Jusuf Kalla, Vice President of Indonesia, confirmed that subsidized fuel prices will be raised this month. Although Kalla declined to announce the specific amount, analysts expect a sharp increase of between IDR 2,000 and 3,000 (roughly USD $0.21) per liter - a price hike of almost 50 percent - to prices of both gasoline and diesel. Currently, the price of premium gasoline is IDR 6,500 (USD $0.54) per liter and diesel IDR 5,500 (USD $0.46). Economists have long requested for higher subsidized fuel prices in Indonesia as these distort the economy.
However, higher subsidized fuel prices usually leads to large-scale demonstrations and other social unrest in Southeast Asia’s largest economy as this move triggers significant inflation. As an illustration, when the Susilo Bambang Yudhoyono administration raised these fuel prices by an average of 33 percent in June 2013, inflation soon peaked at around nine percent (y/y). The impact of higher fuel prices was felt for three months (see table below).
Inflation in Indonesia tends to be relatively high (and volatile) compared to developed countries as Indonesia has been experiencing a period of robust (and sustained) economic growth over the past decade. However, peaks in Indonesia's inflation volatility correlate with administered price adjustments, particularly regarding fuel subsidies. The danger of these peaks is that it can push a big portion of those millions of Indonesians who live just above the poverty line (back) into poverty. Therefore, the government needs to implement well prepared social safety programs in order to support this group.
Opinions about the exact impact of an IDR 3,000 price hike on inflation differ. But most analysts expect that it will add between 1.7 and 3.6 percentage points to the country’s inflation figure. On Monday (03/11), it was reported by Statistics Indonesia (BPS) that the country’s inflation stood at 4.83 percent year-on-year (y/y) in October 2014.
Inflation in Indonesia:
|Month|| Monthly Growth
| Monthly Growth
Source: Statistics Indonesia
To support the poorer segments of Indonesian society, Indonesian President Joko Widodo launched the Indonesian Health Card (Kartu Indonesia Sehat, or KIS), Indonesian Smart Card (Kartu Indonesia Pintar, or KIP) and Indonesian Prosperous Card (Kartu Keluarga Sejahtera, or KKS) on Monday (03/11). Through these programs, the poor people will have better access to healthcare and education. Moreover, these programs help to safeguard their purchasing power (which will be negatively affected by higher subsidized fuel prices). Kalla added that these social safety programs should not be considered as compensation for higher fuel prices but as a redistribution of government subsidies. “Previously we supported those who own cars through the fuel subsidies, now we will support those that are poor,” Kalla said. The KIS will be distributed to 86.4 million Indonesians, the KIP to 1.9 million Indonesian children, and the KKS to 15.5 million Indonesian households.
However, subsidized fuel prices distort the economy of Indonesia in a number of ways. First of all, these subsidies eat a large chunk out of government expenditures. According to the 2015 State Budget (APBN 2015), a total of IDR 276.1 trillion (USD $23 billion) has been allocated for fuel subsidies in 2015. This means that about 14 percent of total government spending is ‘eaten’ by fuel subsidies. It would be much better to relocate these funds to structural social and economic development instead of fuel consumption only. Moreover, generous fuel subsidies imply that Indonesia's state budget is closely (and dangerously) linked to the volatile global oil price.
Indonesian Energy Subsidies:
|Year|| Fuel Subsidies
in trillion rupiah
Secondly, fuel subsidies are (to a large extent) to blame for Indonesia’s government budget deficit, trade deficit and current account deficit. As Indonesians’ demand for fuel is growing amid rapid economic expansion, while domestic oil output has been declining for about two decades, it turned Indonesia from an oil exporter into a net oil importer. These costly oil imports are the primary reason for the abovementioned deficits. In the second quarter of 2014, the current account deficit reached USD $9.1 billion, equivalent to 4.27 percent of GDP. This level is generally considered unsustainable and causes a steep decline in investor confidence. In times of global shocks (which is expected to occur again when the US Federal Reserve decides to raise its key interest rate) Indonesia may therefore be hit harder than other emerging countries.
Thirdly, several studies (conducted by both foreign and domestic institutions) show that the people who benefit most from subsidized fuel prices in Indonesia are not the country’s poorest segments but instead the richer segments of society.
• The government of Indonesia will raise subsidized fuel prices by (perhaps) nearly 50 percent (about IDR 3,000 per liter) in November 2014
• Higher subsidized fuel prices will cause a significant higher inflation figure and this can have severe consequences for the poorer segments of society (as people’s purchasing power declines)
• The Indonesian government has introduced social safety programs to support the poorer segments of society to deal with the higher fuel prices (KIS, KIP, and KKS)
• Generous fuel subsidies and expensive oil imports (brought on by robust fuel demand) have caused serious stress on the Indonesian economy by 'fuelling' the government budget deficit, trade deficit and current account deficit