In an interview that took place on Thursday with CNBC Indonesia TV, Indonesian President Joko Widodo stated that the country has not yet completed the process of assessing who is qualified to receive fuel subsidies.
In order to rein in the out-of-control growth of energy subsidies in the economy that dominates Southeast Asia, some have proposed limiting the number of people who are eligible to receive fuel subsidies.
An adviser told Reuters on Friday that Indonesia’s President-elect Joko Widodo intends to raise the prices of subsidized gasoline and diesel by approximately 50 percent the following month. This will be done in an effort to bring down the budget deficit in Southeast Asia’s largest economy, which is Indonesia.
The new government will be taking a step that is extremely unpopular, but some of the worries about the future of the minority coalition were eased when opposition leader Prabowo Subianto offered qualified support for Widodo’s administration at a joint news conference following the rivals’ first meeting since a disputed election in July.
Widodo is scheduled to take office on Monday, and immediately after taking office, he will be tasked with addressing Indonesia’s most pressing fiscal challenge: a fuel subsidy bill totaling $23 billion, which is the primary factor contributing to the country’s simultaneous budget and current account deficits.
In a move that will save the government around $13 billion the next year, the adviser stated that the future president intends to hike the price of gasoline by 46 percent, and the price of diesel by 55 percent, maybe as early as November 1 of this year.
The adviser, who asked to remain anonymous because he was not permitted to speak to the media, said, “It’s safe to say they are likely to do it within the first two weeks of taking office. It’s safe to say they are likely to do it within the first two weeks of taking office.”
Increasing the cost of fuel is a touchy subject that frequently results in demonstrations and was a contributing factor in the overthrow of a long-serving authoritarian and the president of Indonesia at the time, Suharto, in 1998.
According to the side, there is still time for Widodo to make changes to his plan; however, even while opposition parties would likely object to the magnitude of the price hikes, the government does not require consent from parliament in order to boost fuel prices.
However, the former governor of Jakarta will need backing for future difficult decisions, and after a contested election that was the closest in Indonesia’s history, he has been trying to heal ties with Prabowo in order to do so.
It seemed like tensions were eased at their meeting on Friday, but it was unclear whether they discussed the recent increase in the cost of petrol.
Widodo has stated that all that is done would be for the benefit of the nation, and that “our aims” remain the same.
After the conclusion of the press conference, Prabowo, who is a retired general, extended his congratulations to Widodo and saluted him.
“I conveyed that the party I head, my supporters, and I will urge them to support Joko Widodo and the government he will lead,” Prabowo said. “I will ask them to support Joko Widodo and the government he will lead.”
Investors in Indonesian equities were given hope by Prabowo’s reassuring statements and the possibility of an increase in the price of fuel as a means of bringing down a worrisome fiscal deficit.
The rupiah currency and the stock market both increased by approximately 1 percent, while the yields on 10-year government bonds decreased.
According to the advisor, Widodo now intends to proceed with his plan to increase the price of both gasoline and diesel by 3,000 rupiah ($0.25) per liter by November. The price of a liter of gasoline in Indonesia is currently 6,500 rupiah, while a liter of diesel is 5,500 rupiah, making Indonesian fuel prices among the most affordable in the area.
Hashim Djojohadikusumo, a top assistant and Prabowo’s brother, told Reuters last week that they would likely reject it on the grounds that it would be too much of a shock to the system. “We would probably oppose it on the grounds that it would be too much of a shock to the system,” Hashim said.
According to him, MPs affiliated with the opposition would most likely support a more moderate increase in gas prices, anywhere between 1,000 and 1,500 rupiah.
According to the information provided by the consultant, the government is anticipated to reduce its expenditures on gasoline subsidies by 156 trillion rupiah ($12.76 billion) in the following year. The subsidies for gasoline and diesel fuel account for 13.5% of total government spending in the budget for 2015.
According to Widodo’s advisers, the money that was saved would be used to expenditure on programs related to agriculture, education, and healthcare.
According to the adviser, Widodo intends to compensate for the increase in the cost of fuel by giving 300,000 rupiah every three months to the poorest families in Indonesia up until the first quarter of 2016.
According to the consultant, there will be further discussion regarding the price of fuel during the fourth quarter of 2015.
Because of a shortfall in tax revenues and the slowest economic growth in five years, the 2014 budget deficit had been targeted at 2.4 percent of gross domestic product; however, it is in danger of busting a budget law setting the limit at 3 percent. The law is in place to prevent the deficit from exceeding the 3 percent threshold.
According to the current Finance Minister, Chatib Basri, an increase in the price of fuel by 3,000 rupiah in November will result in a savings of 21 trillion rupiah for the government in the remaining two months of this year.
According to the deputy central bank governor Perry Warjiyo, the proposed increase in the price of fuel would contribute an additional 3-3.5 percentage points to inflation this year, and the inflationary pressures caused by the increase would endure for around three months.
The current projection for inflation in 2014 is at a rate of 5.3 percent.
The increase in the price of fuel will contribute to a reduction in the current account deficit, which is anticipated to reach 3.2 percent of gross domestic product in 2014 but is expected to fall below 2.9 percent in 2015.