The Energy and Mineral Resources Ministry told a press conference on Monday that the targeted energy hike would save the state Rp 3.09 trillion (US$210 million) in compensation for energy companies.

The ministry said it would adjust the electricity rates for five customer categories against the real costs to maintain fiscal consolidation amid rising inflation and cost of funds.

Statistics Indonesia (BPS) data show that inflation reached 3.55 percent year-on-year (yoy) in May, the highest inflation recorded since December 2017, as oil and natural gas prices respectively increased 64.28 and 350.61 percent yoy.

"There needs to be an adjustment of the burden-sharing scheme and a correction of the government assistance that was [mistakenly] given to parties who enjoyed it previously. Thus, we are correcting the current conditions so it is more targeted and equitable," Rida Mulyana, the ministry’s electricity director general, told reporters.

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An electricity hike of 17.64 percent applies to customers in the R2 (medium residential load) category of between 3,500 and 5,500 volt-amperes (VA) as well as customers in the R3 (high residential load) category of 6,500 VA and above. These categories primarily apply to customers in the higher income bracket.

A hike of 17.64 percent applies to all government buildings in category P1 (6,600 VA to 220 kilovolt-amperes/kVA), while P2 government buildings (220 kVA and above) are subject to a 36.61 percent hike. The P3 category for all street lighting is subject to a 17.64 percent hike.

All price increases take effect on July 1.

President director Darmawan Rahardjo of state-owned electricity company PLN told the press that some customers in the R2 and R3 residential categories had erroneously benefited since 2017 from "mistargeted compensation” for wholesale electricity prices to suppliers.

“In this case, the compensation that has not been on target has reached Rp 4 trillion,” he said.

The government underlined that the price hikes would contribute just 0.019 percent to inflation. It also noted that business and industry customers were excluded from the hikes to maintain the momentum toward economic recovery.

Rida added that the figure resulted from calculations by the energy ministry as well as the Finance Ministry’s Fiscal Policy Agency (BKF). “It will hardly [affect] consumer purchasing power," he said.

Read also: Consumers stunned by rising food, energy prices

A report from business intelligence firm IHS Markit, a S&P Global subsidiary, shows that the manufacturing purchasing managers' index (PMI) dipped 1.1 points to 50.8 in May as a result of persisting supply constraints and subdued optimism about the economy among business leaders.

The government’s plan to raise electricity rates comes as the annual inflation rate in the United States reached a 40-year high of 8.6 percent in May, and as global markets anticipate that the US Federal Reserve to raise its interest rates this month or next.

A Fed rate hike would increase the cost of funds, which would in turn increase the burden on countries with external debt, including Indonesia.