Indonesia is preparing to increase automotive taxation and introduce other restrictive measures to help it deal with the country's worsening fuel crisis, according to sources within the national and Jakarta local governments.

Despite being one of the region's largest oil producers, Indonesia is a net importer of oil. The country also lacks the refining capacity to meet its growing automotive transportation requirements.

New vehicle sales this year are expected to reach a new record high of 550,000 units, according to the latest projections by the vehicle manufacturers association Gaikindo.

Despite substantial cuts in government fuel subsidies already implemented over the last two years, the government is struggling with a gaping budget deficit due to rising domestic fuel consumption, the strengthening US dollar/rupiah exchange rate and record high international oil prices. The latest fuel subsidy cuts were made in March of this year, which resulted in average fuel prices rising by around 30%.

In order to reduce energy consumption, the government - by presidential decree - has so far introduced some questionable knee-jerk solutions. Among the "sacrifices" it has asked of the country's households are limits on night-time TV transmission hours and bringing forward nightspot closing times. The government is now turning its attention once again to private motoring, with further cuts in fuel subsidies likely in the coming months. This will lead to further fuel price increases at the pumps and inevitably to higher inflation.

Fuel consumption in Indonesia in the first half of the year has exceeded the government's target of 59.6 million kilolitres by 10%. Together with rising international oil prices, fuel subsidies will likely amount to around Rp120 trillion ($US12.25 billion) in the first half of 2005 instead of the budgeted Rp75.6 trillion, according to a Ministry of Finance official. Some privatisation plans are being brought forward to help bridge the growing budget deficit.

Measures specifically targeted at motorists and car buyers are being studied both at local and national government level, with a view to immediate implementation. The national government is looking into a tiered fuel pricing structure, with larger cars paying more for fuel at the pumps. Also, the Jakarta city administration is looking into increasing taxes on households with two or more cars, which could potentially have a significant impact on the new vehicle market in the country. The administration is trying to encourage car users to switch to public transport. Further policy developments are expected to emerge in the next few weeks.

Tony Pugliese

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