Yudhoyono Still Weighing Single Price to Reduce Fuel Subsidies

Indonesia is still considering a plan to raise fuel prices across all categories to curb subsidies, instead of just revising them by vehicle types, President Susilo Bambang Yudhoyono said today.

An across-the-board increase of 1,000 rupiah ($0.10) a liter may add about 1.6 percentage points to inflation, while a policy that is differentiated by vehicles will cut the impact by half, Bank Indonesia Deputy Governor Perry Warjiyo told reporters in Jakarta separately today.

Yudhoyono has sought to cut fuel subsidies and allocate more funds to infrastructure to spur expansion. The government limited the use of partially subsidized diesel in January after protests derailed plans to raise prices in 2012. Subsidies must be reduced for those who can afford paying for fuel at full market price and maintained for those who can’t, Yudhoyono said.

“That’s the reason for having two different prices, even though there’s still a single price option,” Yudhoyono said. “The reports coming to me are on whether this is technically possible on the ground; if the risk is too high then it’s not possible for the government to choose that.”

Yudhoyono, who can’t run for president next year after serving two terms, struggled to win support from within his own coalition for last year’s proposed fuel-price increase. He has said that Indonesia should review its subsidy bill and use the savings to boost infrastructure, calling for fiscal prudence.

Standard & Poor’s said this month that a delay in structural reforms, especially rationalization of energy subsidies, is a constraint in Indonesia’s credit quality.

Energy Subsidies

In his annual budget announced in August, the president allocated 274.7 trillion rupiah for energy subsidies, compared with 184.4 trillion rupiah for capital spending. The country spent 211.9 trillion rupiah on fuel subsidies in 2012.

Consumer price gains quickened to 5.9 percent last month from a year earlier and Bank Indonesia has held borrowing costs for 14 meetings. While gross domestic product has risen above 6 percent for the past nine quarters, the economy expanded in the three months through December at the slowest pace in more than two years as exports fell amid a decline in commodity prices.

PT Pertamina, Indonesia’s state-owned oil company, will group its gas stations into four categories to anticipate the government’s plan to sell subsidized fuel at two prices, Hanung Budya, the company’s marketing director, said today.

Some will only sell fuel at current prices, while others will be a mix of revised and current rates and the rest at the new levels, he said. Of its 5,569 fuel stations, 54 percent will sell gasoline at current costs and the rest at new prices, the company said.