Fuel, power prices to go up in June

JAKARTA (JP): The government finally decided on Thursday to raise fuel prices by an average 30 percent and electricity rates by 20 percent next month in a bid to help keep the 2001 state budget deficit at a safer level.

"Fuel prices will be increased by 30 percent, and electricity rates by 20 percent on June 15," Finance Minister Prijadi Praptosuhardjo told a press conference following a limited cabinet meeting on the revision of the 2001 state budget.

Prijadi said that the government would submit the revised budget including the new plan on fuel prices and power rates to the House of Representatives on Monday for approval.

"We will meet the House and submit the revised budget on Monday, and we'll arrange a schedule to discuss the revision," he said.

The budget deficit could widen to a critical level of 6 percent of gross domestic product (GDP) (more than Rp 86 trillion), compared to the initial projection of 3.7 percent of GDP, due to the sharp plunge in the value of the rupiah and rising domestic interest rates.

In a bid to maintain the deficit at the safer level of around 3.7 percent of GDP, the government has designed several measures which basically focus on increasing domestic revenue and cutting spending.

Cutting fuel subsidies, which means an increase in fuel prices, has been the most crucial and difficult choice of the program to trim government spending particularly due to the serious political consequences.

The fuel price increase in April 1998 had contributed to the downfall of the former president Soeharto in May 1998.

Some analysts have earlier said that with the political position of President Abdurrahman Wahid already significantly weakened by the recent issuance of a second censure by the House of Representatives over his alleged involvement in two financial scandals, the fuel price increase would be a political suicide.

It is not clear, however, whether the fuel price increase would also affect the price of fuel products purchased by people of a low income bracket and the general public.

The recent fuel price increase had only affected the fuel products used by industries.

Some government officials have earlier said that the government would introduce measure to protect people in the lower income bracket from the impact of the fuel price increase.

The drop in the value of the rupiah has raised the fuel subsidy in the 2001 state budget to around Rp 66 trillion from the initial estimate of around Rp 53 trillion.

In a bid to limit spending, the government plans to reduce the fuel subsidy by around Rp 6 trillion resulting in a 30 percent increase in the average price of fuel products.

The government also plans to raise value added tax (VAT) from the current level of 10 percent to 12.5 percent in a bid to boost domestic revenue.

Some economists have earlier warned that the raising of VAT would be more damaging to the overall economy as it would further hurt the business sector already facing the risk of lower business volume due to the expected slower economic growth at home and abroad.

The 2001 state budget revision includes changes in the exchange rate of the rupiah against the U.S. dollar to Rp 9,600 per dollar from the initial assumption of Rp 7,200 per dollar, inflation rate to 9.3 percent from 7.2 percent, GDP growth to 3.5 percent from 5 percent, and interest rate of Bank Indonesia SBI promissory notes to 15 percent from 11.5 percent.

The government expects the House to complete the debating process of the budget revision quickly to allow the government to request the International Monetary Fund to immediately disburse its crucial loan to the country.

The IMF had earlier demanded that it would only agree to resume economic talks with the government after the House approved the budget revision.

The IMF delayed the disbursement of its loan to the country late last year due to slow progress in the implementation of key aspects of the economic reform program.

Meanwhile, the IMF hailed on Thursday the government's plan to submit the revised state budget to the House on Monday, saying that it would help open the way for the IMF to disburse the loan.

"The government has decided to take bold and necessary steps to prevent the fiscal problem from worsening, so we are very encouraged by the (finance) minister's statement," IMF Jakarta representative John Dodsworth told Reuters.

The April 1998 fuel price increase was also recommended by the IMF. (rei)