Indonesian President Joko Widodo on Wednesday ordered his energy ministry to scrap an increase in retail gasoline prices within hours of its announcement. But with the crude marching higher and the currency slumping to a two-decade low, Widodo, known as Jokowi, is only delaying the inevitable.
Jokowi, who’s seeking re-election in a vote scheduled for early next year, asked PT Pertamina not to go ahead with a 6.9 percent increase in retail prices of premium RON-88, a widely used gasoline, announced by the Energy and Mineral Resources Ministry. What would have been the first increase in more than two years, will be delayed until the state retailer is ready, Agung Pribadi, a spokesman for the ministry, told reporters.
Jokowi ordered the price freeze considering the risk of inflation and the need to shield people’s purchasing power, Fajar Harry Sampurno, a deputy at the State-Owned Enterprises Ministry, said in a statement. The president asked his top economy ministers including finance, SOE and energy to coordinate issues related to fuel prices, he said.
With crude surging to a four-year high, Widodo, who earlier this year ordered a freeze in fuel and electricity prices until the end of 2019, is battling a ballooning energy subsidy bill and widening current account deficit. Raising fuel prices would have made him vulnerable to attacks from the opposition, which has blamed his economic policies for the slump in rupiah to its lowest level since the 1997-98 Asian financial crisis.
The discussion around a hike in fuel prices is a signal that Jokowi is committed to reform even as the elections loom, according to PT Bahana Sekuritas. Raising fuel prices to trim the government’s energy subsidy is one of the highlights of Jokowi’s reform.
“We believe that the fuel price hikes are more of policy signal that the government under President Jokowi is still committed to reform as election looms,” Satria Sambijantoro, an economist at Bahana said in an email. “Economic rationale could still prevail over political considerations in any given day.”
Indonesia, which meets about 50 percent of its crude oil requirements through imports, had in August ordered domestic producers to sell their output to Pertamina to reduce costly imports. With the gap between subsidized and non-regulated gasoline widening, more and more consumers would switch to cheaper fuel, burdening the state refiner and retailer, according to Bahana Sekuritas.
“The possibility of further fuel price hikes should not be ruled out” including that of diesel, Sambijantoro said. “We expect the policy to have limited impact on consumer price index given Indonesia’s current low inflation environment,” he said.
The consumer price index rose 2.88 percent last month, the slowest pace since August 2016, official data show. That’s below the midpoint of Bank Indonesia’s inflation target band of 2.5 percent to 4.5 percent.