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.