Indonesia’s inflation lower than expected in 2022 despite cut in fuel subsidies

INDONESIA’s headline inflation was a lower-than-expected 5.5 per cent for 2022, from an initial estimate of 6.8 per cent, despite a cut in fuel subsidies.

In September 2022, the country announced that it would cut subsidies for its most popular 90-octane petrol called Pertalite as well as diesel, effectively hiking these prices by at least 30 per cent.

It was the first cut in fuel subsidies in eight years. But the resulting hike in fuel prices did not cause a disruption in the country’s economic growth, which is gradually recovering from the effects of the Covid-19 pandemic, Sri Mulyani Indrawati, Indonesia’s finance minister, said on Thursday (Feb 9) at a sustainability conference organised by The Economist.

Rising energy costs meant that continuing the same level of subsidies would take a greater toll on Indonesia’s reserves. The country nearly tripled its energy subsidy budget to 502 trillion rupiah (S$47.7 billion), which is about 16 per cent of its 2022 budget, to maintain prices of subsidised petrol and diesel as well as some power tariffs amid global surging energy prices.

To control upward price pressures, Dr Sri Mulyani said that the central government worked with its local counterparts to reduce non-fuel related costs, such as food.

She said that the Indonesian government was in a bit of a dilemma as there was concern that the sudden increase in fuel prices might put a stop to the country’s economic recovery from the pandemic.

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To prevent such shocks, the government ensured that the subsidies were more targeted by ensuring that only low-to-middle-income Indonesians who registered their vehicles could buy the subsidised fuel.

The unspent government proceeds, which would originally have gone into subsidising these fuels, would be distributed to the bottom 40 per cent of households as financial support.

Dr Sri Mulyani said this policy is more equitable as high-income households would have to pay more fuel. Indonesia’s fuel subsidy scheme has long been criticised for largely benefiting high-income households that need it the least.

The decision to cut fuel subsidies was “not an easy choice” given its political sensitivity, she said, but it “had to be done” to create a more equitable society.