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Indonesia gives 44% fuel price rise nod

Indonesia has approved a controversial fuel price rise to slash its ballooning subsidy bill

The move, approved by parliament, will see gasoline prices increase by 44% from 4,500 rupiah ($0.45) per litre to 6,500 rupiah/l, while diesel will edge up 11% to 5,000 rupiah/l, according to data from IHS Global Insights.

Analysts at Nomura have estimated that the proposed price rise would trim the subsidy bill by 60 trillion rupiah to 228 trillion rupiah this year.

But despite cash handouts to mitigate the effect on the poor, nationwide protests could still derail the plan, which has yet to be formally implemented by President Susilo Bambang Yudhoyono.

Subsidies are driving demand, but as international crude prices trended higher, have depleted the state budget. The bill has risen dramatically from 45 trillion rupiah in 2009 to 212 trillion rupiah in 2012, as domestic prices remained relatively flat, raising concerns over Indonesia’s financial stability.

National oil company (NOC) Pertamina now buys about 40% of its crude on the international market, but has been hit hard in recent years as global prices headed north.

The Jakarta Post reported that the government owed the NOC around 31 trillion rupiah in payments for selling subsidised fuel at a loss as of 31 December 2012.

In a note to parliament, Indonesia’s finance minister, Chatib Basri, estimated that the cost of the fuel subsidy could hit 4% of gross domestic product – above the legal limit of 3% - triggering a recent downgrade to the country’s sovereign risk rating.

But if the policy is implemented as planned there could be a political price to pay. It will almost certainly hinder Yudhoyono’s efforts to revive his ruling Democratic Party’s prospects ahead of the upcoming election in 2014.

IHS warned that for most Indonesians– who benefit from one of the lowest petrol prices in the region – cash handouts are unlikely to be enough to cushion the effect of the resulting inflation in the long-run.

However, the consultancy says it’s obvious fuel subsidies are a “blunt instrument” to provide effective social welfare to the roughly half the population that survives on less than $2 per day.

Yudhoyono’s administration has repeatedly proposed subsidy cuts, only to back down in the face of public opposition.

Last April, the government was unable to push through a 33% price rise following widespread demonstrations, as well as opposition from members of parliament.  In 2008 – the last time that fuel prices were increased – the move sparked nationwide protests.

Nevertheless, analysts say the president has few viable alternatives except to increase gasoline prices to keep the deficit below the legal threshold.

But if Yudohoyono is successful, Indonesia will join China, the region’s largest oil consumer, and India, the third-biggest, in heading towards market-based pricing for transport fuels.

However, nations, such as Malaysia, and to a lesser extent Bangladesh and Vietnam, still pay large fuel subsidies.

In Malaysia, following recent elections, moves are afoot to gradually roll back subsidies to help ease growing fiscal pains.

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