Indonesia Announced Increase in Subsidized Fuel
President Jokowi announced an increase in subsidized fuel prices. The price of Pertalite (RON 90) rose 30.71% from IDR 7,650 to 10,000 per liter. Subsidized diesel also increased by 32.03% from IDR 5,150 per liter to IDR 6,800 per liter, and non-subsidized Pertamax (RON 92) rose 16% from IDR 12,500 per liter to IDR 14,500 per liter effective from Saturday, September 3, 2022. To help ease the burden on the community and transportation actors, the government has provided social assistance for wage subsidies to 16 million workers with a maximum salary of IDR 3.5 million/month.
Responding to the increase in fuel prices, a number of transportation company managers said they would soon increase their service rates. Bluebird Taxi is currently finalizing a new taxi fare scenario. The Indonesian Young Autobus Entrepreneurs Association (IPOMI) also ensures that bus companies will adjust passenger bus fares from 25% to 35% depending on the area and distance. In fact, the Association of Indonesian Express Service Companies (Asperindo) has urged its members to raise the shipping service rate at least 10% before the fuel price rises.
The rising price of fuel has caused a wave of demonstrations. Labor unions in 33 provinces plan to hold large demonstrations against the increase, with the first action being held last Tuesday in front of the House of Representatives building, carrying out three agendas to reject the increase in fuel prices, reject the omnibus law, and ask for a 2023 wage increase of 10 -13 %. President of the Confederation of Indonesian Trade Unions (KSPI) Said Iqbal said the purchasing power of workers had fallen by 30 percent. With the increase in fuel prices, purchasing power is estimated to fall to 50 percent. The social aid provided by the government in the form of a fuel subsidy of IDR150,000 was unable to cover the price increase due to skyrocketing inflation. Trade unions are also concerned about rising industrial energy costs due to rising fuel prices, which could trigger an explosion of layoffs.
Minister of Finance Sri Mulyani Indrawati explained that even though the Indonesian Crude Price (ICP) fell to USD 90 per barrel until December 2022, the average ICP price for 1 year was still at the level of USD 98.8 per barrel. The Finance Ministry calculated that the fuel subsidy cost could swell to IDR 689 trillion by the end of the year, up from the 2022 revised budget of IDR 502.9 trillion. In comparison, the government only set aside IDR 152.5 trillion in the original budget. Before the rise, for each liter or kilogram of fuels sold at fixed prices in Indonesia, the government had to spend IDR 4,800–14,250 in subsidies, the ministry data showed.
Deputy Chairperson of the Indonesian Chamber of Commerce and Industry (Kadin) for Maritime, Investment and Foreign Affairs, Shinta Kamdani said, almost all business sectors would be affected by the adjustment. The growth of public consumption is likely to slow down in the short term, until people make adjustments to their consumption and spending patterns from the effects of this subsidized fuel price increase on all components of living costs, especially since the increase in fuel and food prices occurred at the same time, even though the government trying to reduce its negative effects with subsidies to the community. How significant the impact of the fuel price hike will depend on the sector and business scale as operating expenses affected by the fuel price also differ in each sector. The transportation, logistics, tourism services, trade, capture fisheries, agriculture as well as manufacturing industries will be affected more than the banking or education sectors. Kadin asked the government to launch a productive stimulus to trigger higher economic productivity on the business side, including a more affordable business credit stimulus, a credit restructuring stimulus both as a buffer and as an instrument to create confidence in expanding business loans, accelerating tax stimulus in the context of investment, and acceleration of tax refunds, facilitation of export or import logistics, simplification or granting of affordable export credits, and others that can ease the burden of business operations.
Although the Indonesian Government provided social assistance of IDR 24.17 trillion to the low-income community, economists are of the opinion that the social assistance budget is too small, considering the government only focuses on the poor or the bottom 40% of the spending group, and the distribution of social assistance, which is often constrained by data and execution speed. Historically back to 2005, double increase happened when the price of gasoline rose 32.6% and 87.5% and diesel rose 27.3% and 104.8%, resulted in inflation rate of 17.11%. Another increase in gasoline prices by 44.4% and diesel by 22.2% in 2013 resulted in an increase in inflation of 8.38%. And again in November 2014, the price of gasoline rose 30.8% and diesel 36.4%, inflation rate was recorded at 8.36%. Inflation rate was more controllable in 2013-2014 due to better social assistance policies. The Indonesian government is advised to exercise caution in anticipating a surge in inflation for household consumption as the main pillar of economic growth. When fuel prices rose in 2005, household consumption contracted from 4% to 3.20%. Likewise in 2013 and 2014, whereas household consumption contracted from 5.43% to 4.96%.
Director of the Center of Economics and Law Studies (Celios), Bhima Yudhistira, proposed to the government to postpone the increase in fuel prices until crude oil prices reach below USD 60-65 per barrel. In addition to impacting people’s purchasing power, the increase in fuel prices will also have an impact on the decline in demand for the manufacturing industry, disruption of labor absorption and the target of economic recovery, which pushes Indonesia to follow other countries into the stagflation phase.
