In an unexpected move, the Indonesian government has announced that it can no longer afford to maintain the current energy subsidies due to escalating oil prices and currency depreciation. The Finance Minister, Sri Mulyani Indrawati, revealed this development to reporters on September 3rd, acknowledging that the energy subsidy bill has tripled this year to 502 trillion rupiah, equivalent to approximately $34 billion. The rising global oil prices and the ongoing conflict in Ukraine have exacerbated the situation. The budget for 2021 had assumed an average crude oil price of $70 per barrel.
However, current trading prices have surpassed $90, adding significant pressure to Indonesia’s economy. Additionally, the Indonesian rupiah has depreciated by 6% against the US dollar since January, further increasing the cost of imported fuel.
These factors combined have added the equivalent of 1.7% of the country’s GDP to the energy support tab. In response, President Joko Widodo ordered an increase in fuel prices on Saturday, leading to a near 30% hike. Pertalite-90 gasoline, the most commonly used fuel, jumped from 7,650 rupiah (approximately 51 US cents) to 10,000 rupiah (67 cents) per liter, while diesel increased from 5,150 rupiah (35 cents) to 6,800 rupiah (46 cents).
This marks the end of an eight-year freeze on fuel prices, during which Indonesia had some of the lowest pump prices in the world. The government has decided to cap the fuel subsidy at 200 trillion rupiah for 2022, with the remaining 300 trillion rupiah being redirected towards targeted social programs.
“We are faced with a choice between cutting the subsidy or cutting development spending on schools, hospitals, and roads,” Indrawati said, highlighting the stark nature of the decision. The news of the price hike was met with immediate protests, with long queues forming across Java and Sumatra as consumers rushed to refuel before the price increase. In Jakarta’s Tanah Abang district, motorcycle-taxi driver Arif Kurniawan waited three hours overnight to save 25,000 rupiah on a full tank.
“That is one day’s food for my children,” he said, reflecting the hardship many Indonesians are facing. The move aims to trim the ballooning energy subsidy bill, but it does not address the underlying structural problem.
Indonesia’s fuel subsidies have long been a drain on the economy, promoting excessive consumption and depleting state coffers. The government’s decision to redirect funds towards social programs is a gamble. If the cash reaches the intended recipients quickly, the political fallout may be manageable.
However, if the process is slow or inefficient, the protests could escalate. As Indonesia adjusts to the new reality of higher fuel prices, the rupiah may continue to depreciate, and crude oil prices could remain above $90.
The capped subsidy of 200 trillion rupiah for 2022 could prove to be a ceiling that is tested repeatedly if oil prices continue to climb, forcing the government to reconsider its decision on the fuel subsidy.
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