Search

 

Cablegate: Indonesian Cabinet Poised to Raise Fuel Prices

VZCZCXRO1788
PP RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #1023/01 1440939
ZNR UUUUU ZZH
P 230939Z MAY 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 9091
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHBJ/AMEMBASSY BEIJING 5073
RUEHBY/AMEMBASSY CANBERRA 2547
RUEHUL/AMEMBASSY SEOUL 4621
RUEHKO/AMEMBASSY TOKYO 2013
RUEHWL/AMEMBASSY WELLINGTON 2677
RUEAIIA/CIA WASHDC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 JAKARTA 001023

SENSITIVE
SIPDIS

DEPT FOR EAP, EAP/MTS, EAP/MLS
SINGAPORE FOR SBAKER
TOKYO FOR MGREWE
COMMERCE FOR 4430/KELLY
USDA/FAS/OA YOST, MILLER, JACKSON
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER
USDA/FAS/OGA CHAUDRY, DWYER
USTR FOR WEISEL, EHLERS
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR TCURRAN
DEPARTMENT PASS EXIM BANK
NSC FOR EPHU

E.O. 12958: N/A
TAGS: EAGR ECON EFIN ID PGOV
SUBJECT: INDONESIAN CABINET POISED TO RAISE FUEL PRICES

REF: A. A) JAKARTA 1008
B. B) JAKARTA 972
C. C) JAKARTA 943
D. D) JAKARTA 901

1. (SBU) Summary: The Cabinet will meet on May 23 to finalize
fuel price increase and related pro-poor social spending
plans, according to press reports. Although the Government
of Indonesia (GOI) has not proposed any specific
implementation date for these proposals, officials have
stated that the anticipated fuel price increase would average
25-30% and the pro-poor spending would total Rp 40 trillion
($444 million). With world oil prices soaring, the decision
to increase the fuel price reflects concerns that the subsidy
bill will exceed 25% of the state budget this year if the GOI
does not increase the price of subsidized fuel. The current
GOI plan would offset short-term budget concerns but leave
the GOI finances vulnerable to further rises in global oil
prices. A fuel price increase would exacerbate inflation and
is expected to slow GDP growth this year. The GOI is set to
implement a series of pro-poor programs to offset the impact
of rising fuel prices, including a cash transfer program for
19.1 million poor households. While a similar cash transfer
program eased concerns after the 2005 fuel price hike, the
current subsidy reduction comes amid rising food prices that
have already strained household budgets. End Summary.

Government Fuel Price Hike Imminent
-----------------------------------

2. (SBU) The Indonesian cabinet is set to meet on May 23 to
finalize the details of the planned increase in subsidized
fuel prices and pro-poor social spending. The date for
actually implementing the fuel price hike remains unknown,
although the press and numerous contacts believe it will
occur in late May or early June. The projected 2008 budget
would result in a Rp 125.3 trillion($13.9 billion; Rp
9,000/USD) deficit -- 2.9% of GDP -- if there was no fuel
price increase and the government oil estimate of $110 per
barrel is accurate (ref B). Using the same assumptions, the
total fuel and energy subsidy expenditure would reach Rp 265
trillion ($29.4 billion) this year or almost 25% of the
budget, according to GOI officials. The proposed average
fuel price hike of 28.7% would reduce the fuel and
electricity subsidy bill to Rp 201 trillion ($22.3 billion).
GOI officials repeatedly highlight the regressive nature of
the fuel subsidy regime in an effort to align the policy with
pro-poor programs; the top 40% of the population receive 66%
of the benefit of subsidized fuel prices whereas the poorest
40% receive only 18% of the benefit, according to government
contacts. The GOI plan would offset current budget concerns
but leave the budget vulnerable to further rises in global
oil prices. The plan increases the price cap on subsidized
fuel, but fails to introduce a market-based price.

Fuel Price Increase Will Exacerbate Inflation
---------------------------------------------

3. (SBU) The proposed reduction in fuel price subsidies would
exacerbate inflation, which had already reached 9.0% in April
due to rising food costs. The GOI estimates that inflation
would rise to 11.2%, significantly higher than the current
6.5% projection, in response to the subsidy reduction.
Market analysts expect inflation to rise to 11-15% this year
if the GOI increases the price of subsidized fuel by 25-30%
and global commodity prices remain high. Most analysts expect
the central bank to respond by raising interest rates by as
much as 100-200 basis points by the end of the year, although
political pressure to limit the impact of higher interest

JAKARTA 00001023 002 OF 002


rates on economic growth will be strong in advance of the
election (ref D). Aggressive monetary tightening this year
will slow growth prospects in 2008 and into 2009. The
official economic growth estimate for 2008 would slip to 6.0%
after the proposed fuel price hike, down from the current
6.5% projection, according to the GOI.

Cash Transfer Program Ready for Implementation
--------------------------------------------- -

4. (SBU) The GOI plans on allocating Rp 40 trillion ($4.4
billion) of the fuel subsidy savings for pro-poor social
programs, according to press reports. Within this plan, the
GOI is set to implement a cash transfer program for poor
households to offset the impact of rising fuel prices, aiding
Indonesia's poorest families but leaving the near poor and
lower middle class vulnerable. The proposed cash transfer
program would provide 19.1 million poor households (an
estimated 76.4 million people) with Rp 100,000 ($11) per
month for seven months beginning in June. The program would
cost Rp 14.2 trillion ($1.6 billion), according to GOI
estimates. Finance Minister Sri Mulyani Indrawati said that
the GOI would also propose to include this cash transfer
program in next year's budget, according to press reports.
While a similar cash transfer program eased concerns about
the 2005 fuel price hike, the current subsidy reduction comes
in the wake of rising food prices that have already strained
household budgets. The estimated 25 million people that live
near the poverty line but do not qualify for the cash
transfer program have already faced household budget pressure
from rising food prices and are likely to feel the largest
impact of the fuel price hike. The Indonesian National
Police are concerned that the fuel price hike will lead to
larger, more raucous demonstrations throughout the country
but they do not think the demonstrations will cause serious
problems.
HEFFERN

© Scoop Media

 
 
 
 
 
World Headlines

 

Werewolf: Gordon Campbell On North Korea, Neo-Nazism, And Milo

With a bit of luck the planet won’t be devastated by nuclear war in the next few days. US President Donald Trump will have begun to fixate on some other way to gratify his self-esteem – maybe by invading Venezuela or starting a war with Iran. More>>

Victory Declared: New Stabilisation Funding From NZ As Mosul Is Retaken

New Zealand has congratulated the Iraqi government on the successful liberation of Mosul from ISIS after a long and hard-fought campaign. More>>

Gordon Campbell: On The Current US Moves Against North Korea

If Martians visited early last week, they’d probably be scratching their heads as to why North Korea was being treated as a potential trigger for global conflict... More>>

ALSO:

Gordon Campbell: On The Lessons From Corbyn’s Campaign

Leaving partisan politics aside – and ignoring Jeremy Corbyn’s sensational election campaign for a moment – it has to be said that Britain is now really up shit creek... More>>

ALSO:

Another US Court: Fourth Circuit Rules Muslim Ban Discriminatory

ACLU: Step by step, point by point, the court laid out what has been clear from the start: The president promised to ban Muslims from the United States, and his executive orders are an attempt to do just that. More>>

ALSO:

 
 
 
 
 
 
  • Pacific.Scoop
  • Cafe Pacific
  • PMC