The Indonesian government has finally moved to reduce its ballooning fuel subsidy bill, after years of deliberation and delays.
At the end of last week, Indonesia’s lawmakers approved a 44% hike in the price of the widely-used low-octane “Premium” petrol to IDR 6,500 per litre (USD 0.65) and a 22% hike in the price of “Solar” diesel to IDR 5,500.
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Both fuels are exclusively sold across the state-owned Pertamina nation-wide petrol station network.
Government fuel subsidies have increased substantially since the last fuel price hike took place in October 2005. Vehicle ownership has increased sharply over the last decade, as have average annual crude oil prices. The cost of fuel subsidies is understood to have increased to in excess of USD 20 billion in 2012.
The freed up funds from the subsidy cuts are expected to be allocated to poverty alleviation programmes and infrastructure development.
The resultant fuel price hike is also expected to be inflationary, with the cost of producing and transporting goods set to rise significantly over the next 12 months. The rupiah has also lost some of its value against the US dollar since the fuel price announcement.
The fuel price hike is also likely to encourage purchases of small cars, especially following the announcement of earlier this month of cuts in the tax rate for small cars with a fuel consumption of up to 20km/litre.
