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JAKARTA - Indonesia's government will implement long-planned fuel price increases starting Tuesday, including a 32% increase in the price of gasoline, Minister of Energy and Mines Purnomo Yusgiantoro told reporters late Monday. The price increases will result from a reduction in massive fuel subsidies that have crippled the government's ability to fund economic development and have prompted illegal imports of petroleum products, Purnomo told a special press briefing attended by top government ministers.
The government must make the politically unpopular move to raise fuel prices to alleviate the pressure of fuel subsidies on state revenues and to meet a budget deficit of 1% of gross domestic product in 2005, Minister of Finance Jusuf Anwar told reporters. Fuel subsidy costs rose to 69 trillion rupiah ($1=IDR9,273.90) in 2004, or about 3% of GDP, due to higher global oil prices.
Purnomo said that the price of kerosene, the fuel that Indonesia's poor are most dependent on, will remain unchanged. That decision reflects the government's efforts to mitigate public dissatisfaction with the price increases and bolster official assertions that the price hikes were based on assessments of social fairness. The price of industrial-use kerosene will rise 22% on Tuesday to IDR2,200 from IDR 1,800 a liter while diesel prices will increase 27% to IDR2,100 from IDR1,650/liter, Purnomo said.
Industrial-use diesel and high-speed diesel fuel prices will rise 33% and 39% respectively, while the price of aviation fuel will rise to IDR2,300 a liter from IDR1,560. Analysts say the price increases will likely deliver a short, sharp inflationary shock to the economy, driving up inflation to up to 8.5% a year in the three or four months following the price hike. But they say the annual inflationary rate will likely ease to 6.5% in the second half of 2005. Indonesia recorded higher-than-expected annual inflation in January of 7.32%.
The government had to raise fuel prices because maintaining the current level of fuel subsidies threatened to "ruin economic development" efforts, Coordinating Minister for the Economy, Aburizal Bakrie, said at the briefing. Bakrie said that the price increases would reduce fuel subsidies by IDR39.8 trillion in 2005, of which IDR17.8 trillion would go into a special compensation fund to fund education and health care programs for Indonesia's poor.
Drivers in urban centers across Indonesia reacted to the imminent price hike by forming long queues beginning at dusk outside petrol stations to fill up their tanks ahead of the increase. The 32% increase in gasoline prices means that Indonesian drivers will pay an average of around IDR2,400/liter at the pumps starting Tuesday, an increase from IDR1810/liter. But analysts have predicted that the government of President Susilo Bambang Yudhoyono will experience more muted public reaction to the price hikes compared with the massive street demonstrations that forced his predecessor, Megawati Sukarnoputri, to abort a similar attempt to slash fuel subsidies and raise fuel prices in 2003.
Both Yudhoyono and analysts have indicated that Indonesia's consumers are mostly resigned to the necessity and inevitability of the price increases.
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