Satria Sambijantoro and Raras Cahyafitri, Jakarta – Cuts in fuel prices, liquefied petroleum gas (LPG) and cement announced by the government on Friday would have limited impact on the economy in the short-run as overall inflation was likely to stay high, analysts said.
President Joko "Jokowi" Widodo revealed that the price of Premium gasoline would be lowered to Rp 6,600 (US 52 cents) per liter from the previous Rp 7,600, effective next week. Meanwhile, diesel would be cut to Rp 6,400 from Rp 7,250.
He also said there would be an adjustment in the LPG price to Rp 129,000 from Rp 134,700, while the price of cement produced by state-run firms would be lowered by Rp 3,000 per 50-kilogram sack.
However, economists say the lower prices would not significantly boost the people's purchasing power or economic growth, as overall inflation is unlikely to return to pre-November levels before the fuel-price hike.
This was mostly because price levels in Indonesia had always been "sticky downward", noted Philip McNicholas, an economist with BNP Paribas.
"While this may give some relief for consumers, as many prices are 'sticky downward', the discretionary spending capacity should remain below its Oct. 2014 level," he said via an email interview on Friday. "As such, private consumption growth is likely to remain under pressure in the near-term despite the cut in prices."
The lower fuel prices might only push down Indonesia's annual inflation by approximately 0.2 percent this year, according to estimates from Bank Indonesia (BI). The central bank estimated inflation would hover around 5 percent.
Jokowi, meanwhile, was optimistic that inflation could fall below 5 percent this year, citing his success in controlling inflation during his tenure as mayor in Surakarta, Central Java.
Well-contained inflation would support Indonesia's economic growth, which the President hopes will be between 5.6 and 5.8 percent this year.
"All ministers, governors, regents and mayors must work to ensure that price levels will go lower," he said after announcing the fuel-price adjustment.
The adjustment in fuel prices will be different for each region. Premium gasoline in Java and Madura will be sold at Rp 6,700 per liter, while in Bali the price has been set at Rp 7,000 per liter as a result of the fuel tax applied in the area, according to Ali Mundakir, a spokesman for state-run oil and gas firm Pertamina.
The Premium fuel price of Rp 6,600 per liter would apply only for gas stations outside Java and Bali, he said. The price is lower because Pertamina partly pays for the distribution costs.
Despite the new fuel prices, the government is now considering the possibility of setting a floor price for gasoline; meaning that the government is not likely to make further price cuts even if the world crude oil price continues to decline.
The limit may be set at Rp 6,500 per liter for gasoline, according to Energy and Mineral Resources Minister Sudirman Said.
"The government is considering that, even if the oil price continues declining, it is better to save some money from the price difference," Sudirman told reporters. "We will have a kind of oil profit, which will be saved by the government and can be used to accelerate the development of infrastructure to support our strategic reserves," he added.
Source: http://www.thejakartapost.com/news/2015/01/17/fuel-price-cuts-have-little-impact-economy.html