Indonesia raised subsidized fuel prices by an average Rp 2,000 per liter, in an attempt to curb fuel usage and narrow the gaps in the current account and the state budget.
The price for low-octane gasoline, or Premium, will rise to Rp 8,500 (70 US cents) per liter, from Rp 6,500. Subsidized diesel was raised to Rp 7,500 per liter from Rp 5,500. The prices would go into effect at midnight on Monday.
“From time to time we as a nation face difficult choices, but we have to take a decision,” President Joko Widodo said, as he announced the price increases at around 9:10 p.m. on Monday in an address that was broadcast via television.
“I hope the shifting of the subsidy to a more productive direction can benefit the entire Indonesian people,” he said.
The move would also help to reduce state expenses on the subsidy and that money could be used for other programs such as education and health care. Bambang Brodjonegoro, the finance minister, said that the increase will save Rp 120 trillion ($9.8 billion) in the 2015 state budget.
Sofyan Djalil, the coordinating minister for economic affairs, said in a press briefing on Monday that the government has so much infrastructure that needs to be built that “we need to save some of our budget for productive spending.”
Bambang said in Monday night’s televised announcement that the subsidized fuel price increases would cause inflation to accelerate to 7.3 percent by the end of this year from 5.3 percent targeted in the 2014 state budget.
The government last raised subsidized fuel prices in June 2013 by an average Rp 3,000 a liter. That caused inflation to accelerate from 5.90 percent in June to 8.61 percent in July. Inflation then peaked at 8.79 percent in August of last year before slowing to as low as 3.99 percent in August 2014. Inflation stood at 4.83 percent in October.
Still, the prices for subsidized fuel have yet to catch up with regular fuel prices. The price for non-subsidized gasoline, by comparison, is around Rp 11,000 a liter.
Higher prices could curb use of subsidized gasoline and diesel, and that in turn might reduce fuel imports. Indonesia’s current account deficit has narrowed to 3 percent of gross domestic product in the third quarter from 4.3 percent of GDP in the previous three-month period.
Fitch Ratings in a report on Monday said that Indonesia may see a short-lived decline in car and motorcycle sales from higher subsidized fuel prices because the economy will continue to grow as funds from the subsidy are shifted into other programs.
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