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Jakarta's fuel subsidy reform to deliver mixed results

Friday, January 2, 2015

Significance

Having increased the regulated price of diesel and petrol by 30% in mid-November, President Joko 'Jokowi' Widodo's government yesterday fixed the diesel subsidy at 1,000 rupiah (80 cents) and deregulated the price of petrol. Taking advantage of the steep decline in international oil prices since July, the government is seeking to reduce further the burden of fuel subsidies on the national budget.

Impacts

  • Bank Indonesia could come under pressure to raise rates if inflation fails to level off before the end of the first quarter.
  • The auto sector is likely to bear the brunt of the fuel price hike as middle class demand is suppressed.
  • Redirection of state funding from energy subsidies to areas such as health and education will deliver long-term gain.
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