Aditya Suharmoko, Jakarta – The National Development Planning Agency (Bappenas) has proposed gradually increasing fuel prices to draw closer to international price levels and safeguard the state budget.
"We want it (the price increase) to be done gradually as it would minimize the risk," Bappenas chairman Paskah Suzetta said Friday.
Paskah said if the average fuel prices were raised 1 percent per month, then within three years fuel subsidy spending would no longer overburden the state budget.
The current disparity between domestic and international prices stands at about 50 percent. Under the revised 2008 state budget, the government has allocated Rp 135.1 trillion for fuel subsidies, about 13 percent of the total state expenditure of Rp 987.48 trillion.
The government on May 24 raised fuel prices by an average 28.7 percent per liter. Premium gasoline was raised from Rp 4,500 (48 US cents) to Rp 6,000, diesel from Rp 4,300 to Rp 5,500 and kerosene from Rp 2,000 to Rp 2,500. The average international price of Premium gasoline, or low-octane gasoline, is almost $1 per liter.
On Friday, oil prices in New York rose to more than $130 per barrel as the US dollar tumbled against the euro following the European Central Bank's warning that soaring inflation might force it to raise interest rates.
Oil prices reached an all-time high of $135.09 per barrel on May 22. Analysts have predicted oil prices may surpass $150 per barrel later this year.
Bappenas said that with a monthly fuel price rise of 1 percent, inflation could be controlled and have fewer negative impacts than the latest increase or the October 2005 rise of an average 126 percent.
Inflation soared to 10.38 percent in May from a year earlier due mostly to the fuel prices increase, according to the Central Statistics Agency (BPS). Analysts have predicted inflation will further rise in June, passing 11 percent.
Paskah also said should the proposal be accepted, the government would focus on pro-poor programs – such as the direct cash transfer scheme – to reduce the possibility of rising poverty rates as other product prices also increase.
The government provides a cash transfer program of Rp 100,000 per month to poor households to compensate for the latest fuel prices increase.
"The cash transfer is expected to help poorer households cope with the new fuel prices," said Bappenas director of development performance evaluation Bambang Widianto. "With 11 percent inflation, the poor households' expenditure will rise about Rp 70,000. Rp 100,000 in aid is enough to cover rising consumer prices," he said.
The Bappenas proposal will be subject to further discussion with the Finance Ministry. Along with other proposals, it could then form the basis of the country's annual state budget.