After weeks of uncertainty, Indonesian President Joko Widodo announced on Monday (17/11) that prices of subsidized fuels (gasoline and diesel) are to be raised by IDR 2,000 (USD $0.16) per liter starting from midnight. Gasoline (premium) is to be raised from IDR 6,500 to IDR 8,500 per liter, while diesel will be raised from IDR 5,500 to IDR 7,500 per liter. Earlier it was speculated that an IDR 3,000 per liter price hike would be announced. However, as global oil prices have declined sharply, this was considered an unnecessary burden for the people.
Higher subsidized fuel prices are a measure to curb ever-increasing domestic fuel consumption thus relieving pressures on the country’s wide current account deficit as well as government budget deficit. This move frees up fiscal space for economic and social development, including infrastructure, healthcare and education, which should bring Indonesia’s economic growth pace back to the level of +7 percent year-on-year (from around 5 percent y/y currently). The fuel price hike will save IDR 120 trillion (USD $9.8 billion) in the 2015 State Budget.
Despite the significant price increase, fuel prices are still subsidized in Indonesia. Non-subsidized gasoline costs IDR 11,000 per liter.
Higher subsidized fuel prices are expected to result in accelerated inflation for a period of about three months. Previously, the central bank of Indonesia (Bank Indonesia) estimated that an IDR 2,000 per liter fuel price hike would add about 2.5 percentage points to the annual inflation pace. This means that inflation may accelerate to 7 percent y/y by the year-end or start of 2015 before slowly easing again.