Indonesia Says to Raise Fuel Prices on Saturday

Raising fuel prices is a sensitive issue in Indonesia and there have been a series of rallies opposing the plans.

Indonesia will raise fuel prices with immediate effect on Saturday, the energy minister said, after the government cut surging fuel subsidies despite concerns about possible social unrest.

President Susilo Bambang Yudhoyono's government has faced considerable opposition to plans to cut fuel subsidies, with several big protest in recent days.

Millions of Indonesians live on less than $2 a day and have had to cope with increases in the price of rice, cooking oil and now fuel. The government has said it will compensate for rising fuel prices by providing cash hand-outs, or transfers, to poor families.

"After going through all considerations thoroughly and ensuring adequate preparations for the cash transfer programme, the government...decided to increase prices of subsidised fuel starting midnight (on Friday)," Energy Minister Purnomo Yusgiantoro told reporters.

Fuel prices are set to rise on average by 28.7 percent, with the price of gasoline increasing by a third to 6,000 rupiah (65 U.S. cents) a litre.

The government will distribute 14.1 trillion rupiah ($1.52 billion) in cash handouts to about 19 million poor families to cushion the blow of the fuel hike, Social Welfare minister Aburizal Bakrie told reporters.

Indonesia, Asia's only OPEC member but Southeast Asia's top diesel and gasoline importer, provides heavy subsidies for fuel. Consumers are effectively shielded from surging global prices for crude oil, which hit a record above $135 a barrel on Thursday, way above an Indonesian budget assumption of $95.

INFLATION IMPACT

With presidential and parliamentary elections due next year, the government had initially resisted cutting fuel subsidies, but was forced to act because of the impact on the budget deficit and government borrowing requirement.

Finance Minister Sri Mulyani Indrawati has also defended the hikes by arguing that 70 percent of fuel subsidies were being enjoyed by the top 40 percent income group in the country.

Vice President Jusuf Kalla said on Friday that the government could not guarantee there would be no further increases.

"There's no guarantee because the economic risk must be distributed to those who are capable but what I can say is whatever the policy will be it will not hurt the poor, that's what can be guaranteed," he told reporters.

The central bank warned earlier that the rise in fuel prices would push Indonesia's inflation rate above 12 percent this year and lead to higher interest rates.

In October 2005, the Yudhoyono administration more than doubled subsidised fuel prices, pushing the annual inflation rate above 18 percent and rocking the automotive, banking and manufacturing sectors.

The government has allocated 126.8 trillion rupiah for fuel subsidies in this year's budget, about 13 percent of total government spending.

President Yudhoyono's predecessor, Megawati Sukarnoputri, was forced to roll back a decision to lift fuel prices after massive demonstrations. A big fuel price increase also led to the rioting that helped topple former president Suharto on May 21, 1998.