Economic Challenges Indonesia: Jokowi to Raise Fuel Prices Soon?

After the Indonesian government recently published its Revised State Budget of 2015 (RAPBN 2015), Jokowi immediately responded saying that the IDR 363.5 trillion (about USD $31.2 billion) for energy subsidies, including IDR 291.1 trillion for fuel subsidies, is much too high as energy subsidies would account for roughly 18 percent of total government spending (IDR 2,019.9 trillion) in 2015 in Southeast Asia's largest economy.

Indonesian Energy Subsidies:

Year	Fuel Subsidies	Electricity Subsidies
2015	291.1	72.4
2014	246.5	103.8
2013	210.0	99.9
2012	211.9	94.6
2011	165.2	90.4
2010	82.4	57.6
2009	45.0	49.5
2008	139.1	83.9
2007	83.8	33.1
2006	64.2	30.4
2005	95.6	8.9
2004	69.0	2.3

^{in trillion rupiah}

Last week, Jokowi had a meeting with incumbent President Susilo Bambang Yudhoyono (SBY) on the island of Bali. During the meeting, Jokowi requested that prices of subsidized fuel prices would be raised before Yudhoyono will end his second and final term in October. However, SBY declined on grounds that the timing is not right as the recent electricity tariff hike and 12-kilogram liquid petroleum gas (12kg LPG) canisters price hike have already led to reduced purchasing power of the Indonesian people in 2014. This means that it is up to the Jokowi-led government to implement the unpopular measure. Although the measure will hurt as it results in demonstrations and high inflation, it is the correct strategy to target for higher economic growth in the future as well as to foster investor confidence, leading to increased foreign direct investments (FDIs).

The economic team of Jokowi stated that it is considering three strategies regarding the fuel subsidy issue: a one-time price hike, a gradual quarterly price adjustment, or fixing the subsidy amount. The team is also looking for ways to reduce the impact of the fuel price hike on food and public transportation prices. Cash programs for the poor are also required to avert the impact of poverty basket inflation, possibly leading to a jump in poverty as a large portion of Indonesian society lives just above the poverty line.

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