Source: World Bank's Indonesia Economic Quarterly, April 2012





To put it in terms of a household’s budget, fuel subsidies are estimated to transfer a car owner who consumes 50 liters of gasoline a week (200 liters a month) IDR 1,115,000 per month (based on the difference between the economic price of fuel and the price of subsidized fuel as of March 2012). This is in contrast with the average motorcycle user who consumes 5 liters a week (20 liters a month, according to SUSENAS, 2009) and only receives a transfer of IDR 111,000 per month from the fuel subsidy scheme. Over a year, this equates to these wealthier households which use a car receiving a transfer of IDR 13,382,000 – 10 times more than the average motorcycle user which receives IDR 1,338,240 and many times the indirect benefits from subsidized fuel that may be received from those households without a car or motorbike.

could move up to 3.1 percent of GDP

On Inflation

This shock is starkly different to the 33 percent increase in fuel prices in 2008 and the potential 2012 increase.

In contrast to this, in 2012 inflation was at a two year low of 3.6% in February (less than half the level of 2008) and food inflation was at an eight-year low of 2.9%.

occurred not in response to the fuel price increases in mid-2008, but to the global financial crisis in late 2008. In 2012, economic activity has been robust at 6.5%

Source: World Bank's Indonesia Economic Quarterly, April 2012

If we continue subsidizing fuel, assuming oil prices of USD 120 per barrel, the World Bank estimates that Indonesia’s budget deficit in 2012. If oil prices stay high and the fuel price adjustment is implemented in the third quarter of 2012 the World Bank projects a deficit of 2.5 percent of GDP, compared with a revised Budget deficit level of 2.2 percent (with an oil price assumption of USD 105 per barrel.) Note that the revised budget includes the option of a IDR 1,500 fuel price increase provided the ICP price is, on average, over a six month period, 15% above the revised budget assumption of USD 105 per barrel.Let's compare the potential inflation in 2012 with the previous fuel price increases of 2005 and 2008. However, this exercise still has its limitations due the considerably different inflation contexts and macroeconomic backdrop. For instace, in 2005 the rising cost of market price for fuel was close to 3 times the subsidized pump price of IDR 1,800 per liter that Indonesian’s were paying, thus government increased the price by 150% within 5 months.In 2008, unrelated to fuel price increases, food price inflation had reached 16 percent in April (the month before fuel prices increased) due to rice and cooking oil shortages. This meant headline inflation was already 7.4% before the fuel price increase and food inflation continuing to build.Not to mention, with the 2008 global economic downturn, most of the downward movement in economic indicators in 2008in each of the previous four quarters and, while there remain risks to the outlook from the ongoing fragility of international markets and weakening of external demand, it is expected that growth will remain above 6% for the year.Taking the previous considerations in projecting 2012's inflation, here's the figure: