Fuel prices to go up soon, BI set for rates increase

Fuel prices to go up soon, BI set for rates increase

Rendi A. Witular, The Jakarta Post, Jakarta

The government will raise fuel prices by up to 30 percent in the
first quarter of this year in a bid to lower the fuel subsidy.

To limit the inflationary impact, Bank Indonesia has indicated
it will raise interest rates or absorb the circulation of base
money.

"The first quarter of this year is the best time for us to
increase fuel prices .... We are still considering if a 30
percent hike is suitable at the moment," State Minister for
National Development Planning Sri Mulyani Indrawati said at the
State Palace on Thursday.

"The sooner the better for the state budget. The government
has been burdened by the costly fuel subsidy, which has soared
due to the jump in global oil prices," she said.

With the government maintaining fuel prices throughout 2004,
it was forced to set aside some Rp 10 trillion (US$1.1 billion) a
month from the state budget for the subsidy, the largest fuel
subsidy ever in the country's history.

The government allocated a whopping Rp 59.2 trillion for the
fuel subsidy last year because of rising global oil prices,
against an initial projection of Rp 14.5 trillion. In comparison,
Rp 71.9 trillion was allocated for development spending last
year.

The fuel subsidy has been set at about Rp 19 trillion for
2005, but with global oil prices showing little sign of declining
that figure is expected to rise unless the government begins to
lift the fuel subsidy.

In the past, however, any attempt by the government to raise
fuel prices in order to cut the subsidy sparked public protests.

Another concern is that a fuel price hike will drive up the
inflation rate, which will lead to decreased purchasing power and
eventually affect consumer spending.

Higher consumer spending is a prerequisite for the robust
domestic consumption that since the economic crisis in 1997 has
been the engine driving economic growth.

"The government's plan to raise fuel prices has caused
producers to hedge production costs and selling prices, thus
accelerating the inflation rate," said Bank Indonesia Governor
Burhanuddin Abdullah.

In a bid to ease inflationary pressure, Burhanuddin has
indicated it will raise its benchmark interest rate (SBI) to
reach this year's inflation target. The government has targeted
inflation at between 6.5 percent and 7 percent.

"The January inflation level is worrying. The central bank
will adopt a tight monetary policy to control the inflation
level, with raising interest rates to be our priority," he said.

The Central Statistics Agency announced on Wednesday the
inflation rate for January tipped 1.43 percent, the highest
monthly level in four years, mostly due to a rise in the prices
of basic foods, housing and utilities.

According to Burhanuddin, the price rises were primarily
driven by anticipation of the government's plan to raise fuel
prices and due to a number of natural disasters in the country
that had increased the demands for food.

"In this year's first semester, the central bank will adopt a
combination of base money facilities with interest rate hikes to
ease inflation. In the second semester, we will only use the
interest rate facilities," he said.

Signs by the central bank that it will raise interest rates
could prompt banks to adjust upward their lending rates and make
loans more expensive for the private sector.