Inflation Hike Inevitable if Govt Raise Price of Subsidized Fuel, Experts Say

18 August 2022 09:39 WIB

TEMPO.CO, Jakarta - The Indonesian government signaled that it would possibly increase the price of subsidized fuel after the budget spiked to Rp502 trillion. One of the renowned subsidized fuels sold by state-energy firm Pertamina is Pertalite, which is currently sold at Rp7,650 per liter and will likely be increased to Rp10,000 per liter. 

According to Development of Economics and Finance (Indef) researcher Nailul Huda, if the government decides to do so, it will likely cause inflation to grow even more rapidly and exceed the current rate of 4.94 percent.

“If an increase does come then it will push inflation even higher. It can reach more than 7 percent if Pertalite fuel is increased,” said Nailul to Tempo on Thursday, August 18.

Meanwhile, the director of the Center of Economic and Law Studies (Celios) Bhima Yudhistira said that the people will be immediately affected by the fuel prices increase. This, he said, can reduce people’s purchasing power and potentially put them into the poverty line. 

According to Bhima, currently, there are more than 11 million workers who have lost their jobs, cut hours and wages, and have been laid off. It is feared that the situation will get worse with the increase in subsidized fuel prices and cause economic pressure to deepen on the bottom 40 percent of households.

"Not to mention there are 64 million MSMEs that depend on subsidized fuel. Because currently, users of subsidized fuel are not only personal vehicles, but also MSME operational vehicles," said Bhima.

Nailul Huda suggested that if the government does not end up increasing the price of subsidized fuel, it needs to reallocate the unproductive budget and Indonesia's defense budget, which Huda believes is too large. 

He also mentioned diverting the large budgets for the nationwide food estate program and construction of the new capital city of the Nusantara project to subsidize fuel instead. 

In addition, to suppress rising inflation, the government through Bank Indonesia can raise the benchmark interest rate. However, according to Huda, currently BI seems to be still trying to hold the current rate even though the rupiah exchange rate weakens, in addition to the collapse of the oil subsidy budget.

MUHAMMAD HENDARTYO | DICKY KURNIAWAN | TEMPO

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