May 12

Increasing Fuel Prices now coming to IndonesiaFuel prices in Indonesia are fixed by the government and don’t float according to market conditions. This leads to unbelievably cheap costs of fuel of Rp 4.500 per liter (app. USD 0.50).

While that was basically great for the population and led to an increased use of fuel – making oil-rich Indonesia basically an Oil Importer instead of an Exporter a few years back – it did cost the country an ‘arm and a leg’ in fuel subsidies.

Changing that policy caused national unrest and riots the last time they tried in 2005. Now things look a bit more calmer; but still fuel prices have to go up to save the country from sliding into bankruptcy in the mid-term:

A staggering subsidy bill of USD 14 billion currently accounts for about 20% of the government’s budget in 2008!

So, after mulling about that highly sensitive political issue for the last 2 years and with fuel prices at world markets rising practically every day to over USD 125 per barrel now – there has to be something done to improve the situation for Indonesia’s treasury.

What will increase?

Here are the proposed changes per liter:

  • Premium Fuel with 88 octane: increase from Rp 4.500 to Rp 6.000
  • Diesel Fuel: increase from Rp. 4.300 to Rp 5.500
  • Kerosene Fuel: increase from Rp 2.000 to Rp 2.500

The risky move is highly controversial within the country as well as political and economical analysts; as besides possible anti-government protests it would add another 1.5-1.9 percent to an already high inflation of around 9 percentage points.

This in return could make overseas lending more expensive for the country. In 2005 it also slowed down economic growth in South East Asia’s biggest economy significantly.

Indonesia as Asia’s only member in the OPEC cartel is now even mulling to leave the conglomerate to be able to adjust their prices more freely and independently from world market conditions.

Other upcoming changes

This time around it seems though, the country is much better prepared to shoulder a hike in prices, as the government announced at the same time an economic stimulus package which should ease the fuel increases for the low-income population.

Pertamina Gas Station in IndonesiaIt should work basically that lower income households will have a quota to spend on cheaper fuel, while excess fuel can then be purchased at market conditions.

Another method would be in the form of direct cash distributions to help cushion the impact of rising fuel; although I would see that as a more problematic way – prone to be misused by legions of corrupt politicians and officials.

On top of compensating the poor for the latest fuel increases – Indonesia’s president is about to sign a progressive “Economic Program 2008-2009“.

The goal is to set stringent guidelines for improving the country’s competitiveness; covering areas from tax breaks or reductions for private investments, further improvements of investment climate and conditions, reforming the labor and transmigration sector, boosting the energy supply, infrastructure upgrading and better economic integration into ASEAN.

Another big topic are the consolidation and privatization of now inefficient state-run companies, a process which only slowly progressed here in comparison to its Asian/ASEAN neighbors over the last couple of years.


So, while the higher prices will likely cost you a bit more to fill your tank with the precious liquid – please don’t forget the overall positive benefits for the country, when complaining about the price hike.

The Cost of Living here is still highly affordable for the average foreigner and it will improve even more, due to higher inflation compared to your base currency.

As for the Permanent Traveler or Expat in Indonesia it’s only a small sum to pay to get mobile with your bike or vehicle – but for the country’s finances it will come as a huge step towards relieving financial constraints on the treasury and providing a sustainable state budget.


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written by Chris

8 Responses to “Cutting Subsidies – Indonesia’s Government will raise Fuel Prices by app. 30% in June”

  1. balidreamhomeNo Gravatar INDONESIA Says:

    I think the gasoline will rise up by the end of May and to be honest like or dislike as Indonesian as me, has to accept it and find a constructive solution regarding the rising up expenses of living…hhhhh just have to be more creative!!

  2. nomadicmattNo Gravatar UNITED STATES Says:

    Good! Maybe it will encourage conservation. I am opposed to artifically cheap gasoline as it does nothing but keep people from conserving.

  3. nomadicmattNo Gravatar UNITED STATES Says:

    hmm i tried commenting but it didn’t work…lets try again.

    I’m for the cuts. I think subsidizing gas is bad because it encourages consumption not conservation and in this day and age, we need to conserve not burn.

    That being said, while making gas expensive, the government has to provide good alternatives to driving otherwise they just hurt their population!

  4. ChrisNo Gravatar INDONESIA Says:

    While I think too, that it’s more than about time to increase the gas prices; alternatives of transportation aren’t that easy to realize here either. Indonesia is a huge nation on 17.000 islands, so naturally the transport system heavily relies on cars, trucks and ferries. Sure, bus and train are alternatives, but mainly they only exist on the same island, if at all.

    But the new Economic Program (see the link in the article) looks very promising and it seems, that the government finally acknowledged their problems and tries its best to solve them. Let’s press our thumbs! ;-)

  5. Christine GilbertNo Gravatar UNITED STATES Says:

    The thing about gasoline is that it drives the cost of so many other industries. As we’re starting to figure out in the US, increased gas prices can also mean increases elsewhere, like food. While conservation is great, I wouldn’t want to see people go hungry over it.

  6. Teguh AdityaNo Gravatar INDONESIA Says:

    Sorry, because i can’t speak english i ngomong pake bahasa indonesia aja..
    ehm menurut gw kenaikan bbm 30 % tuh gak jadi masalah, yang jadi masalah tuh yang jual bbmnya sok dinaikin lagi.. itu penyebabnya harganya jadi selangit…
    en beberapa oknum (yang cari kesempatan dalam kesempitin)…
    kalau misalnya ngehapus subsidi buat bayar utang seh gak apa-apa, tapi utangnya jangan di tambahin ya.. kasian neh para penerus bangsanya… (termasuk gw)…

    ok thank’s ya..

  7. ChrisNo Gravatar INDONESIA Says:

    What Teguh Aditya is saying is that cutting the subsidies is actually the right thing to do. He is hoping, that the government uses the higher prices not as an excuse to increase debt, other prices and governmental spendings even more, but uses the saved funds to improve the living quality of the people.

    As it looks right now, other prices will go up as well, due to then higher transport costs, we can only hope for the best – that the governmental plan of offsetting this with cash handouts and other support for the lower income population will balance that more evenly.

  8. James The Professional AdventurerNo Gravatar UNITED STATES Says:

    My friends in Jakarta have been telling me that there have been allot of demos about the rising prices of… well everything, due to the rising gas prices

    That sucks, they always block off the roads and the already long wait in traffic doubles or triples. I’ll remember to bring a magazine or a pillow if I go downtown

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