[Updated at 3:10 p.m. on Tuesday, Feb. 17, 2014]
Jakarta. Indonesia raised subsidized fuel prices by an average 33.6 percent as it seeks to shift subsidy spending to productive sectors.
“The government decided to divert the subsidy spending,” President Joko Widodo said during a live television broadcast at the State Palace on Monday night.
He added that his administration planned to allocate more money on infrastructure, education and health.
Joko said the new price of subsidized fuel would be effective from 00:00 on Tuesday. The prices of the widely used low-octane gasoline, or Premium and subsidized diesel were increased by Rp 2,000 (16 cents) per liter.
Indonesians will now pay Rp 8,500 per liter for Premium and Rp 7,500 per liter for subsidized diesel. Previously, Premium was sold at Rp 6,500 per liter and subsidized diesel at Rp 5,500 per liter.
News reports previously stated that the government planned to increase subsidized fuel prices by Rp 3,000 per liter on average.
“The increase is moderate compared to recent increases because we currently see a declining trend in global oil prices,” Energy and Mineral Resources Minister Sudirman Said said.
On Monday, Brent crude fell by 73 cents to $78.68 a barrel after Japan, the world’s fourth-largest crude oil importer, slipped into recession and as Saudi Arabia officials reiterated that the oil price should only be subject to supply and demand.
Finance Minister Bambang Brodjonegoro said that by raising the subsidized fuel prices and slashing fuel subsidy spending, the government would now have more than Rp 100 trillion in additional budget funding in its war chest that can be spent on infrastructure, welfare and development of the nation’s maritime sector.
The minister said the fuel price increase would save Rp 120 trillion in the 2015 budget.
Fuel subsidy spending in next year’s budget is set at Rp 276 trillion, up from 246.5 trillion in the 2014 revised budget.
Bambang said the state budget deficit can fall to below 2.2 percent of the estimated gross domestic product next year.
Indonesia’s inflation rate rose to 4.5 percent in October from 4.3 percent a month earlier, as people already anticipated the subsidized fuel increase and traders jacked up the prices of goods, including food, before the fuel price increase was announced.
Minister Bambang believes inflation may soar to 7.3 percent by the end of this year from an estimated 5.3 percent in the revised state budget.
Sofyan Djalil, the coordinating minister for economic affairs, said in a press briefing on Monday that the government needs to build so much infrastructure, that “we must save some of our budget for productive spending.”
National Development Planning Minister Andrinof Chaniago said between 2015 and 2019, the government plans to build 2,600 kilometers of new roads; 1,000 kilometers of new toll roads; 15 airports; 24 sea ports; and expand the railway network by 3,258 kilometers.
The government also plans to procure 50 ferries to deploy in remote areas and to improve public transportation in 29 cities.
In the energy sector, the government plans to build two new refineries with a total capacity of up to 600,000 barrels of oil per day. It also plans to upgrade the existing refineries of state energy firm Pertamina in Cilacap, Central Java, and Balongan, West Java.
The government further plans to add up to 35,000 megawatts to state utility PLN’s installed electricity capacity of nearly 52,000 megawatts.
Andrinof said the development would prioritize infrastructure “for the public good.”
By doing that, the electrification ratio is expected to be boosted to 96.6 percent of the nation’s population by 2019 from the current 81.4 percent.
Shielding the poor
The government has registered about 15.6 million poor households that will require financial protection from the knock-on effects of higher fuel prices.
Rini Soewandi, the state enterprises minister, said the government would issue one million chip-based cards this year, starting today, which the government will use to transfer cash directly to the poor to help pay for education, health care and welfare.
The remaining 14.6 million poor will get the cards next year, but in the mean time they will receive cash transfers under the old system where local administrations register poor households and distribute cash to them directly.
Efforts to reduce fuel subsidy spending were also made in the energy sector.
Indonesia spends massively on oil imports, while oil exports have dwindled due to falling production.
Government data show that Indonesia recorded a $27.7 billion crude-oil output deficit last year, more than seven times the 2004 levels due to a lack of investment in exploration activities. Energy Minister Sudirman said on Sunday that his ministry had established a special committee to fight what he described as a secretive cabal, or “mafia,” which illegally benefits by acting as brokers in the oil and gas sector.
The committee has been tasked with initiating reforms that include reviewing policies and the bureaucratic systems within the energy sector.
It will table a possible revision of the 2001 Oil and Gas Law and create a healthy investment climate, although details are not yet forthcoming.
Additional reporting by Reuters
Correction: The previous table stated logistics cost in 2019 is targeted at 100 percent of GDP. It is 19.2 percent.