Actually, it is already late to raise the price.
Jakarta (ANTARA News) - The government, along with analysts, has predicted that if it raises subsidized fuel price hikes next month with a dual pricing system it will not significantly trigger inflation.

Based on the dual pricing system, the government is planning to increase subsidized premium gasoline and diesel oil prices for private cars but will maintain its full subsidy price for motorbikes and public transportation vehicles.

"It will not have a big impact because the prices of basic necessaries generally depend on public transportation, while fuel price for this kind of transportation is not raised. So, it will not have a significant impact on inflationary pressures," Chief Economic Minister Hatta Rajasa said on the sidelines of a seminar in Bali last week.

The government so far has provided a subsidy of about Rp5,000 per liter of premium gasoline and diesel oil for vehicles, selling it at Rp4,500 per liter for both private and public transportation vehicles. The economic price for this fuel is estimated at Rp9,500 per liter.

However, the government is planning to introduce next month a two pricing system for subsidized gasoline and diesel oil, namely Rp4,500 per liter for public transportation vehicles and motorbikes and Rp6,500 per liter for private cars.

Data from state oil and Gas Company PT Pertamina show subsidized diesel oil consumption in the first quarter of 2013 reached 3.703 million kiloliters, or 5.2 percent above the quota of 3.52 million kiloliters.

Subsidized gasoline consumption in the same period stood at 7.035 million, accounting for 98.3 percent of the quota of 7.159 million kiloliters.

Under the 2013 state budget, the total quota of subsidized fuels has been set at 46.01 million kiloliters consisting of 29.2 million kiloliters of gasoline, 1.7 million kiloliters of kerosene, and 15.11 million kiloliters of diesel oil.

Subsidized fuel oil consumption reached 45.07 million kiloliters last year.

Now that the 2013 quota of 46.01 million kiloliters was only 2 percent above last year`s realized consumption of 45.07 million kiloliters, subsidized fuel consumption this year would exceed the quota set in the state budget.

Therefore, the government is determined to raise subsidized fuel oil next month.

Hatta acknowledged that the price increase of subsidized fuels would cause a number of basic commodities to adjust their prices. Inflation will slightly increase but that would not seriously impact the people.

With a contribution of about 0.8 percent to the inflation rate, the increase would only have impact on the middle income people who owned private cars and were actually financially capable.

Acting Chief of the Finance Ministry`s Fiscal Policy Agency Bambang Brodjonegoro said fuel price increase was expected to contribute 0.8 percent to the inflation. "It would maximally contribute 0.8 percent, particularly if the increase is implemented next month.

He said the impact will occur for about three to six months. If the plan is postponed its impact would be felt next year.

"Its impact will not occur for one month only but for several months. If its implementation is delayed, its impact will take place next year," he said.

Bank Indonesia (BI) meanwhile predicted that if the price per liter is raised by Rp7,000, it would contribute 0,79 percent to the inflation rate.

"If the prices of gasoline and diesel oil are raised to Rp7,000 per liter it will contribute 0.79 per cent, with assumption the policy is implemented in four big cities in Indonesia, namely Jakarta, Surabaya, Surabaya and Denpasar," BI Deputy Governor Perry Warjiyo said.

Chief Economic Minister Hatta Rajasa said that even though it would not have much impact on inflation, supply of basic necessities should not run short and the prices of a number of products must be lowered.

"The price of meat should go down. The prices of horticultural products should also be lowered. But it should not hurt farmers. Sometime ago, the prices of beef and onions were high so that they should be lowered to a normal level," the minister said.

According to economist Dian Ayu Yustina of Danamon Bank, the inflation rate will remain manageable despite the looming increase in subsidized fuel price for private cars.

"The impact of fuel price hike on the inflation rate will relatively be manageable and will only contribute 0.41 percent to the inflation rate," she said.

The prediction will be relevant if the government pushes through a plan to raise the subsidized fuel price to Rp6,500 per liter for private cars. "Based on our calculation, nearly 75 percent of private cars use subsidized gasoline," she said.

Ayu also said the subsidized fuel price hike will raise indirect inflation by 0.14 percent because the transportation cost of private cars used to carry foods will also increase.

"We predict the year-on-year inflation rate at the end of 2013 will reach 6.02 percent," she said.

The same prediction was also made by economist Aldian Taloputra of PT Mandiri Sekuritas. He said that, based on the dual pricing scheme, the price increase would not boost high inflation. It would even save Rp25 billion on the state budget.

"However, the funds that could be saved for the state budget would only be about Rp25 billion because the subsidized fuel price hike will be implemented in the middle of 2013. Actually, it is already late to raise the price," he said.

In the meantime, legislator Mohammad Hatta of the House`s Commission XI said the government`s plan to raise subsidized fuel prices and reduce subsidy would boost economic growth if the fund that is cut from the subsidy is used to develop infrastructure.

"The increase in the price of subsidized premium gasoline for private cars will reduce subsidy and if the fund obtained from the subsidy deduction is used for infrastructure development, it will generate economic growth," Mohammad Hatta, a politician of the National Mandate Party (PAN), said.

Mohammad said that the government`s policy to introduce a two subsidized fuel pricing system would have only small impact on inflation. Fuel is only a small component that generates inflation.

However, although the government seems to be adopting the dual pricing system, it is also still considering the option of single pricing, namely raising the price for all types of vehicles, regardless of whether private or public transportation. With this system, the government is considering providing direct assistance to the poor as compensation.

President Susilo Bambang Yudhoyono said on Friday that the government had two options in increasing subsidized fuel prices, namely a dual pricing system or a single one.

"This is not a matter of deciding scheme A or scheme B, but of how to help those who are financially incapable," the President said.

He said that the first option is adopting a dual pricing system where one (motorbikes and public transportation vehicles) would be given full subsidy and the other (private cars) would get only half subsidy.

The second option is introducing one pricing system where prices will be raised for all types of vehicles but assistance for the poor will be provided to prevent them from the impact of price increase.

BI Deputy Governor Perry Warjiyo said if the government adopted the second option, it would have direct impact on the inflation. "It will depend on the value of the increase. If it is raised by Rp1,000 per liter, it will have a direct impact of 0.62 percent," he said.
(T.A014/F001)

Reporter: Andi Abdussalam
Editor: Priyambodo RH
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