Fuel hike of 10-15% limits impact on economy: Expert

Leony Aurora, The Jakarta Post/Jakarta

With the new government holding marathon meetings to resolve the problem of ballooning fuel subsidy spending, an economist has presented a scenario in which a 10 percent to 15 percent hike in domestic fuel prices next year would reduce subsidy spending and limit the adverse effects on the economy.

Bank Mandiri economist Martin Panggabean forecasts that such a measure would only push up inflation by around 1.5 percent to between 7 percent and 7.5 percent next year compared to between 6 percent and 7 percent this year.

To enable such a limited rise in domestic fuel prices, the government would have to provide Rp 30 trillion (US$3.33 billion) in fuel subsidy spending, around half of the Rp 63 trillion allocated for this year, Martin explained.

He said that this scenario was based on the assumption that international oil prices would average $35 per barrel next year, while the exchange rate of the rupiah would average Rp 9,000 per U.S. dollar.

"Personally, I think this is the most feasible scenario for the government," he told The Jakarta Post.

Based on the same assumptions, his analysis shows that if the government wished to avoid an increase of domestic fuel prices altogether, it would have to allocate another Rp 63 trillion on subsidy spending next year.

"Where will the government get the money from?" said Martin.

Tackling the increasingly expensive cost of fuel subsidies is seen as one of the toughest economic challenges that the new government of President Susilo Bambang Yudhoyono has to tackle. Although the government has said it will not raise fuel prices at home during the remainder of this year, the cash-strapped administration may have to take such a difficult step next year.

Critics have said that the Rp 63 trillion that will be spent on fuel subsidies this year is too much considering that only Rp 71 trillion has been allocated for development spending. In addition, the fuel subsidies mostly benefit rich car owners, not the poor, while cheap fuel at home has triggered smuggling to neighboring countries. If the subsidy can be reduced, more funds will be available for other much needed economic programs.

Elsewhere, Martin said that the limited impact on inflation of a between 10 percent and 15 percent fuel price hike would also help ensure a stable interest rate environment.

He forecast that the Bank Indonesia benchmark interest rate would stand at between 8 percent and 8.5 percent next year.

"With a 10 percent to 15 percent fuel price hike, the benchmark interest rate will stay at between 8 percent and 8.5 percent next year."

Bank Indonesia has maintained relatively stable interest rates of around 7.41 percent this year. Low interest rates are essential to making bank loans affordable and thereby help finance corporate activities and accelerate economic growth.

Martin further suggested that the government increase prices in stages to help minimize the social and political impacts.

The price of premium gasoline -- the fuel used by private car owners and thus the well-off -- should be increased the most, followed by industrial diesel oil. The lowest increase should be for kerosene, which is used by low-income families.

"A rise in the price of kerosene is inevitable as the difference between its price here in Indonesia and on the international market is too big," he said.