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.