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Explainer-Indonesia bites the bullet on fuel costs as subsidies soar

Explainer-Indonesia bites the bullet on fuel prices as subsidies soar Reuters. Motorcycle drivers wait in line to get subsidised fuel at a petrol station of the state-owned company Pertamina following the announcement of a fuel price hike,in Bekasi, on the outskirts of Jakarta, Indonesia, September 3, 2022. REUTERS/Ajeng Dinar Ulfiana

By Fransiska Nangoy

JAKARTA (Reuters) – Indonesian President Joko Widodo on Saturday raised some fuel costs by around 30% to contain ballooning shelling out for energy subsidies in Southeast Asia’s biggest economy.

The move risks sparking protests and additional fanning price pressures, though analysts saw a have to act to make sure fiscal discipline.

WHAT HAS BEEN CHOSEN FUEL COSTS?

Indonesia raised the cost of its hottest 90-octane gasoline, referred to as Pertalite, to 10,000 rupiah ($0.6714) per litre, up from 7,650 rupiah. The finance ministry said state energy firm Pertamina’s production charges for this sort of fuel was 14,450 rupiah per litre.

The cost of diesel rose to 6,800 rupiah per litre, from 5,150 rupiah, weighed against a production cost of 13,950 rupiah.

Jokowi, because the president is popularly known, also hiked the cost of 92-octane gasoline, referred to as Pertamax, to 14,500 rupiah per litre, from 12,500 rupiah. Pertamina will not receive compensation for losses in Pertamax sales.

WHY RAISE FUEL COSTS NOW?

The federal government has recently tripled its energy subsidy spending this season from the initial budget to 502.4 trillion rupiah ($33.83 billion) to help keep subsidised fuel costs plus some power tariffs unchanged amid high global energy prices.

It has led to a widening price disparity between subsidised and non-subsidised fuel, prompting consumers to change to cheaper fuels.

Some economists have said raising fuel costs this season would decrease the threat of spending overruns in 2023 once the government must lower its fiscal deficit to below 3% of GDP.

HOW COME HIKING FUEL COSTS CONTROVERSIAL?

Fuel costs certainly are a politically sensitive issue in Indonesia sufficient reason for subsidised fuels creating a lot more than 80% of Pertamina’s sales, the changes could have major implications for households and smaller businesses.

Big companies aren’t permitted to buy subsidised fuels for his or her operations.

Previous price increases had resulted in mass protests over the archipelago, including when Jokowi last raised fuel costs in 2014.

The existing price hike comes at the same time when food prices already are trending up. August inflation was 4.69%, above the central bank’s target range for 90 days in a row.

The federal government has this week began to distribute cash from the $1.6 billion additional social protection fund to cushion price pressures for the indegent.

Elections are set to be held in 2024.

HOW WILL THE MEASURES IMPACT INFLATION, GDP?

Pertamina has estimated a 30% to 40% upsurge in fuel costs could add 1.9 percentage indicate inflation in 2022, but this assumed a more impressive upsurge in some prices.

Some economists and business groups think inflation could grab to around 6% by the finish of the entire year, putting strain on the central bank to tighten monetary policy quicker.

Bank Indonesia (BI) raised interest levels on Aug. 23 for the very first time since 2018 in a move analysts said was to pave just how for the fuel price hike announcement. BI continues to be well behind most peers in its roll back of pandemic-era stimulus and economists expect more hikes.

The potential decrease in purchasing power and higher interest levels could hurt economic growth. The federal government targets 2022 GDP growth at 5.2%.

WHAT GOES ON TO SUBSIDY BUDGET NOW?

Finance Minister Sri Mulyani Indrawati said despite having the fuel costs increase, the government’s energy subsidy spending would still swell.

She estimated energy subsidy allocation this season will range between 591 trillion rupiah to 649 trillion rupiah following the price hike, assuming the Indonesia Crude Price moves between $85 to $100 per barrel for the rest of the entire year.

The federal government may shift about 100 trillion rupiah of subsidy payments to 2023, pending parliamentary approval, Sri Mulyani said.

She didn’t give any assessment on what the purchase price hike would affect the 2022 budget deficit outlook. Her latest forecast was for a fiscal gap equal to 3.92% of GDP.

($1 = 14,895.0000 rupiah)

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