More Fuel Price Cuts on the Horizon

BY :NOVI LUMANAW & TABITA NUGROHO

JANUARY 07, 2015

Jakarta. Indonesia is set to further benefit from falling global oil prices, with the government finalizing plans to slash the price of Pertamina’s widely used low-octane gasoline Premium and subsidized diesel once again by the end of this month.

According to a Reuters report published on Wednesday, Brent crude oil fell below $50 a barrel, the first time it reached such levels since 2009, as the commodity continues to be dragged down by a sustained supply glut and weak global demand.

“[The government] will lower fuel prices again, but not until the end of the month,” chief economics minister Sofyan Djalil told reporters on Wednesday.

President Joko Widodo’s administration has removed the subsidy for Pertamina’s RON88 fuel Premium and introduced a fixed subsidy scheme for diesel, which is widely used by buses and trucks.

Even without the subsidy, the drop in global oil prices has allowed the government to slash the cost of Premium to Rp 7,600 (60 cents) per liter from Rp 8,500.

With a subsidy of Rp 1,000 per liter in place, the price  of diesel fell to Rp 7,250 per liter from Rp 7,500.

According to the 2015 state budget set by the previous administration, the central government will be allowed to spend up to $22 billion on fuel subsidies.

With the recent application of Joko’s fuel scheme, this year’s subsidy costs have been reduced by 83 percent, Finance Minister Bambang Brodjonegoro said on Monday, as quoted by Reuters.

The drop in global oil prices would also help lower inflation rate and narrow the current-account deficit — a major source of economic vulnerability — of large oil-importing emerging nations like Brazil, India, Indonesia, South Africa and Turkey, according to a World Bank report on fiscal  policy challenges in emerging economies published on Wednesday.

“The impact across countries will vary significantly, reflecting in particular the importance of oil in consumer baskets, exchange rate developments, stance of monetary policy, the extent of fuel subsidies and other price regulations,” the World Bank report said.

For Indonesia, domestic fuel prices play a significant role in the undulating costs of consumer goods. Inflation in December accelerated to its fastest pace in nearly six years after Joko’s administration raised the price of Premium and subsidized diesel by more than 30 percent on Nov. 18 in an effort to shift state spending to more productive sectors, like infrastructure and welfare.

The consumer prices index rose by 8.36 percent year-on-year in December, statistics agency data showed.

That compared to a 6.23 percent year-on-year gain in November.

Additional reporting from Reuters

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fuel subsidies