Indonesia Finally Moves on Fuel Subsidies

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Indonesia Finally Moves on Fuel Subsidies

Indonesian President Susilo Bambang Yudhoyono has finally decided to raise fuel prices by an average of 33 percent.

For years the Indonesian authorities have had to weigh the economic realities of providing fuel subsidies against the needs of its people, who have shown a readiness to protest – at times viciously – when prices become too high.

However, after months of haggling, petrol and diesel prices are set to rise by an average of 33 percent amid a revised budget. The government hopes cash handouts for the poor will limit protests over an inevitable surge in the inflation rate.

The decision came as a surprise after President Susilo Bambang Yudhoyono (SBY) failed to push through economic reforms on fuel subsidies last year with a proposed increase of 33 percent. The plan has sparked violent demonstrations around the country and heated opposition in Parliament.

SBY has also been accused of procrastinating in his second and last term in office, as he appears unwilling to push through much-needed reforms amid fears of a public backlash.

Indonesian fuel prices are among the lowest in the world and the subsidies have for years led to a hike in demand for fuel while draining state finances and undermining foreign investment. The government spent $20 billion on fuel subsidies in 2012 and this was expected to rise to $23 billion this year.

But a deal struck in parliament over payments for those left worse off proved pivotal and lawmakers voted 338 to 181 in favor of a revised 2013 state budget.

A date for the rise has not been set and Finance Minister Chatib Basri said the government had to focus first on initiating the proposed $900 million in cash handouts for poor families which will be carried out over a four month period. The inflation rate is expected to rise from five percent to eight percent.

Protests to date have been manageable, although sometimes violent.

Clashes between police and protestors outside of parliament in Jakarta were reported as the revised budget was being passed. Masked demonstrators hurled Molotov cocktails, rocks and fireworks at security forces who responded by firing tear gas into the crowds estimated in the hundreds.

Protests were also reported in provincial cities across the country.

However, a World Bank Report titled Winds of Change: East Asia’s Sustainable Energy Future, found that energy subsidies designed to protect the poor only ended up benefiting the rich. This simply increases the financial burden on governments and their budgets.

In 2011, the World Bank also reported that the top 50 percent of Indonesian households by income consumed 84 percent of subsidized gasoline. However, the lowest 10 percent of households by income consumed less than one percent of subsidized petrol – lending much support for these reforms.

Luke Hunt can be followed on Twitter at @lukeanthonyhunt.