Indonesia's new president raised
subsidised fuel prices by more than 30 percent on Monday, a move
that is expected to save the government of Southeast Asia's
biggest economy more than $8 billion next year.
President Joko Widodo's first major economic policy decision
since taking the helm in October will help provide the necessary
fiscal space to fund his reform agenda and tackle the country's
twin budget and current account deficits.
"The government has decided to redirect fuel subsidies,"
Widodo told reporters at the presidential palace. "The country
has needed a (larger) budget for infrastructure, healthcare and
education but instead spent it on subsidizing fuel."
Indonesian fuel prices, among the cheapest in the world,
were raised by 2,000 rupiah ($0.16) per litre, with subsidised
gasoline now costing 8,500 rupiah a litre and diesel 7,500
rupiah.
The fuel price hike was welcomed by economists, but
immediately sparked small protests and long queues at petrol
stations in the capital.
"The move is encouraging since it suggests that (Widodo) is
serious about economic reform in Indonesia, and is even prepared
to take steps that may prove unpopular in the short run," said
Gareth Leather of Capital Economics.
Finance Minister Bambang Brodjonegoro said he expected
inflation to rise 2 percent to 7.3 percent this year after the
fuel price rise, and that the inflationary impact would be felt
through February 2015.
Economists said Bank Indonesia may need to raise interest
rates as early as this month to tame inflation. "We expect BI to
raise 25 bps either this month in an unscheduled meeting or in a
monthly policy meeting in December depending on the impact,"
said Eric Sugandi, economist with Standard Chartered.
Analysts expected the news to support Indonesian stocks and
bonds when markets open early Tuesday. The rupiah was
little changed after the announcement, down 0.2 percent at
12,202 per dollar.
Raising fuel prices is a sensitive issue that typically
sparks protests and contributed to the downfall of long-serving
autocrat and then president Suharto in 1998.
The decision to raise fuel prices was criticised by trade
unions and some opposition politicians.
"This is not a wise decision right now," said Bobby Rizaldi,
a member of the Golkar party, part of the opposition majority
coalition. "Electricity prices have just been raised recently,
the currency has been under pressure, and now the inflation will
be higher than we anticipated at the beginning of the year."
Officials within Widodo's government have said any money
saved from reduced subsidies would be diverted to spending on
infrastructure, agriculture, education, and health projects.
Social assistance will also be available to 15.6 million
people from Tuesday, Chief Economics Minister Sofyan Djalil told
reporters, in a government drive to soften the impact of the
fuel price rise on the poor.
(1 US dollar = 12,202.0000 rupiah)
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