Govt may up fuel prices in June

Abdul Khalik and Rendi A. Witular ,  The Jakarta Post ,  Jakarta   |  Wed, 04/30/2008 4:01 AM  |  Headlines

The government is exploring the possibility of raising fuel prices in June by an average of 28.7 percent in response to skyrocketing fuel subsidies, which many fear may undermine the state budget.

A lawmaker from the House of Representatives’ budget committee and a businessman close to President Susilo Bambang Yudhoyono told The Jakarta Post on Tuesday that all key economics ministers had approved the plan.

“It’s the President’s call now to lay it on the table,” the lawmaker said, adding the President’s fear of losing popularity ahead of next year’s presidential election was the main reason behind the uncertainty in fuel prices.

Under a proposal that will be discussed further by the President and the Indonesian Chamber of Commerce and Industry (Kadin) next month, the price of premium gasoline would be raised to Rp 6,000 (65 U.S. cents) per liter from Rp 4,500.

The price of diesel would be set at Rp 5,500 per liter, up from the current Rp 4,300, while kerosene will be raised to Rp 2,500 from Rp 2,000.

If fuel prices were raised, it would allow the government to save Rp 25 trillion in subsidies, according to the proposal.

Under the new oil price assumption in the revised state budget, fuel subsidies rose from Rp 42 trillion to Rp 126.82 trillion, about 12 percent of the government’s Rp 987.48 trillion total spending.

The new scheme is based on an estimate the Indonesian Crude Price (ICP) — the country’s benchmark oil price — will stand at an average
of US$95 a barrel for the budget year.

The average ICP price during the first quarter of the year was $103.10 a barrel, while fuel consumption reached 27 percent of this year’s 35.5 million kiloliter allocation.

The proposal also includes a new mechanism for a direct cash distribution scheme to help cushion low-income Indonesians from the impact of rising fuel prices, which would likely trigger a rise in the prices of other products.

“Some Rp 11.5 trillion of the total money saved from the fuel subsidies would be given directly to the poor,” said the lawmaker.

The proposal also includes an assumption of a higher central bank benchmark interest rate at 8.5 percent from the current 8 percent, and a lower economic growth target of 6 percent from the current forecast of 6.4 percent.

“Vice President Jusuf Kalla has already approved the proposal. He will lead some key economics ministers and business representatives to discuss it with the President next month,” the businessman said.

Finance Minister Sri Mulyani Indrawati and Energy and Mineral Resources Minister Purnomo Yusgiantoro acknowledged the proposal, saying it was one of the government’s options to address the growing fuel subsidies.

“It (the proposal) is similar to the story conveyed during the revision of the state budget. We will look at all the scenarios to help the state budget, and at the same time reduce negative impacts on the public,” Mulyani told the Post.

President Yudhoyono has received pressure from the business community to raise fuel prices in a bid to ensure fiscal sustainability.

Analysts fear that if fiscal sustainability is not ensured, it could endanger the country’s sovereign risk, which would eventually make overseas lending expensive and foreign-direct investment riskier.

Kadin officials and a group of local businesspeople renewed calls Tuesday for President Yudhoyono immediately to raise fuel prices to help ease speculation in the financial market.

“The market is now speculating on the sustainability of the state budget. This will not be good for businesses in trying to accurately formulate business plans. The government should send a signal of certainty,” said Kadin chairman Mohamad S. Hidayat.

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