VZCZCXRO1788
PP RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #1023/01 1440939
ZNR UUUUU ZZH
P 230939Z MAY 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 9091
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHBJ/AMEMBASSY BEIJING 5073
RUEHBY/AMEMBASSY CANBERRA 2547
RUEHUL/AMEMBASSY SEOUL 4621
RUEHKO/AMEMBASSY TOKYO 2013
RUEHWL/AMEMBASSY WELLINGTON 2677
RUEAIIA/CIA WASHDC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 JAKARTA 001023 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP, EAP/MTS, EAP/MLS 
SINGAPORE FOR SBAKER 
TOKYO FOR MGREWE 
COMMERCE FOR 4430/KELLY 
USDA/FAS/OA YOST, MILLER, JACKSON 
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER 
USDA/FAS/OGA CHAUDRY, DWYER 
USTR FOR WEISEL, EHLERS 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR TCURRAN 
DEPARTMENT PASS EXIM BANK 
NSC FOR EPHU 
 
E.O. 12958: N/A 
TAGS: EAGR ECON EFIN ID PGOV
SUBJECT: INDONESIAN CABINET POISED TO RAISE FUEL PRICES 
 
REF: A. A) JAKARTA 1008 
     ¶B. B) JAKARTA 972 
     ¶C. C) JAKARTA 943 
     ¶D. D) JAKARTA 901 
 
¶1. (SBU) Summary: The Cabinet will meet on May 23 to finalize 
fuel price increase and related pro-poor social spending 
plans, according to press reports.  Although the Government 
of Indonesia (GOI) has not proposed any specific 
implementation date for these proposals,  officials have 
stated that the anticipated fuel price increase would average 
25-30% and the pro-poor spending would total Rp 40 trillion 
($444 million).  With world oil prices soaring, the decision 
to increase the fuel price reflects concerns that the subsidy 
bill will exceed 25% of the state budget this year if the GOI 
does not increase the price of subsidized fuel.  The current 
GOI plan would offset short-term budget concerns but leave 
the GOI finances vulnerable to further rises in global oil 
prices.  A fuel price increase would exacerbate inflation and 
is expected to slow GDP growth this year.  The GOI is set to 
implement a series of pro-poor programs to offset the impact 
of rising fuel prices, including a cash transfer program for 
19.1 million poor households.  While a similar cash transfer 
program eased concerns after the 2005 fuel price hike, the 
current subsidy reduction comes amid rising food prices that 
have already strained household budgets. End Summary. 
 
Government Fuel Price Hike Imminent 
----------------------------------- 
 
¶2. (SBU) The Indonesian cabinet is set to meet on May 23 to 
finalize the details of the planned increase in subsidized 
fuel prices and pro-poor social spending.  The date for 
actually implementing the fuel price hike remains unknown, 
although the press and numerous contacts believe it will 
occur in late May or early June.  The projected 2008 budget 
would result in a Rp 125.3 trillion($13.9 billion; Rp 
9,000/USD) deficit -- 2.9% of GDP -- if there was no fuel 
price increase and the government oil estimate of $110 per 
barrel is accurate (ref B).  Using the same assumptions, the 
total fuel and energy subsidy expenditure would reach Rp 265 
trillion ($29.4 billion) this year or almost 25% of the 
budget, according to GOI officials.  The proposed average 
fuel price hike of 28.7% would reduce the fuel and 
electricity subsidy bill to Rp 201 trillion ($22.3 billion). 
GOI officials repeatedly highlight the regressive nature of 
the fuel subsidy regime in an effort to align the policy with 
pro-poor programs; the top 40% of the population receive 66% 
of the benefit of subsidized fuel prices whereas the poorest 
40% receive only 18% of the benefit, according to government 
contacts.  The GOI plan would offset current budget concerns 
but leave the budget vulnerable to further rises in global 
oil prices.  The plan increases the price cap on subsidized 
fuel, but fails to introduce a market-based price. 
 
Fuel Price Increase Will Exacerbate Inflation 
--------------------------------------------- 
 
¶3. (SBU) The proposed reduction in fuel price subsidies would 
exacerbate inflation, which had already reached 9.0% in April 
due to rising food costs. The GOI estimates that inflation 
would rise to 11.2%, significantly higher than the current 
6.5% projection, in response to the subsidy reduction. 
Market analysts expect inflation to rise to 11-15% this year 
if the GOI increases the price of subsidized fuel by 25-30% 
and global commodity prices remain high. Most analysts expect 
the central bank to respond by raising interest rates by as 
much as 100-200 basis points by the end of the year, although 
political pressure to limit the impact of higher interest 
 
JAKARTA 00001023  002 OF 002 
 
 
rates on economic growth will be strong in advance of the 
election (ref D).  Aggressive monetary tightening this year 
will slow growth prospects in 2008 and into 2009.  The 
official economic growth estimate for 2008 would slip to 6.0% 
after the proposed fuel price hike, down from the current 
6.5% projection, according to the GOI. 
 
Cash Transfer Program Ready for Implementation 
--------------------------------------------- - 
 
¶4. (SBU) The GOI plans on allocating Rp 40 trillion ($4.4 
billion) of the fuel subsidy savings for pro-poor social 
programs, according to press reports.  Within this plan, the 
GOI is set to implement a cash transfer program for poor 
households to offset the impact of rising fuel prices, aiding 
Indonesia's poorest families but leaving the near poor and 
lower middle class vulnerable.  The proposed cash transfer 
program would provide 19.1 million poor households (an 
estimated 76.4 million people) with Rp 100,000 ($11) per 
month for seven months beginning in June.  The program would 
cost Rp 14.2 trillion ($1.6 billion), according to GOI 
estimates.  Finance Minister Sri Mulyani Indrawati said that 
the GOI would also propose to include this cash transfer 
program in next year's budget, according to press reports. 
While a similar cash transfer program eased concerns about 
the 2005 fuel price hike, the current subsidy reduction comes 
in the wake of rising food prices that have already strained 
household budgets.  The estimated 25 million people that live 
near the poverty line but do not qualify for the cash 
transfer program have already faced household budget pressure 
from rising food prices and are likely to feel the largest 
impact of the fuel price hike.  The Indonesian National 
Police are concerned that the fuel price hike will lead to 
larger, more raucous demonstrations throughout the country 
but they do not think the demonstrations will cause serious 
problems. 
HEFFERN