Fuel Price Rises Pushed Through in Indonesia as Government Digs In

Wait and See

"The Friday decision to further reduce oil subsidies was the best, necessary and responsible solution to save our national economy from crumbling and protect our people from harm…The alternative would be a possible financial and economic crash similar to that of 1997, and the real loser here would be our own people." So said Indonesia's President Susilo Bambang Yudhoyono, quoted by Reuters, as he defended his decision to increase fuel prices by the proposed average of 28.7% in order to prevent the country spiralling further into negative budgetary territory as the difference between domestic and international energy prices mounts.

The government managed the increases in the only way possible: announcing and implementing them in a 24-hour period to put a cap on hoarding and panic-buying ahead of the rise (see Indonesia: 22 May 2008: Fuel Price Rises Near-Finalised in Indonesia Amidst Popular Anger). A fund for the most vulnerable has also been rolled out, with a US$10/month payout to 19 million of the poorest families previewed for the rest of the year and a further US$2.5 billion available in 2009. The government has made much of the fact that the highest earners benefited most from the subsidies, although in reality the higher cost of transportation for people and goods is likely to have an impact across all social classes—both directly and indirectly, in the form of increasing inflation. Premium gasoline (petrol) now costs some 6000 rupiah (US$0.49) a litre compared to 4,500 rupiah/litre last week, while diesel is now 5,500 rupiah/litre.

As expected, popular protests and demonstrations have gathered steam in the wake of the price rises, with students remaining at the forefront in most instances. Clashes with the authorities have been reported at a number of locations although, as yet, the majority of demonstrations have passed off peacefully. The president has reportedly postponed a foreign trip to Europe in order to remain at home while the protests continue, in order to continue to monitor and shape the domestic response.

Outlook and Implications

The government has created some—but not much—breathing space through the fuel price hike. Subsidies are still forecast to increase to 200 trillion rupiah this year—from a revised budget of 135.1 trillion—based on an international oil price of US$120/b.

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