Higher Electricity Price Will Have Limited Impact on Indonesian Inflation

It remains unknown whether the electricity price will indeed be raised per July 2014 as this decision still needs approval of the House of Representatives' Commission VII on energy affairs. The government wants to increase the price in order to reduce funds spent on energy subsidies in an attempt to make the country’s financial framework healthier. In 2014, the government has allocated a total of IDR 282.1 trillion (USD $70.2 billion) to energy subsidies. This involves IDR 210.7 trillion worth of fuel subsidy and IDR 71.4 trillion worth of electricity subsidy. By raising the electricity price, the government hopes to save IDR 8.5 trillion (USD $720.3 million). Speculation has also risen that the government will raise prices of subsidized fuels later this year or in 2015. However, reducing energy subsidies always triggers public outcry, demonstrations as well as accelerated inflation (with the risk of pushing many people into poverty) and thus imply political risks for the ruling parties. The last time, the government raised subsidized fuel prices - by an average of 33 percent - was in June 2013 (inflation accelerated to nearly 9 percent year-on-year).

Indonesian Energy Subsidies 2005-2014:

Year	Fuel Subsidy	Electricity Subsidy	Total Energy     Subsidies
2014	210.7	71.4	282.1
2013	193.8	80.9	274.7
2012	137.4	65.0	202.4
2011	165.2	90.4	255.6
2010	82.4	57.6	140.0
2009	45.0	49.5	94.6
2008	139.1	83.9	223.0
2007	83.8	33.1	116.9
2006	64.2	30.4	94.6
2005	95.6	8.9	104.4

^{in IDR trillion
Source: Investor Daily}

Deputy Finance Minister Bambang Brodjonegoro also stated that, contrary to higher subsidized fuel prices, the influence of the possible higher electricity tariffs on inflation is limited at around 0.2 percent. Higher subsidized fuel prices immediately add at least 1 percent to inflation as these subsidies can be labelled an engine of economic growth in Indonesia.

Deputy Governor of Bank Indonesia Perry Warjiyo said that inflation in 2014 is expected to reach about five percent, which is well within the central bank’s inflation target range of 3.5 to 5.5 percent (year-on-year) for this year.

 
Inflation in Indonesia:

Month	Monthly Growth           2013	Monthly Growth           2014
January	1.03%	1.07%
February	0.75%	0.26%
March	0.63%	0.08%
April	-0.10%	-0.02%
May	-0.03%	0.16%
June	1.03%
July	3.29%
August	1.12%
September	-0.35%
October	0.09%
November	0.12%
December	0.55%
Total	8.38%	1.56%

 

	2008	2009	2010	2011	2012	2013
Inflation (annual percent change)	9.8	4.8	5.1	5.4	4.3	8.4

^{Source: Statistics Indonesia}

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