While that was basically great for the population and led to an increased use of fuel – making oil-rich Indonesia basically an Oil Importer instead of an Exporter a few years back – it did cost the country an ‘arm and a leg’ in fuel subsidies.
Changing that policy caused national unrest and riots the last time they tried in 2005. Now things look a bit more calmer; but still fuel prices have to go up to save the country from sliding into bankruptcy in the mid-term:
A staggering subsidy bill of USD 14 billion currently accounts for about 20% of the government’s budget in 2008!
So, after mulling about that highly sensitive political issue for the last 2 years and with fuel prices at world markets rising practically every day to over USD 125 per barrel now – there has to be something done to improve the situation for Indonesia’s treasury.
What will increase?
Here are the proposed changes per liter:
- Premium Fuel with 88 octane: increase from Rp 4.500 to Rp 6.000
- Diesel Fuel: increase from Rp. 4.300 to Rp 5.500
- Kerosene Fuel: increase from Rp 2.000 to Rp 2.500
The risky move is highly controversial within the country as well as political and economical analysts; as besides possible anti-government protests it would add another 1.5-1.9 percent to an already high inflation of around 9 percentage points.
This in return could make overseas lending more expensive for the country. In 2005 it also slowed down economic growth in South East Asia’s biggest economy significantly.
Indonesia as Asia’s only member in the OPEC cartel is now even mulling to leave the conglomerate to be able to adjust their prices more freely and independently from world market conditions.
Other upcoming changes
This time around it seems though, the country is much better prepared to shoulder a hike in prices, as the government announced at the same time an economic stimulus package which should ease the fuel increases for the low-income population.
Another method would be in the form of direct cash distributions to help cushion the impact of rising fuel; although I would see that as a more problematic way – prone to be misused by legions of corrupt politicians and officials.
On top of compensating the poor for the latest fuel increases – Indonesia’s president is about to sign a progressive “Economic Program 2008-2009“.
The goal is to set stringent guidelines for improving the country’s competitiveness; covering areas from tax breaks or reductions for private investments, further improvements of investment climate and conditions, reforming the labor and transmigration sector, boosting the energy supply, infrastructure upgrading and better economic integration into ASEAN.
Another big topic are the consolidation and privatization of now inefficient state-run companies, a process which only slowly progressed here in comparison to its Asian/ASEAN neighbors over the last couple of years.
So, while the higher prices will likely cost you a bit more to fill your tank with the precious liquid – please don’t forget the overall positive benefits for the country, when complaining about the price hike.
The Cost of Living here is still highly affordable for the average foreigner and it will improve even more, due to higher inflation compared to your base currency.
As for the Permanent Traveler or Expat in Indonesia it’s only a small sum to pay to get mobile with your bike or vehicle – but for the country’s finances it will come as a huge step towards relieving financial constraints on the treasury and providing a sustainable state budget.
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