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s the central bank sees lower consumer prices next year, observers consider it the right time to raise fuel prices without hurting the people’s purchasing power to ease the budget strain.

Bank Indonesia (BI) predicted inflation easing next year as global economic uncertainties are expected to slow overall demand and drive down global commodity prices, Governor Darmin Nasution told members of the House of Representatives’ budget committee last week.

BI saw the consumer index price (ICP) lowering from 4.8 to 4.9 percent headline inflation rate projected this year, he added. Darmin said BI’s inflation target ranged from 3.5 to 5.5 percent next year compared with 4 to 6 percent this year.

“If inflation is lower, which did occur during the 2009 slowdown, it is an opportunity to raise fuel prices,” Tony Prasetiantono, Gadjah Mada University (UGM) center of economic and public policy studies director, told The Jakarta Post on Sunday. “It is urgent.”

The government — which said fuel price hikes could hurt the people’s purchasing power — has allocated Rp 123.6 trillion (US$14.40 billion) for 40 million kiloliters fuel subsidy in the 2012 State Budget bill, almost 9 percent of the overall Rp 1,418.5 trillion state spending and over 59 percent of the total Rp 208.9 trillion subsidy expenditures.

Economists and financial institutions, including the World Bank and International Monetary Fund (IMF), have expressed concerns over the large proportion of subsidy bills as they crowd out development and social spending which could create multiplier effects on Indonesia’s economy and ease poverty issues. In comparison, capital spending for 2012 is proposed at Rp 168.1 trillion while spending for social safety net programs Rp 63.6 trillion.

“Looking at the structure of the state budget, with such a huge fuel subsidy, I really expect the fuel prices to be increased to ease budget strain,” Ahmad Erani Yustika, an economist at Brawijaya University told the Post. “The savings could be allocated for those in need.”

Erani suggested a gradual increase to Rp 7,000 per liter until 2014 from the current Rp 4,500 per liter for premium gasoline and diesel. “That way, the market will not fluctuate too much, inflation will remain under control and the subsidy will not be that huge.”

Harry Azhar Aziz, vice chairman of the House of Representatives’ Commission XI overseeing financial affairs, said a price hike should be done by 2012, at the latest, to avoid “risky” political impacts ahead of the 2014 elections.

“Does the government dare to do it, given the corruption cases that have emerged? Tens of trillions of rupiah subsidy expenditures could be saved if the fuel price is raised,” he said.

History has shown that an increase in subsidized fuel prices have “high political pressures” with riots seen across the country, Erani said.

“That shakes political stability, while the government recently lost trust from the people due to many corruption cases. That weakens the opportunity for a fuel price hike.”

Finance Minsiter Agus Martowardojo said the government needed enough room for government-controlled prices adjustments next year, urging the central bank to maintain core inflation in light of the possibility of a fuel price hike.

BI is in charge of maintaining core inflation steady through the rupiah exchange rate, while the government takes control of administered prices and a part of volatile food prices in the nation’s inflation basket.

“We don’t want administered price adjustments to affect our national inflation,” Agus told reporters at his office on Friday.

Bambang Brodjonegoro, acting chief of the finance ministry’s fiscal policy office, said there has not been any discussion to raise fuel prices next year. “What is definite has been announced in the financial note. Other than that, do not speculate.”

On the 2012 financial note, the government wrote that raising subsidized fuel prices will be the government’s “last resort”, which could happen only “if fuel subsidy burdens are viewed as disrupting the sustainability of the state budget, both in the short-term and medium-term”.

—JP/ Esther Samboh