Jokowi unveils hefty increase in fuel prices to fix ailing economy

Jakarta

INDONESIAN President Joko Widodo on Monday raised fuel prices to free up funds for ports and programmes for the poor, fulfilling an election pledge to curtail a decades-old subsidy that has constrained government finances.

The price of subsidised petrol will increase to 8,500 rupiah (S$0.90) a litre from 6,500 rupiah effective from Tuesday, Mr Joko, who is also popularly known as Jokowi, told reporters in Jakarta on Monday. Diesel will rise to 7,500 rupiah a litre from 5,500 rupiah, he said.

Jokowi is seeking to boost economic growth from the slowest pace since 2009 and reduce Indonesia's vulnerability to fluctuations in international crude prices. Some 276 trillion rupiah has been earmarked for fuel subsidies in the 2015 budget, or 13.5 per cent of total spending, while oil imports have contributed to a persistent current account deficit.

"The move is long overdue and shows Jokowi doesn't shy away from tough decisions," Frederic Neumann, co-head of Asian economics at HSBC Holdings plc in Hong Kong, said before the announcement. "There are a few things in the print we are going to look at, like what are the other spending commitments he unveils to cushion the blow."

Indonesia has been subsidising fuel since the first oil price shock in the 1970s and kept prices at less than US$0.20 per litre until 2005, according to a World Bank report published in March. Before Monday's announcement, the price of petrol at the pump was most recently raised in 2013, to 6,500 rupiah per litre from 4,500 rupiah.

Dismantling the decades-old fuel subsidy programme is a political hot potato - protests accompanied past price increases and riots spurred by soaring living costs helped oust former president Suharto in 1998.

Previous cuts - including a large one last year - have sparked violent protests and before Monday's announcement, stone-throwing youths briefly clashed with security forces in one traditional protest hotspot, but most parts of the country were calm.

"We maintain our constructive bias on Indonesia risk assets and believe a hike in fuel prices is critical for performance," Barclays plc Singapore-based analysts Wai Ho Leong and Avanti Save said in an Oct 27 research note. An increase of 1,500 rupiah per litre in November could cut the subsidy cost by 11.8 trillion rupiah this year, they estimated.

South-east Asia's largest economy expanded 5.01 per cent in the third quarter from a year earlier, the least since the period ended September 2009. BLOOMBERG, AFP