Fuel Price Hike in Indonesia

Indonesia has some of the lowest fuel prices in Asia because the government provides heavy subsidies. But, recently, soaring global prices have made a huge dent in the budget. Jakarta is now struggling to contain inflation and bring its expanding budget deficit under control.

Revison Baswir, an economics expert at Gajah Mada University in Yogyakarta, explained the situation: “If the price of gas increases, it won’t only hurt the Indonesian people but it will also hurt industry because production costs will increase. The high costs will have a negative impact on product competition in the global market. There will be no benefit at all if the government raises the fuel prices.”

Echoes of 1998

Other analysts, who are against the fuel hikes, cite the events of 1998. That year, a fuel price rise sparked a mass protest movement that ultimately brought down the Suharto regime.

This is one reason that the current government had resisted a price hike so far -- especially in the run-up to elections next year. However, Jakarta felt compelled by rising global prices to announce the hike.

Revison suggested other measures the government could promote, besides a fuel price hike: “The first thing is to increase national production and increase the efficiency of oil-use. Indonesia has to become self-sufficient so that the economy is not so dependent on the international markets.”

Thorny issue

But in the meantime, Yudhoyono's administration seems to think the price hike is unavoidable.

It has already outlined hazy plans for direct cash transfers to the poor and for expanded rice distribution. It has also announced healthcare subsidies in a bid to limit the political fallout.

Thousands had already taken to the streets before the confirmation of the price hike. The sensitive issue is likely to be a thorn in the government’s side for many weeks or months to come.