Indonesia raised the price of subsidised petrol by nearly 31 per cent last night, in a much-anticipated move welcomed by economists and others as a signal of the new government's commitment to reforming South-east Asia's largest economy.
The pump price of one litre of lowest-grade premium fuel went up from 6,500 rupiah (70 Singapore cents) to 8,500 rupiah at midnight. Diesel now costs 7,500 rupiah a litre, up from 5,500 rupiah.
Talk that a hike was imminent saw long queues of motorists at petrol stations across the country, as well as demonstrations against the hike.
Fuel subsidies are tipped to cost the government some 250 trillion rupiah this year. They will rise to 290 trillion rupiah next year unless they are cut.
"All this time, we needed funds to spend on infrastructure, education, health. The funds were not there because we wasted them on fuel subsidies," President Joko Widodo told a press conference last night. "This fuel price hike will hopefully open doors to development spending."
The cost of building 10,000km of railway tracks is about US$20 billion (S$26 billion), or less than the annual spending on fuel subsidies. Indonesia currently has a 5,500km railway network which serves only Java and Sumatra.
Mr Wahyu Trenggono, director at the Indonesia Bond Pricing Agency, told The Straits Times: "In the short term, corporations will face higher costs and see a drop in profitability, but in the medium term, it will be good for the economy, and good for all."
Protests against the price hike have been taking place in recent weeks, and they are expected to mount in the coming days. Yesterday, several hundred undergraduates blocked a toll road in Bogor and dozens of workers protested in Tangerang, both on the outskirts of Jakarta.
The Straits Times understands that details of the price hike, and the political fallout, were discussed at a closed-door Cabinet meeting yesterday afternoon.
The decision to go ahead came after President Joko, who took office on Oct 20, said on several occasions - including at the recent Asia-Pacific Economic Cooperation meetings in Beijing - that he would cut the hefty subsidies, which account for one-fifth of government spending which he described as "daily burning of cash".
Fuel subsidies have been around for decades as a means of providing a cushion against inflation for the poorest Indonesians. But in recent years the subsidies were enjoyed by the country's growing middle class instead.
Talk of an imminent subsidy cut has already seen food prices rise slightly, and to cushion the impact of the fuel price hike on the poor, Mr Joko launched health and education assistance cards earlier this month.
These will eventually help as many as 90 million residents and 24 million less-well-off students benefit from free health care and assistance for school necessities such as books and uniforms, and ease the burden of inflation from rising fuel prices.
Mr Joko had also instructed governors of 34 provinces to understand what was at stake and to explain to their officials and people that the subsidy was excessive, had trade-offs, and was affecting the national coffers.
Finance Minister Bambang Brodjonegoro had said that even with the declining global crude oil prices, currently at US$80 a barrel, the pump prices of Indonesia's subsidised RON 88 fuel were still much lower.
Dr Brodjonegoro said that each 1,000 rupiah increase in the subsidised fuel price would add an additional 1.2 per cent to inflation. OCBC economist Wellian Wiranto wrote in a recent research note:
"Fuel price has to be adjusted before it (the government) can really get the other stuff on the economic agenda done. This brings inflationary risk, sure, but one that the market can stomach."