Jokowi keeps his pledge to cut fuel subsidies

Indonesia’s new Jokowi-led government kept its pledge to reduce the economy’s fuel subsidy overhang and in turn free budgetary space to rev up investment spending by announcing the much awaited cut in fuel subsidies of IDR 2,000 per litre, effective today. The move translates into a 30% price hike in gasoline from IDR 6500 currently to IDR 8500 and a 36% price hike in diesel from IDR 5500 to IDR 7500. The magnitude of fuel subsidy cut was cushioned by a sharp decline in global crude oil prices, which have fallen 20% since mid-June 2014. Looking ahead, a combination of benign international oil price scenario and a stable rupiah can lead to substantial reduction in Indonesia’s fuel subsidy burden from a sizable nearly 3% of GDP. Such favorable commodity-currency interplay could create room for Jokowi to reallocate the savings to fund the government’s priority program especially the infrastructure and the maritime sector development.

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