Indonesia to Cut Fuel Subsidies to Balance Budget

Indonesia will soon raise fuel prices by up to 30 percent to avoid a budget blowout amid the soaring cost of oil on the global market, the government said Monday.

The decision to cut subsidies that keep gasoline, diesel fuel and kerosene affordable to the country's millions of poor risks nationwide demonstrations and political opposition from parties jockeying for position ahead of elections next year.

The government last raised prices in 2005, defying protests and winning praise from international donors. To cushion the blow, it provided direct cash payments to the poor - a policy it is sure to repeat this time around.

President Susilo Bambang Yudhoyono said the government was no longer debating whether to raise prices,but rather by how much and when. The discussion now is "whether it will be 20, 25 or 30 percent and why will it be that," he said.

Senior Economic Minister Boediono said the government was planning to raise prices in the "coming weeks" and that the poor would receive some form of direct compensation. He gave no more details.

Any price hike is sure to trigger inflation in the country of235 million people and risk hurting economic growth as its poorest citizens struggle to afford rice and other staples amid rising food costs.

Still, most in Indonesia agree the current level of fuel subsidies are unsustainable as global prices hover around US$117 a barrel.

Critics note they are also enjoyed by many of its wealthiest citizens, who currently spend just under half a dollar for a liter of gasoline for their cars.

Indonesia is Southeast Asia's largest oil producer and a member of OPEC, but it has to import oil because of decades of declining investment in exploration and extraction.

A big fuel price increase in 1998 triggered rioting that helped topple former dictator Suharto. Protests also forced former President Megawati Sukarnoputri to scale back a fuel price increase in 2002.(**)

Taken from: http://www.thejakartapost.com/news/2008/05/05/indonesia-cut-fuel-subsidies-balance-budget.html

Based on my opinion, I think Indonesia faces a tough choice. Surging energy and food prices are pushing up the cost of subsidies, but a rise in fuel prices could spark anti-government protests ahead of next year's parliamentary and presidential elections.