December 14, 2010 3:33 pm

Indonesian parliament backs fuel subsidy cut

The Indonesian parliament has agreed to a politically-sensitive plan to lower fuel subsidies for millions of car owners but has postponed its implementation for several months to prepare the nation.

Roughly one-fifth of the entire state expenditure, or $15bn, is spent on subsidies aimed at helping the poor. Critics say they are of more benefit for the well-off and should be replaced with direct aid for low-income households.

The government had intended to remove part of the fuel subsidy, for private car owners, on January 1 and free up $422m toward the 2011 budget. But a majority of parties agreed at a late-night commission hearing on Monday both to the scheme and to postpone its implementation by up to six months.

It is now slated to be introduced in the capital Jakarta at the end of March, at the earliest. It will later be phased in across Java and Bali. Subsidised fuel will then only be available for public transportation vehicles and motorbikes, under the proposal from the legislature’s commission for energy, mineral resources and the environment.

After a 14-hour session in parliament, the commission instructed the government to carry out a thorough study into the impact of the plan. Members of parliament said it had not been properly explained to the public and lacked implementation details.

Fuel subsidies are a heated topic in Indonesia, a country of nearly 240m where half the population lives on less than $2 a day. A slight increase in fuel prices can make basic living difficult for the poor.

The latest plan proposed by the administration of Susilo Bambang Yudhoyono, president, is to increase prices only for private car owners. Authorities are eager to avoid a repeat of 2008, when a 30 per cent fuel price hike led to widespread rioting.

Indonesia, a member of the Group of 20 major economies and south-east Asia’s largest economy, was until recently an oil exporter. It dropped out of the 13-member organisation for oil producing countries, OPEC, in 2008, citing falling production and growing domestic demand.

Fears were also expressed in parliament that a fuel price increase could fan inflation. Food prices, including the nation’s staple, rice, have risen rapidly in recent months due to crop failures. The latest government projections predict inflation will exceed a target range of 4 per cent to 6 per cent, driven mainly by higher food costs, in 2010.

Reducing fuel, fertiliser and electricity subsidies would free up funds better used to build infrastructure and sustain the momentum of the economic boom Indonesia is undergoing, the OECD said in a November report. It highlighted subsidies as a critical reform area for the government, needed to attract foreign investment.

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