After receiving approval from legislators to increase the prices of subsidized fuel this month, the government plans another price increase next year to cut the subsidy further.

Deputy Finance Minister Mahendra Siregar said in Jakarta on Friday that the government might propose another increase in the draft of the 2014 budget which would go to the House in August this year.

'When we finish with the revised 2013 state budget, we'll go to the deliberation of the 2014 state budget. In the 2014 fiscal year, we vow to continue our reforms, including a further discussion on fuel subsidies,' he said in his Jakarta office on Friday.

The government has, in principle, received approval from legislators to increase the price of Premium gasoline to Rp 6,500 (65 US cents) from Rp 4,500 and subsidized diesel to Rp 5,500 from Rp 4,500 per liter in next few days, Finance Minister Chatib Basri said.

 The final approval will be obtained when the House formally approves the revision of the 2013 state budget on Monday.

As part of the budget revision, the government also proposes direct financial assistance to cushion the poor from inflation stemming from the fuel price increase.

Poor households will get Rp 150,000 each month for four months, starting immediately after fuel prices are increased, according to the proposal.

The government needs to cut the subsidy to maintain fiscal sustainability. With strong fiscal conditions, Indonesia will be well prepared for the impact of future external shocks that could prompt capital flight overseas, said Chatib.

'Global uncertainty is not temporary; it might be a long-term phenomenon. This is why we must address all investors' concerns regarding our domestic weaknesses,' the minister said after Friday prayers in his office.

Money streamed out of capital markets in emerging economies, including Indonesia, after the Federal Reserve in the US hinted in May that it might scale down its quantitative easing policy, which so far has flushed liquidity into the global economy.

The capital outflow has destabilized the economy, forcing Bank Indonesia (BI) to raise its interest rate for the first time in 15 months to support the ailing rupiah, which hit the 10,000 per US dollar barrier this week.

'It's already time for us to raise the BI rate,' BI Governor Agus Martowardojo said on Friday. 'There's a specific need for us to maintain financial stability at times when the global economy is still overwhelmed by uncertainty.'

Besides stabilizing the rupiah, monetary tightening is necessary to respond to the build-up of inflation expectations stemming from the fuel price rise, Agus added.

Economists have long called for Indonesia to raise its subsidized fuel prices. A price adjustment to Rp 6,500 for Premium and Rp 5,500 for diesel fuel could save the state at least Rp 37 trillion, government officials said.

'If the government succeeded in raising fuel prices now, then it could be an instrumental step for further reform,' Asian Development Bank (ADB) deputy country director Edimon Ginting told The Jakarta Post on Friday.

Nevertheless, there should be no room for complacency. There is still a need to cut fuel subsidies further because, even after the increase, both the subsidized Premium and diesel fuel will remain well below the market price, he said.

'I'm still worried because the global demand is yet to recover, weakening our exports and external account. But I think it another fuel increase will get more difficult as the elections draw nearer, mainly because of political considerations.'

Over 100 students of Makassar State University (UNM) staged a rally in the capital of South Sulawesi on Friday to protest at the increase in fuel prices.

Clashes between the police and students could not be avoided when security forces tried to disperse the mob blocking the street to the public.

The students refused to withdraw and threw rocks at the police instead. Police fought back by firing tear gas. (nai)

Andi Hajramurni in Makassar contributed to this story

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