Government plans 30% hike in fuel prices this year

JAKARTA (JP): The government may be forced to raise fuel prices by an average 30 percent this year in a bid to help maintain the 2001 state budget deficit at a safe level, Coordinating Minister for the Economy Rizal Ramli said on Wednesday.

Speaking to reporters following a meeting with Vice President Megawati Soekarnoputri on the state budget, Rizal said that the price increase was a consequence of the plan to reduce the fuel subsidy in the state budget.

But Rizal was quick to say that the government would try to ensure that the subsidy cut would be mainly shouldered by the middle-to-high income earners rather than the poor.

The current state budget deficit could widen to a dangerous level of 6 percent of gross domestic product (GDP) or nearly Rp 90 trillion (about US$8 billion), compared to the initial projection of 3.7 percent of GDP, primarily due to the sharp plunge in the value of the rupiah against the U.S. dollar and rising domestic interest rates.

The government is planning several measures to try to limit the deficit to around 3.8 percent of GDP primarily by cutting spending including the fuel subsidy, and raising domestic revenue particularly taxes.

The government plans to reduce the fuel subsidy by around Rp 5.6 trillion from Rp 41.3 trillion set under the current budget.

But Rizal said that raising fuel prices was a very difficult choice because of the political and social consequences of the policy.

"We want to fix the budget by cutting the fuel subsidy, but we don't want to see a repetition of the May (1998) incident," he said, pointing to the social unrest that led to the downfall of former president Soeharto after he raised fuel prices in April 1998.

The government had earlier canceled the plan to raise fuel prices by an average 20 percent on April 1 due to the unfavorable political climate.

The government instead raised fuel prices for industries by between 50 to 100 percent, leaving the prices of kerosene and fuel products sold at gas stations unchanged.

Meanwhile, economist Didik Rachbini said that the time was not yet ripe for the government to raise fuel prices due to the current political uncertainty and weak purchasing power of the people.

"It is better for the government to focus on cutting spending for the more prosperous provinces," Didik said.

The government has said that it plans to cut allocated funds for wealthier provinces and districts including by encouraging them to purchase government bonds, shares in state-owned enterprises, and assets under the Indonesian Bank Restructuring Agency (IBRA).

The above measures are part of the plan to revise the current state budget.

The revision will include the change in budget assumptions including revising the rupiah rate to Rp 9,600 per U.S. dollar from an earlier estimate of Rp 7,800 per dollar, inflation rate to 9.3 percent from 7.2 percent, economic growth to 3.5 percent from 5 percent, and interest rate of Bank Indonesia SBI notes to 15 percent from 11.5 percent.

Rizal said that the revised state budget would be discussed at a cabinet meeting today before submitting it to the House of Representatives for deliberation.

Rizal did not say when the budget would be submitted to the House, but Minister of Trade and Industry Luhut B. Pandjaitan said that it would only be made after the government held final discussions on May 16.

The House approval on the budget revision is a prerequisite demanded by the International Monetary Fund to decide on the disbursement of its next US$400 million loan tranche to the country. (rei)