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Jakarta moves to cut fuel subsidies to prevent bulging deficit

Against a backdrop of street protests and political wrangling, Indonesia's government is struggling to end fuel subsidies, saying a price increase is needed to arrest its expanding fiscal deficit

In a speech, President Susilo Bambang Yudhoyono announced that there was an urgent need to cut the bulging fuel subsidy bill to prevent the 2013 budget deficit ballooning beyond a legal limit of 3% of gross domestic product.

He stopped short of committing to how much prices, unchanged for more than four years, will rise and when, saying only that he expected a decision in May, once the government had worked out a plan to shield the poor from the subsequent inflationary pressures.

Indonesia's fuel subsidies, budgeted at 193.8 trillion rupiah ($20 billion) this year and likely to increase to 297.7 trillion rupiah if no action is taken, have proved one of the trickiest issues for Yudhoyono's government since he came to power in 2004.

But the case for scaling back subsidies is clear. Offering fuel at half the market price is crippling state finances, while the wealthy car-driving middle class are enjoying most of the benefits rather than the country's poor, says the World Bank.

Gasoline is so heavily subsidised that at the end of 2012, Indonesia had the lowest fuel prices of any net oil-consuming nation in the world, according to the World Bank.

Indonesia subsidises 88 RON gasoline, gasoil and kerosene. The 88 RON gasoline and gasoil are sold at 4,500 rupiah per litre compared with the market price of 10,000 rupiah/litre.

Under the new plan, cabinet ministers say fuel prices would probably increase to 6,500 rupiah/litre. If prices rise to that level, the government would save about $3bn this year.

But Yudhoyono's administration has repeatedly roposed subsidy cuts, only to back down in the face of public opposition. The latest move saw tens of thousands of Indonesians take to the streets in protest at the proposal.

Last April, too, the government was unable to push through a 33% price rise following widespread demonstrations, as well as opposition from members of parliament.

Fuel prices are a sensitive issue in Indonesia, where about half the 240m people live on less than $2 per day, and low-cost gasoline helps maintain stability.

The president has been wary of unleashing popular protests against a fuel price increase. And mindful of his legacy as he prepares to step down next year, Yudhoyono has now passed the buck to the Indonesian parliament, even though his government can raise fuel prices without parliamentary approval.  The president says he will not push fuel prices up before parliament agrees a compensation package for the poor as he seeks widespread political support to wean Indonesia off subsidies. But many observers say opposition parties are unlikely to give Yudhoyono's Democratic Party a boost ahead of next year's elections.

Nevertheless, despite the Democratic Party's waning popularity, analysts say the president has few viable alternatives except to increase gasoline prices to help keep the deficit below the legal threshold.

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