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BI: Fuel price hike best undertaken in November
President-elect Joko âJokowiâ Widodo should not waste the momentum he has to hike fuel prices, Bank Indonesia (BI) has suggested: He has an opportunity to raise them coming up in November as thatâs when inflation normally remains stable before picking up again at year-end
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resident-elect Joko 'Jokowi' Widodo should not waste the momentum he has to hike fuel prices, Bank Indonesia (BI) has suggested: He has an opportunity to raise them coming up in November as that's when inflation normally remains stable before picking up again at year-end.
In case the government moves to hike fuel prices this year, the central bank is already preparing the necessary monetary tool to respond to a potentially corresponding hike in inflation, BI Deputy Governor Perry Warjiyo said on Friday.
'In consideration of inflation, I think November is the right time [to hike fuel prices],' Perry told reporters. 'Whenever the policy is undertaken, BI will work to ensure that the short-lived inflationary impact would be contained.'
Jokowi's economic team has floated the idea of raising the price of subsidized Premium gasoline by Rp 3,000 per liter (25 US cents), from the current price of Rp 6,500, as the president-elect must attempt to reduce the burden of burgeoning fuel imports and reallocate the fuel subsidies into more productive spending, such as on infrastructure.
The team stated that the adjustment in fuel prices may take place between November and the first quarter of next year, with it likely happening toward the end of that period because of unstable political developments. Jokowi's term is set to begin today (on Monday), when he is slated to be inaugurated as Indonesia's seventh president, while all the members of his Cabinet are expected to be announced shortly thereafter in order to get the work of the country's new government going as soon as possible.
A fuel price hike of Rp 3,000 might drive up inflation by 3.2 percent, according to Perry. However, a price adjustment of such magnitude would be positive for Indonesia's economy in the long term as it could shrink the annual current-account deficit by around US$3 billion in 2015, the BI deputy governor argued.
'The inflationary pressures will last for around three months, with [price levels] likely to return to normal in the fourth month,' he noted.
The annual inflation rate surged to 8.4 percent when the government hiked the price of subsidized fuel last year. After President Susilo Bambang Yudhoyono's government adjusted fuel prices in June, inflation exceeded 8 percent for seven consecutive months until January. Nevertheless, price levels had returned to their pre-adjustment patterns recently, with inflation standing at 4.5 percent at the end of September.
The recent slide in oil prices, with the price for benchmark Brent crude oil falling to a three-year low of $82.60 per barrel, may not weaken the plan to hike fuel prices in November, but may affect the magnitude of the adjustment, said Helmi Arman, an economist with Citigroup.
- Inflation normally stable in November before picking up at year-end
- BI preparing monetary tools to ensure inflationary impact could be contained
- A fuel price hike of Rp 3,000 may drive up inflation by 3.2%
'If oil price weakness persists, a price hike of Rp 3,000 per liter could totally eliminate the subsidy per liter for petrol, if not convert it into profit,' Helmi said.
Nonetheless, the fuel price hike would still be seen among investors as a signal about whether Jokowi was up to the difficult task of spearheading economic reforms in Indonesia, argued Wellian Wiranto, an economist with the Oversea-Chinese Banking Corporation (OCBC Bank) in Singapore.
'If Jokowi is seen as backing away from a subsidy cut ' either by delaying the price hike to next year or by opting for an inconsequential increment this year ' the market will not take kindly to the news, especially in the context of a global environment that is far more receptive to reasons to sell than to buy,' Wellian said.
'If he [Jokowi] cannot find enough gumption to cut subsidies despite his prior commitment and the lack of a direct legislative roadblock, what are the chances of him attempting anything else?'
