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Indonesia gears up for subsidy reform

Indonesia is gearing up for further economic reforms which could narrow its current account deficit and reduce the need to raise interest rates. The finance minister foreshadowed adjustments to expensive subsidies that have been a big contributor to the country's struggles.

JAKARTA: Indonesia is gearing up for further economic reforms which could narrow its current account deficit and reduce the need to raise interest rates.

In a veiled concession to the media this week, the finance minister foreshadowed adjustments to expensive subsidies that have been a big contributor to the country's struggles.

Finance Minister Chatib Basri said: "Don't rule out the possibility of subsidy reform even this year. Subsidy reforms mean electricity and fuel. Don't rule out this possibility. I always believe that bad times make good policy."

Plans are underway for a fixed subsidy for fuel sales this year.

Currently, the higher the market price, the higher the government subsidy.

Right now, subsidised premium gasoline is set at 55 US cents a litre while market price is around 76 cents.

The difference is paid for by the government, at great expense and at some vulnerability to exchange rate and oil price fluctuations.

Under the finance minister’s proposed fixed energy subsidy system, the government would fix fuel subsidies at a certain amount.

This will allow the price of subsidised fuel to automatically change when fuel market price soars or declines significantly.

However, with subsidies being so sensitive among the voting public, the fixed price regime is unlikely to be introduced until the next government.

Electricity subsidies are also on the reform agenda.

The Ministry of Energy and Mineral Resources plans to increase power prices for two types of industries by an average of 65 percent.

The policy will affect 70 large-scale companies.

Susilo Siswoutomo, deputy minister for energy and mineral resources, said: "It won't affect small-scale businesses that use 450 to 900 watts. Electricity prices will go up for big companies such as malls. Why should we subsidise electricity for malls? It is better that the money is used for national development."

Parliament's Budgetary Board has agreed to reduce electricity subsidies by 9 to 18 percent and set this year's electricity subsidies at an estimated US$6.8 billion.  

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