Indonesia must raise fuel prices to curb a subsidy bill that threatens to sap funds from pivotal health, education and road and port building programs, an adviser to President Susilo Bambang Yudhoyono said.
Maintaining subsidies “would have a really bad impact” on growth by causing the fiscal deficit to exceed the legal limit of 3 percent of gross domestic product, forcing cuts in more productive spending, National Economic Committee Vice Chairman M. Chatib Basri said in an interview with Bloomberg Television in Hong Kong on March 23.
Surging oil prices led China to boost fuel costs the most in more than two years this month and has added pressure on nations from Indonesia to India to raise tariffs. A proposed 33 percent increase being debated by the Indonesian parliament may cause inflation to double to 7 percent by year-end, Basri said.
“The hike is necessary because more than 90 percent of the subsidy is enjoyed by the middle class” and thus “mistargeted,” Fauzi Ichsan, senior economist at Standard Chartered Plc in Jakarta, said in an e-mail yesterday. “The bigger the gap between domestic and global fuel prices, the more widespread will hoarding and smuggling be, bloating the subsidy.”
Implementation won’t spur “major” unrest as the government will compensate the poor directly, Basri said. Protests against the proposed fuel-price increase have occurred across Southeast Asia’s largest economy.
The administration’s plan to raise diesel and petrol prices to 6,000 rupiah (65 U.S. cents) per liter from 4,500 rupiah is subject to approval by lawmakers.
Inflation could reach 6.8 percent in 2012 if the increase is implemented, Governor Darmin Nasution said March 8. Consumer prices rose 3.56 percent last month from a year earlier.
The central bank has said it will respond to a surge in costs if needed. Bank Indonesia has cut interest rates by one percentage point to 5.75 percent in three moves since the start of October 2011.
Indonesia’s rupiah has weakened about 1.5 percent against the dollar so far this year, while the benchmark Jakarta Composite Index of stocks has climbed 5.5 percent in the period.
Crude oil is up 32 percent in the past six months, partly on concern international tensions with Iran may affect supplies. The advance threatens to crimp consumer spending and company profits, with PT Garuda Indonesia, the nation’s largest listed airline, saying this month it will raise ticket prices to cope.
Indonesia should cap fuel subsidies, rather than set a subsidized fuel cost, to enable tariffs to reflect global crude prices better, Basri said. He gave 2,000 rupiah per liter as an example level for the cap.
“The 10 percent richest consume about five times the fuel compared with the 10 percent poorest,” Basri said. “We have to change the structure from subsidizing commodities like fuel to direct subsidies for poor people.”
The Indonesian economy expanded 6.46 percent in 2011, the fastest pace since 1996, as investment and domestic spending countered easing export demand on Europe’s debt crisis.