The government of Indonesia may cut fuel prices in the fourth quarter of 2015 in an effort to boost people's purchasing power and reduce costs for local manufacturers. The move would be part of the government's stimulus package that is expected to be announced next week. On 9 and 29 September the Indonesian government had already unveiled the first two installments of the policy package. Contrary to the first two installments, the third one should bear fruit on the short-term.
Overall, Indonesia's economic policy package aims to boost the domestic economy through increased investment while safeguarding rupiah stability.
After the decades-long fuel subsidy program was largely scrapped in January 2015 by Indonesian President Joko Widodo, inflation remained high in the first half of 2015 as global petroleum prices somewhat recovered (Indonesian inflation had already been high prior to the scrapping of gasoline subsidies due to two subsidized fuel price hikes that took place in June 2013 and November 2014). The combination of high inflation, slowing economic growth, low commodity prices and the high key interest rate of the central bank (with the BI rate at 7.50 percent) managed to curb consumer's purchasing power.
In January 2015, gasoline subsidies were scrapped altogether while the subsidy for diesel was set at a fixed IDR 1,000 per liter in order free-up funds (about IDR 230 trillion) for much-needed infrastructure development. However, due to red tape a large part of these funds remains unused.
Meanwhile, the heavily depreciated rupiah (which weakened around 18 percent against the US dollar so far in 2015) brought imported inflation. Indonesia's manufacturing industry saw prices of imported raw materials rise while (domestic and foreign) demand for manufacturing output declined. This led to the continuation of job shedding in September. According to data from the Confederation of Indonesian Workers Unions (KSPSI), over 62,000 people have lost their jobs in the first nine months of 2015, an alarming figure. Yesterday (01/10), it was announced that Indonesia's Nikkei/Markit manufacturing purchasing managers' index (PMI) contracted for the 12th straight month at 47.4 in September (from 48.4 in the preceding month). Layoffs mainly occur in the country's tobacco, food and beverage, textile, food-wear, electronics and mining sectors. Therefore, the KSPSI requests for breakthrough policies from the government.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.38 percent to IDR 14,709 per US dollar on Friday (02/10).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
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