Indonesia raises fuel costs to cut back on soaring subsidies

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Last Updated on September 3, 2022 by Bitfinsider

On Saturday (Sept. 3), Indonesia increased the price of subsidised petrol by around 30% as the government works to cut back on skyrocketing subsidies despite the possibility of widespread unrest.

According to energy minister Arifin Tasrif, the price of subsidised gasoline increased to 10,000 rupiah (US$0.67) per liter from 7,650 rupiah and the price of subsidised diesel increased to 6,800 rupiah per litre from 5,150 rupiah.

The biggest economy in Southeast Asia had already increased its 2022 energy subsidies to 502 trillion rupiah (US$34 billion), three times the initial budget, as a result of higher oil prices around the world and a declining rupiah.

The budget would have been much bigger, reaching 698 trillion rupiah, according to Finance Minister Sri Mulyani Indrawati, had prices not been raised.

After the price increase, she predicted overall energy subsidies will fall between 591 trillion and 649 trillion rupiah for this year, assuming the average crude price stays in the US$85 to US$100 per barrel range for the rest of 2022.

The central bank of Indonesia was able to postpone hiking interest rates until last month, significantly behind regional and international peers, because high energy subsidies had previously kept Indonesia’s inflation low. 4.69 percent was the inflation rate in August.

The head of the business association Indonesian Employers Association, Hariyadi Sukamdani, predicted that at the end of the year, inflation will reach 6% and that overall price pressure from the fuel price increase would not be excessive.

Although businesses use non-subsidized fuels, Hariyadi noted that the cost increase will have an impact on logistics.

However, increasing inflation might put pressure on the central bank to accelerate the tightening of monetary policy. A two-day policy meeting at the bank ends on September 22.

Faisal Rachman, an economist at Bank Mandiri, predicted that BI might increase the policy rate this year from 3.75 percent to 4.25 percent and that inflation could spike to between 6 and 7 percent.

Faisal predicts that the economy would expand by 5% this year despite the rise in fuel prices, thanks to commodities exports and increased mobility following the pandemic. He also notes that the government’s cash distribution program might assist lessen the impact on spending. In the three months ending in June, the GDP expanded by 5.44 percent.

According to Jokowi, the government has set aside an additional 24.17 trillion rupiah for cash handouts to assist the underprivileged in adjusting to the effects of the policy.


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Disclaimer: The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, legal, tax or other advice. Investing in or trading cryptocurrency or stocks comes with a risk of financial loss.

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