World Economy

Indonesia to Fix Economy With Fuel Price Hike

Indonesia to Fix Economy With Fuel Price HikeIndonesia to Fix Economy With Fuel Price Hike

Indonesian President Joko Widodo unveiled a hefty increase in the price of subsidized fuel on Monday,  taking a risky, unpopular first step towards fixing the tattered finances of Southeast Asia’s top economy.

He announced the price of petrol and diesel would go up more than 30 percent from midnight, a deep cut to government subsidies that will be welcomed by economists but risks denting the new president’s popularity.

“From time to time, a nation faces difficult choices - nevertheless, we must take a decision,” the president, known as Jokowi, said in a televised address to the nation.

Government fuel subsidies are a thorny issue in Indonesia. Economists have long been calling for the payouts that gobble up a huge chunk of the state budget to be reduced but large sections of the public are staunchly against any increase.

Previous cuts – including a large one last year – have sparked violent protests and before Monday’s announcement, stone-throwing youths briefly clashed with security forces in one traditional protest hotspot.

Analysts hailed the move by Widodo, who took office last month, as it fulfilled a campaign pledge to cut the payouts in order to divert money to reforms, such as overhauling infrastructure and helping the country’s poorest.

It is seen as an urgently needed boost to an economy that is expanding at its slowest pace for five years, with growth slipping to 5.01 percent on-year in the third quarter.

 Budget Wasted

The price of petrol is rising 2,000 rupiah ($0.16) to 8,500 rupiah ($0.69) a liter, an increase of just over 30 percent, while diesel will go up 2,000 rupiah ($0.16) to 7,500 rupiah ($0.61) a liter, a 35 percent increase, Widodo said.

“The state needs a budget for infrastructure, education, and health. The budget has not been available as it has been wasted on fuel subsidies,” he said.

Widodo, Indonesia’s first leader from outside the political and military elites, also said there would be “social protection” for the poorest, a reference to a government scheme aimed at providing cash handouts to cushion the impact of the fuel price increase.

Politicians are nervous about dismantling the decades-old fuel subsidy program in part because an attempt by Suharto to reduce the payouts triggered riots that helped end his three-decade dictatorship.