Although not stating clearly that the government would soon increase the subsidized fuel prices, including Pertalite gasoline and Solar diesel, Finance Minister Sri Mulyani Indrawati explained the additional social aid fund was a part of the energy subsidy-diversion strategy, as instructed by President Joko Widodo.

She elaborated that the social assistance would be divided into three types, namely direct cash transfers (BLT), wage subsidies and a regional transfer budget allocation for public transportation.

"The first aid will be distributed to 20.65 million beneficiary groups in the form of direct cash transfers worth Rp 12.4 trillion in total. It will be disbursed four times, Rp 150,000 per person, by the Social Affairs Ministry," Sri Mulyani said at a press conference on Monday.

The second aid package would be wage subsidies worth Rp 600,000 per person, aimed at 16 million workers earning a maximum salary of Rp. 3.5 million a month.

In this regard, she added, the Manpower and Transmigration Ministry would soon release official instructions for the disbursement of the wage subsidy.

“Third, the Home Ministry and the Finance Ministry will also issue a new regulation to allocate 2 percent of the regional transfer funds – which includes the general allocation fund [DAU] and revenue-sharing fund [DBH] – to protect the public transportation sector, such as motorcycle taxis, as well as fishermen in the regional level.”

Furthermore, Sri Mulyani underlined that all of the additional social aid would begin to be distributed this week and was expected to "relieve pressure on the community and reduce poverty amid inflationary pressures."

Read also: Govt seeks to cushion blow of impending Pertalite price hike

Regarding the urgency of the additional aid, Energy and Mineral Resources Minister Arifin Tasrif recently concurred that policymakers would seek to offset the effects of the planned increase in the subsidized fuel price with a bump in social-assistance spending.

He stated that the government felt the two strategies would have to be deployed in tandem to protect consumers.

“Should [Pertalite] fuel prices need to be increased, social assistance must be disbursed first. This is one of the main [policies] that the [government] is preparing,” Arifin told reporters on Friday.

He claimed the subsidized fuel price increase would be calculated in detail but did not specify when it would take place.

Fuel price hike to trigger inflation

Mohammad Faisal, executive director of the Center of Reform on Economics (CORE) Indonesia, estimated additional inflation of 3.6 percent, assuming the Pertalite price is set to increase to Rp 10,000 per liter. He predicted inflation to reach a range between 7 and 9 percent by year-end.

“The ideal option is to control the distribution of subsidized fuel. [But] if the subsidized fuel price must increase, protection for lower-income households must be prioritized,” he said when contacted on Monday, adding that the government needed to efficiently disburse the aid package to cushion the blow of the impending rising fuel prices.

Similarly, Samuel Securities senior economist Fikri C. Permana said on Aug. 19 that food prices could remain stubbornly high because of climate-related disruptions to food production. He expected the inflation rate to shoot up to 5.9 percent this year and 4.8 percent next year if the government raised the price of Pertalite by 30 percent.

Ajib Hamdani, chairman of the economic policy analyst committee at the Indonesian Employers' Association (Apindo), suggested the government hike the subsidized fuel price when inflation is more controlled at 3 percent but admitted that considering the current state budget conditions, subsidized fuel prices may increase in the fourth quarter this year.

Read also: Consumers cut spending as inflation bites household budgets

The government might raise fuel prices by some 30 percent to manage fiscal pressure from a ballooning subsidy budget, a lawmaker from House of Representatives Commission VII overseeing energy and mineral resources told reporters earlier last week.

The government has already tripled its 2022 energy subsidy allocation to Rp 502 trillion – approximately 16 percent of total state spending – to keep prices of subsidized fuels and some power tariffs unchanged amid rising global energy prices.

Finance Ministry officials also previously said that the amount could be insufficient due to rising fuel demand and that the state could have to budget another Rp 200 trillion in subsidies for the full year if no decision is made to raise the price of subsidized fuel.

The additional expenditure will swell the subsidy and compensation budget by 40 percent to Rp 700 trillion. While the government says its fiscal consolidation remains on track, the subsidy spending will take another chunk out of the state’s windfall commodity revenues.