Govt confirms fuel price hike in 2005

The Jakarta Post, Jakarta

After months of speculation, the new government confirmed on Thursday it would reduce the fuel subsidy for next year, making a hike in domestic fuel prices in the near future inevitable.

A government team is now studying a modified subsidy scheme to replace the current scheme, which is seen as benefiting the rich more than the poor, according to Coordinating Minister for the Economy Aburizal Bakrie.

"We are readying a subsidy formula that will be more pro-poor. The (fuel) subsidy will be reduced, but in return a direct subsidy will be given to certain sectors such as education, health and others," Aburizal said.

Aburizal said a "shift" in the fuel subsidy policy was necessary because the current subsidy failed to reach those who needed it most.

"Even I benefit from the existing subsidy because it makes fuel prices cheap," he added.

Aburizal did not provide details on the new scheme, including whether it meant the government would submit a revision of the 2005 state budget to the House of Representatives sooner than scheduled.

Under existing law, the government is allowed to submit a revision of the state budget to the House only in the second semester of the fiscal year.

Aburizal did not mention by how much the government would be willing to reduce the subsidy.

Yet, his remarks should end speculation over the issue, at least for a while.

Debate over the fuel subsidy took off amid soaring global oil prices, which have been hovering at levels well above those anticipated in the state budget.

This has meant that Indonesia has had to allocate more money for the fuel subsidy.

After projecting the fuel subsidy at about Rp 14.5 trillion for this year, rising global oil prices boosted the subsidy to a whopping Rp 69.2 trillion -- just slightly less than the Rp 71.9 trillion allocated for development spending.

The subsidy has hugely burdened the already cash-strapped sate budget, putting pressure on the government to review the scheme.

Also, the subsidy has encouraged fuel smuggling to neighboring countries.

The World Bank, one of the country's major donors, was the latest to urge the government to cut the fuel subsidy, which it said was draining away money the government could spend on poverty alleviation.

It said the existing subsidy scheme benefited the rich five times more than it did the poor.

Experts believe the impact of a domestic fuel price hike on inflation would be manageable, with a 10 percent increase in fuel prices expected to add about 0.6 percent in inflation.