It is the first time in five years that Indonesia's fuel prices are raised again. The last time was in May 2008 when prices rose by 28.7 percent. Indonesia, once an important oil producer and former member of the OPEC, keeps the price of fuel artificially low in order to support the poorer segments of society. However, as domestic oil production declined steadily in the last 15 years, while the international oil price rose, the country needed to rely on expensive imports to meet domestic demand. As imports of oil have been placing great pressure on the government's budget balance, the need for a fuel price hike has been felt again. Moreover, international pressure is most likely to have played a role. Various international institutions, such as the World Bank and IMF, have been stressing the need for reduction in fuel subsidies as it creates a distorted economy and simply can not be maintained toward the future due to the exhaustive nature of the commodity. Standard & Poor's decided to downgrade Indonesia's BB+ credit rating outlook from positive to stable in May 2013 because of ongoing hesitance regarding the fuel price decision. Similarly, Moody's warned to take a similar action if the Indonesian government would not address the fuel subsidy issue soon.

In last night's meeting, where 18 ministers were present, Economic minister Hatta Rajasa explained the necessity for higher fuel prices as global turmoil has weakened government revenues. Moreover, government spending has been ballooning due to the robust increase in domestic demand for fuels in Indonesia in recent years. As such, it has impacted on the government's budget deficit, causing the government to act in order to heal the economy.

At the same time, the government is aware that higher fuel prices will trigger higher inflation and will impact hardest on people with low purchasing power. To support the poorest segment of Indonesia's society, the government will provide several compensation programs: community grants (Bantuan Langsung Masyarakat, or BLSM), the Family Hope program (Keluarga Harapan, or PKH), the subsidized rice program (Beras Miskin, or raskin), scholarships for the poor, and basic infrastructure development.

The government hopes that through the increase in fuel prices, oil consumption as well as oil imports will reduce. Without this government intervention, the amount of consumed subsidized fuel would have reached up to 53 million kilo liter (KL) although the 2013 State Budget allocated only 48 KL. Moreover, this measure is expected to give a positive sign to the financial markets and is expected to support the IDR rupiah as well as the Indonesia stock index (IHSG), both of which have weakened steadily recently. Government securities (SBN) yields rose sharply as investors anticipated the fuel price hike.