Indonesia's parliament approves package paving way for fuel price hike

Indonesia’s parliament approved compensation measures for the poor on June 17 that the government had demanded before it would agree to cut costly fuel price subsidies which are blamed for undermining confidence in Southeast Asia’s biggest economy.
The decision to raise fuel prices by an average of 33% rests with President Susilo Bambang Yudhoyono. Government officials had repeatedly stated that the price increases would follow shortly after the parliamentary decision.
The economic impact could be quite significant. The planned fuel price hike will drive 2013 inflation to a five-year high, or 7.2%, and pressure the central bank to raise interest rates again even as the increased cost of living weighs on consumers.
The plan will help restore some confidence in Indonesia’s markets and the government’s fiscal discipline, analysts said.
The central bank increased interest rates in mid-June as it scrambled to prop up the rupiah, which fell to its lowest level in almost four years partly on worries that the cost of the fuel subsidies were holding back the economy.
“By implementing the fuel price hikes, the government is showing its commitment to undertake tough reforms, especially a year ahead of elections,” Barclays said in a research note, referring to presidential and general elections due in 2014.
The stock market rose 1.4%, but the rupiah fell as much as 0.7% against the dollar, its steepest one day fall since February 1, 2013.
Finance Minister Chatib Basri said the planned 44% increase in gasoline prices and 22% rise in diesel prices would only take place once the government had finalized a process to compensate poor families for the higher costs.
The compensation, part of a revised 2013 budget passed by the parliament, will provide about 9 trillion rupiah (US$882 million) in cash for more than 15 million families, to be paid over four months.
The president, who has to formally sign off on the fuel price increases, wants to minimize the impact on the cost of living for the country’s 240 million residents, which could spark higher wage demands and potential unrest ahead of the 2014 elections.
Thousands protested on June 17 across the country as parliament met and there were scattered reports of violence.
(June 18, 2013)