Indonesian Finance Minister Chatib Basri expects that the higher electricity tariffs which may be introduced per 1 July 2014 (for 400-950 watt capacity) will have a relatively small impact on the pace of inflation in Southeast Asia’s largest economy. “If introduced, the higher electricity price may add 0.1 or 0.2 percentage point to inflation. The limited impact of this price hike on Indonesian inflation means that the government will not revise its inflation target for 2014 yet,” Basri said. The Indonesian government targets an inflation growth rate of 5.3 to 5.5 percent.
It remains unknown whether the electricity price will indeed be raised per July 2014 as this decision still needs approval of the House of Representatives' Commission VII on energy affairs. The government wants to increase the price in order to reduce funds spent on energy subsidies in an attempt to make the country’s financial framework healthier. In 2014, the government has allocated a total of IDR 282.1 trillion (USD $70.2 billion) to energy subsidies. This involves IDR 210.7 trillion worth of fuel subsidy and IDR 71.4 trillion worth of electricity subsidy. By raising the electricity price, the government hopes to save IDR 8.5 trillion (USD $720.3 million). Speculation has also risen that the government will raise prices of subsidized fuels later this year or in 2015. However, reducing energy subsidies always triggers public outcry, demonstrations as well as accelerated inflation (with the risk of pushing many people into poverty) and thus imply political risks for the ruling parties. The last time, the government raised subsidized fuel prices - by an average of 33 percent - was in June 2013 (inflation accelerated to nearly 9 percent year-on-year).
Indonesian Energy Subsidies 2005-2014:
|Year|| Fuel Subsidy
|| Electricity Subsidy
|| Total Energy
in IDR trillion
Source: Investor Daily
Deputy Finance Minister Bambang Brodjonegoro also stated that, contrary to higher subsidized fuel prices, the influence of the possible higher electricity tariffs on inflation is limited at around 0.2 percent. Higher subsidized fuel prices immediately add at least 1 percent to inflation as these subsidies can be labelled an engine of economic growth in Indonesia.
Deputy Governor of Bank Indonesia Perry Warjiyo said that inflation in 2014 is expected to reach about five percent, which is well within the central bank’s inflation target range of 3.5 to 5.5 percent (year-on-year) for this year.
Inflation in Indonesia:
|Month|| Monthly Growth
| Monthly Growth
(annual percent change)
Source: Statistics Indonesia