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Indonesia Signals Higher Fuel Price Still Needed to Curb Subsidy

Indonesia may still need to raise fuel prices to reduce the government’s energy budget, supplementing plans to restrict the use of subsidized oil as early as June, according to the country’s fiscal chief.

“The optimal policy is a combination between price increase and tight restriction on subsidized fuel,” Bambang Brodjonegoro, head of fiscal policy at Indonesia’s Finance Ministry, said in an interview yesterday in Bandar Seri Begawan, Brunei. “It has to be combined so you don’t have to increase prices that much.”

The earliest possible time for an increase would be April because inflation is usually low during the harvest season, he said, adding that any such move would depend on President Susilo Bambang Yudhoyono’s approval. A 10 percent boost in fuel prices would be the most feasible option, he said.

The availability of gasoline and diesel below international market rates has spurred oil imports in Indonesia, contributing to a record trade deficit in October and the worst-performing Asian currency after the yen and Indian rupee in the past 12 months. Containing the subsidy bill to free up funds for infrastructure development will be a key challenge for the next finance minister as Yudhoyono prepares to name a successor to Agus Martowardojo, set to head the central bank in May.

“The simplest and best way to curb energy subsidies is to raise the fuel price as it can be implemented soon without the need to prepare infrastructure and other things,” said Destry Damayanti, chief economist at PT Bank Mandiri in Jakarta. While inflation may accelerate to about 8 percent after an increase, in the long term, it “will give a positive impact to Indonesia’s economy,” she said.

Seeking Alternatives

The Indonesian government has been exploring a variety of options to reduce the need to raise fuel prices in a country where riots spurred by soaring living costs helped oust dictator Suharto in 1998.

The administration is considering restricting the use of subsidized fuel in the greater Jakarta metropolitan area starting June or July before implementing it in other cities, Brodjonegoro said yesterday. Other measures may include banning private cars from buying partially government-funded fuel, and setting a daily limit to the volume of subsidized products being sold, he said.

The government budgeted for 46 million kiloliters of subsidized oil products this year, consisting of low-octane gasoline, diesel oil, kerosene, biodiesel and liquefied petroleum gas.

New Fuel

Finance Minister Martowardojo said April 2 Indonesia may introduce a new type of fuel that can be sold at a higher price than existing subsidized products as the government seeks to reduce its energy budget without exacerbating inflation.

The country is considering having state-owned PT Pertamina sell a new fuel as part of plans to limit energy subsidies to private-owned vehicles, he said. A revised fuel policy may be announced in two weeks, Energy Minister Jero Wacik said.

Pertamina plans to install a fuel monitoring system from July, equipping a controlling system in its pump stations to record the amount of subsidized fuel being distributed to consumers, Ali Mundakir, spokesman at the state oil and gas company, said in Jakarta yesterday. The company may start installing the device in July in the greater Jakarta area, expanding nationwide by 2014, he said.

A 2012 plan to ban some private vehicles from using subsidized fuel wasn’t implemented, Martowardojo said April 2. An alternative fuel type priced below the current non-subsidized gasoline products needs to come with other policies in one package, he said. Pertamina sells subsidized fuel at 4,500 rupiah ($0.46) a liter.

Finance Minister

Yudhoyono has prepared names for the finance minister post and may name someone within a month, Julian Aldrin Pasha, a presidential spokesman, said in Jakarta yesterday. Martowardojo will remain minister until he’s been sworn in as Bank Indonesia governor, Pasha said.

Yudhoyono’s office signaled last month the government will avoid an immediate increase in fuel prices, as the scope for such moves narrows ahead of elections in 2014. The government is formulating a more targeted fuel-subsidy policy because the current one benefits middle to upper-income groups more than the poor, he said on March 13.

Indonesia limited the use of partially government-funded diesel in January, after protests in the world’s fourth-most populous nation derailed plans to raise prices in 2012. The restrictions limit the use of subsidized diesel by forestry companies, commercial vessels and government vehicles in several provinces.

To contact the reporter on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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