would outweigh short- term costs: "He may well be called a lame duck by some, but nonetheless one that could croon a melodic swan song to help put Indonesia's economy on a more sustainable path if he so chooses to."

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