Jokowi Raises Indonesia’s Subsidized Fuel Prices by IDR 2,000/Liter

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.