Indonesia increases fuel prices by 30% as it aims to rein in subsidies

The last fuel price rise in the South East Asian country was in 2014

Cars and motorcycles queue at a petrol station in Indonesia's capital Jakarta, as drivers try to beat the price increase. AP

Indonesia has raised subsidised fuel prices by about 30 per cent on Saturday, top officials said, as the government moves to rein in ballooning subsidies.

The price of subsidised petrol was raised to 10,000 rupiah ($67 US cents) a litre from 7,650 rupiah, while that of subsidised diesel rose to 6,800 rupiah a litre from 5,150 rupiah, Energy Minister Arifin Tasrif said.

"I actually wanted domestic fuel prices to remain affordable by providing subsidies, but the budget for subsidies has tripled and will continue to increase," President Joko Widodo told a news conference.

"Now the government has to make a decision in a difficult situation. This is the government's last option," Jokowi, as the president is known, said.

South-East Asia's largest economy had already jacked up its 2022 energy subsidies to 502 trillion rupiah ($34 billion), three times the original budget, pushed by rising global prices of oil and a depreciating rupiah currency.

If prices were not raised, the budget would have ballooned further to 698tn rupiah, Finance Minister Sri Mulyani Indrawati said.

She estimated total energy subsidies would range between 591tn and 649tn rupiah for this year following the price review, assuming the average crude price stays in a range of $85 to $100 a barrel for the remainder of 2022.

High energy subsidies had previously kept Indonesia's inflation low, allowing the central bank to delay raising interest rates until last month, well behind regional and global peers. The August inflation rate was 4.69 per cent.

Hariyadi Sukamdani, head of business group Indonesian Employers Association, said overall price pressure from the fuel price rise would not be too much, expecting inflation to top 6 per cent at the end of the year.

"If prices of goods are too expensive, people won't buy. We can't raise prices too much," he said.

Businesses are using non-subsidised fuels, but the price rise will affect logistics costs, Mr Hariyadi said.

Still, accelerating inflation could put pressure on the central bank to tighten monetary policy more quickly. The bank holds a two-day policy meeting ending on Sept 22.

Fuel prices are a politically sensitive issue in Indonesia, and the changes will have major implications for households and small businesses, as subsidised fuel accounts for more than 80 per cent of state-owned oil giant Pertamina's sales.

The last fuel price rise was in 2014, months after Mr Jokowi took office, aiming to free up fiscal space. That sparked protests across the archipelago.

The opposition Labour Party has arranged a protest involving thousands of workers for Tuesday, chairman Said Iqbal, who also heads a trade union, told Reuters, calling on parliament to pressure the government to cancel the price rise.

"This will hurt purchasing power," he said. "Wages have not increased for three years and inflation is bound to rise sharply."

Small protests against any price rise, mostly led by students, had erupted in the past few days in several cities.

The government has allocated an additional total of 24.17tn rupiah for cash handouts to help the poor cope with the policy's impact, Mr Jokowi said.

After the price rise announcement, Pertamina said it was committed to ensuring adequate fuel supplies nationally.

Cars were seen queuing in some petrol stations in the capital Jakarta after the announcement.

Pertamina, Asia's biggest petrol importer, has already deferred some of its petrol deliveries for September before the price rise, due to an expected drop in fuel demand, traders said.

Decades ago, Indonesia was once a major oil exporter, becoming a member of the Organisation of Petroleum Exporting Countries in the 60s, but its oil output has since declined and it turned to be a net oil importing country in the 2000s. Indonesia is still an exporter of gas, however.