Indonesia keeps politically sensitive fuel subsidies, may limit use

JAKARTA, March 14 Thu Mar 14, 2013 8:27am EDT

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JAKARTA, March 14 (Reuters) - Indonesia may restrict subsidised fuel use by private vehicles in major cities but will only raise fuel prices as a last resort, the government said on Thursday, as Southeast Asia's largest economy struggles to contain ballooning fuel spending.

Indonesia has long been under pressure to reduce its fuel subsidies, which cut deeply into public finances. But raising fuel prices is considered politically toxic ahead of elections due next year, especially after price increases in 2005 and 2008 sparked protests.

The government's hefty subsidy bill cost $22 billion last year and contributed to a $24.2 billion current account deficit because of the need to import oil.

That amount was 54 percent over budget, and without tighter controls this year's subsidy consumption is again expected to go over, sapping funds needed for infrastructure and other programmes.

An increase in domestic fuel prices would offer relief to markets but could also boost short-term inflation, which topped 5 percent in February, a 20-month high. It also would face resistance in a country where nearly half of the population is in poverty according to World Bank statistics.

"Subsidised fuel is not reaching its target recipients, but there's been an order from the president not to increase fuel prices," Energy Minister Jero Wacik said after a cabinet meeting with President Susilo Bambang Yudhoyono.

Indonesia was considering three options to reduce its subsidy bill, Finance Minister Agus Martowardojo said.

The first of these would be to "stop (subsidised fuel) use by private vehicles", he said, adding that the government was considering carrying out the plan in five major cities.

"If that's not effective, of course, we have the option to cut spending or go ahead and adjust fuel prices," he said.

This year, Indonesia expects to consume between 46 million and 53 million kl (12-14 billion gallons) of subsidised fuel, compared with 40 million kl (11 billion gallons) in 2012.

"It's difficult. If it were easy, we'd just increase fuel prices," National Economic Committee Chairman Chairul Tanjung said after the meeting, adding that the government would make a clearer announcement on its plans on March 28.

Previous attempts to increase fuel prices resulted in demonstrations and were rejected by parliament shortly after they were proposed early in 2012.

"If we increased them by, say, 1,500 to 2,000 rupiah, rich people would continue to be subsidised, but poor people's lives would become more difficult because prices would go up but their income would stay the same," Tanjung said.

So far, programmes to limit subsidised fuel use have focussed on government and corporate vehicles and have had limited impact on spending. (Reporting by Jakarta bureau; Writing by Fergus Jensen; Editing by Jason Szep)

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