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Indonesia Braces for Rising Fuel Costs

  • Kate Lamb

A worker fills a tank with subsidized fuel at a fuel station in Jakarta, April 18, 2013.

A worker fills a tank with subsidized fuel at a fuel station in Jakarta, April 18, 2013.

Indonesian authorities are expected to slash fuel subsidies next month by 44 percent, sending fuel costs soaring. Economists say the subsidies are a costly expense that increases Indonesia’s reliance on foreign oil imports. But they remain politically popular and politicians are worried about a public backlash.

Rising gasoline costs are bemoaned across the globe and particularly in Indonesia - a nation heavily dependent on subsidized fuel.

For decades, fuel subsidies have been politically volatile.

The government planned to cut the fuel subsidy last year, but balked in the face of national uproar. This year, the proposed cuts - the first in five years - no longer hinge on a parliament vote.

On his official Twitter account, President Susilo Bambang Yudhoyono admits it will be the toughest decision of his presidency.

Head of a party marred by ongoing corruption scandals and plummeting popularity, the president’s decision is both political and economic, says political analyst Aleksius Jemadu.

"They want to achieve two goals at the same time. They want to achieve their economic goals to decrease the deficit of the state budget, but at the same time they also [want to] take care of their popularity," said Aleksius Jemadu.

In a nation where more than a 100 million people live on less than $2 dollars a day, cheap fuel is good politics.

But critics say the fuel subsidy is poorly targeted, unfairly benefiting the middle class.

And, in the minds of economists, the practice burdens the state budget and creates a reliance on foreign oil imports.

Authorities have allocated about $20 billion for fuel subsidies this year, accounting for 15 percent of the overall budget. But, that is not expected to be enough to cover the subsidy’s cost.

Despite the fuel subsidy controversy, Fauzi Ichsan, a senior economist at Standard Chartered, says that Indonesia is still doing very well compared to fiscal deficits in the United States, Europe and Japan.

"While economically it is very prudent to hike fuel prices, domestic fuel prices are lower than international prices by about 30-40 percent and that has created a lot of smuggling and hoarding. On the other hand, there is no fiscal crisis, if you look at the fiscal deficit as a percentage of GDP, in 2012 it was less than 2 percent, like 1.8 percent of GDP," he said.

Fauzi says economists have been pushing for fuel price increases for the past year - not because of the deficit - but because it is economically prudent to do so.

He says that, although inflation could rise when the subsidies are reduced, it should stabilize in the long term. Fauzi says the government should offer cash benefits to minimize the impact on the poor.

Under the proposed changes, private vehicles will pay an additional 21 cents per liter, still among the cheapest rates in Asia.

Suryo Bambang Sulisto, head of the Indonesian Chamber of Commerce and Industry, says that even a reduced subsidy creates a false economy and the government should scrap it altogether.

"We are of the view, we are in opposition, to abolish it altogether so this huge saving can be directed to a more productive use. So, in other words, reallocate this subsidy for something that is more useful, more targeted," said Suryo Bambang Sulisto.

Sulisto says the funds would be better spent on infrastructure, regional growth and education.

But, at a gas station in South Jakarta this morning, 50-year-old Melly says she is definitely going to feel to pinch.

"I have a catering business I’m on the road every day and buy a lot of gasoline," she says. "I just can’t accept it," she said.

The proposed hike is expected to save Southeast Asia’s largest economy an estimated $2.1 billion a year.