Chris McCall, Jakarta – Unions threatened nationwide protests yesterday after the Government vowed to press ahead with controversial fuel price increases next month.

It will be the first across-the-board increase since May 1998, when a similar move triggered a nationwide wave of bloody rioting which ended former president Suharto's 32-year reign.

One leading trade unionist and former political prisoner said unions had vowed to resist the move. "We have already come to an agreement with the other trade unions that we are going to try to have a mass demonstration on October 1," said Dita Sari, chairwoman of the National Front for Indonesian Workers' Struggle. "We plan to make it national but we will see the conditions. If we can make it national it will be better," she said.

Mines and Energy Department officials confirmed that retail oil and gas prices would rise by an average 12 per cent on October 1, as mandated by the International Monetary Fund (IMF) under its US$5 billion loan package to Jakarta.

Tomorrow, new economics chief Rizal Ramli is due to sign the latest letter of intent with the IMF, after which the fund is expected to release a US$400 million loan tranche. Without IMF support, Indonesia's cash-strapped Government cannot balance its books.

Ms Dita accused Mr Ramli of using the issue to prove his mettle to the IMF following his appointment in last month's cabinet reshuffle. She doubted the Government would back down this time but said the move would damage President Abdurrahman Wahid's credibility.

"This is the kind of price that he has to pay," she said. "This kind of decision will have a very deep impact on the economy of the people."

In a bid to deflect criticism, Mr Ramli said yesterday the Government would allocate 800 billion rupiah for fuel subsidies to help the needy. Funds will be channelled through three mechanisms – cash transfers directly to poor people, financing for infrastructure projects designed to create jobs, and loans for small businesses and co-operatives, said Mr Ramli. Living standards in Indonesia have been slashed by the Asian economic collapse, the weak rupiah and an unemployment rate of 40 per cent. But the country is a net oil exporter. Oil and gas prices have been heavily subsidised and the issue is sensitive.

Earlier this year Mr Wahid cancelled a bid to raise oil prices at the last minute after mass protests broke out. Next month's price rises come on top of increases in economy-class public transport fares and electricity prices. They are to be followed by a new round of oil price increases next year. The Government has agreed to a special relief scheme to relieve the burden on the poorest households.

Economists say the plan is badly needed as Indonesia's oil production gradually declines. They also point out that new laws on regional autonomy will leave less of the crucial oil revenue, a mainstay of the national budget, in Jakarta's hands.

Indonesian security firms are gearing up for potential unrest, said Mr Arian Ardie of the Jakarta-based consultancy Van Zorge, Heffernan and Associates. "It is one of the issues that they always highlight. It is anticipated that there will be some problems." But for all that, the Government could not avoid the subject forever, he said. "Sooner or later they are going to have to start dealing with the subsidy issue."

An adviser to ex-president Bacharuddin Habibie agreed. "The Government has to do it," said Dewi Fortuna Anwar. "It is a major burden on the budget and also encourages smuggling."