Fuel price hike to have little impact on inflation: BI

Fuel price hike to have little impact on inflation: BI

Urip Hudiono, The Jakarta Post, Jakarta

A hike in domestic fuel prices next year -- if carefully planned
and carried out -- will have only a limited effect on the
inflation rate, Bank Indonesia has said.

"Inflation will, of course, rise when the hike is made, but it
will only be temporarily and will likely not continue over the
following months," central bank Governor Burhanuddin Abdullah
said on Thursday.

Bank Indonesia has suggested several schemes to the government
on the fuel price hike, including the percentage it should be
raised, so as not to affect inflation significantly.

"We have sent our recommendations for the government to
consider, and the final say also lies with them," Burhanuddin
said.

Minister of Finance Yusuf Anwar said on Wednesday that the
government would raise fuel prices next year to reduce fuel
subsidy costs, which was increasing amid the current surge in
global oil prices.

The soaring global price of oil has been a huge burden to the
cash-strapped government, which was forced to raise the fuel
subsidy this year to about Rp 59.3 trillion (US$6.5 billion) from
an original budget of Rp 14.5 trillion.

As a result, the 2004 budget deficit is expected to widen to
about 1.5 percent of gross domestic product (GDP), compared to
the initial target of 1.3 percent of GDP. The greater deficit
will prompt the government to sell more state assets and increase
its tax revenue target.

A rise in fuel prices affects inflation, as it pushes
production, distribution and transportation costs.

According to the World Bank, however, the long-running
relationship between fuel prices and overall inflation rate
suggests that a 10 percent increase in fuel prices would roughly
be equivalent to 0.6 percent of overall inflation rate.

Bank Indonesia has projected that inflation next year would be
around 6.5 percent, about the same with the 2004 full-year
inflation target.

A mild inflation environment is crucial to allow the central
bank to further cut down its interest rate and make bank loans
more affordable to companies seeking to finance investment plans,
while easing the burden of the government in repaying its huge
domestic public debts.

A surge in domestic prices could also cause social and
political unrest, as it would make life more expensive for the
people.

In its last auction on Wednesday, the central bank managed to
lower the benchmark interest rate on a single Bank Indonesia
promissory note (SBI) to 7.41 percent to 7.42 percent.

Elsewhere, Burhanuddin said a decision to retain current fuel
prices and the expensive fuel subsidy could affect the country's
foreign exchange reserves.

"We have to bear in mind that Indonesia is already a net
importer of oil, although we still make a revenue from exporting
gas," he said, adding that the government spent between $800
million and $1 billion per month just to import oil.

"This situation certainly needs to be considered fully,
because if it becomes unmanageable, then it could affect
macroeconomic stability," he said.