Last April, the government canceled its plan to raise fuel oil prices following rallies across the country opposing the plan. Demonstrators claimed the policy would cause commodity prices to increase and burden the public.
"The government will not have the guts to increase the prices of subsidized fuel in 2013, particularly because the general elections are coming up in 2014," said Enny Sri Hartati, an economist from the Institute for Development of Economics and Finance (Indef), on Friday.
Additionally, the government indicated it would not raise subsidized fuel oil prices next year, saying on Friday that it currently has no such plans and had not yet brought the matter before the House of Representatives (DPR).
"Fuel oils are a matter that concerns the state budget. Until today, as our state budget is still secure, we have not yet discussed it in the cabinet session. We have avoided it, since it could cause unrest and panic. So, until today we still have not held a cabinet meeting to discuss it," Energy and Mineral Resources Minister Jero Wacik said on Friday.
The minister added that what the government would now do was preserve the state budget so it would meet all targets, based on earlier plans.
"What we discussed is the state budget. If economic growth could be maintained, the state budget would be secure. We also hope that the Indonesian Crude Price (in the world market) would remain stable so that it (state budget) will remain safe," Jero said.
Subsidized fuel oil quotas in the 2013 state budget were set at 46 million kiloliters, lower than the prediction in which consumption was expected to reach 48 trillion kiloliters.
"Next year, we have a subsidized fuel oil quota of 46 million kiloliters. It`s below our prediction at 48 million kiloliters, as only 46 million kiloliters was approved by the House," the minister said.
Although the approved quota is less than the expected consumption, the government has no plan to increase prices, which economist say could trigger economic risks, such as inflation.
"Early in 2012, the government announced its plan to hike fuel prices in April 2012, but before it could do so, the prices of commodities rose," economist Enny Sri Hartati pointed out.
But the planned price increase was later cancelled, fearing it would create adverse impacts on the economy.
According to Enny Sri Hartati, inflation may increase by up to 2 percent for a few months if the government raises the prices of subsidized fuels by Rp1,500 per liter next year.
The forecast is higher than the government-set inflation target of 4.4 plus and minus 1 percent for 2013. Thus, the 2013 inflation is predicted to clock in at 6 percent, she said.
Yet, it is still unpredictable how long the impact of inflation will last if the government cannot overcome the second round effect of subsidized fuel price hikes, she said.
She added that subsidized fuel price hikes would not necessarily raise inflation, if the government can maintain the confidence of markets.
"What is important is whether or not the market still has confidence in the government. If the government can ensure that supplies are safe, there will be no reason for producers to raise the prices of goods, which will eventually lead to inflation," she said.
Economist Edward Teather of UBS Investment Bank predicted inflation in 2013 could rise to between 6 and 7 percent if fuel oil prices are increased.
"We are sure that fuel price increases would trigger inflation to about 6 to 7 percent in 2013, before it goes down again in 2014," Edward noted.
If the government does not take a firm policy (to increase fuel oil prices), it would possibly worsen conditions, Edward warned, but adding that political considerations are involved with regard to raising fuel oil prices.
He further said that fuel oil price increases could contribute to chaos in the run-up to the 2014 general elections. Yet, the present government will likely make price adjustments, owing to the fact that in the last 18 months it actually had plans to do so.
"We know that President Susilo Bambang Yudhoyono will no longer be nominated in the next presidential race. The president has the authority to raise prices. After all, the government had the plan for the last 18 months," Edward said
He said that raising prices could just trigger inflation. After all, the government is planning to raise power rates by about 15 percent next year.
The government will impose a quarterly 4-percent automatic power rate hike beginning in January in an effort to reduce swelling subsidies in all sectors, which will reach Rp316.1 trillion in 2013.
The same concerns were also raised by Anton Gunawan, chief economist of Bank Danamon, who said the government was likely to raise fuel oil prices to reduce the burden on the budget next year.
Therefore, he predicted that inflation could reach 6.2 percent, which was to be boosted not only by the fuel oil price increase, but also by electricity tariff hikes.
"Inflation is expected to increase in 2013 as a result of power rate increases in the possible rise of fuel oil prices," he said.
He said that the increase by 15 percent of electricity rates could contribute 0.3 to 0.5 percent to inflation, while the increase in fuel oil prices of about 10 percent could contribute 0.7 percent to inflation. "Predictions for inflation in 2013 are 6.2 percent year-on-year," he said.
Enny Sri Hartati added that if the government raised fuel oil prices next year, the move would help reduce the state budget deficit and Indonesia`s heavy dependence on foreign loans.
"The 2013 state budget could then focus on financing sectors that really need subsidies," she said.
Enny stated the government must `make the public mentally ready` before raising fuel oil prices, in order to prevent a negative reaction in the form of increased inflation or higher commodity prices.
Enny noted that the fuel price hike would not trigger inflation if the government could gain market confidence and explain in detail the reasons and consequences of the price hike.
"The government should explain, among other things, what impact the subsidized fuel oil price hike will cause, whether there is enough supply of fuel, and to what levels will the prices be raised," she said.
(A014/KR-BSR/O001)
Reporter: Andi Abdussalam
Editor: Jafar M Sidik
Copyright © ANTARA 2012
