Indonesians will enter a new era of free-floating fuel prices after the government finally decided to overhaul the country's high-cost fuel subsidies just before the close of the year.
Under the new scheme, the government removed the subsidy for the widely used Premium gasoline, which accounts for about 65 per cent of the total fuel subsidies, while maintaining the subsidies - albeit small - for diesel fuel and kerosene.
With the removal of the subsidy, the price of Premium gasoline is now Rp 7,600 per liter (S$0.80), lower than Rp 8,500 previously because the old price had exceeded its economic (market) value due to recent drops in world oil prices.
For diesel, a type of fuel widely used among fishermen, and kerosene, the government imposed a fixed subsidy of Rp 1,000 per liter. With this scheme, the new price of diesel has lowered to Rp 7,500 per liter from Rp 8,250 previously, while the price of kerosene is being maintained at Rp 2,500 per liter.
The new subsidy scheme would enable the government to cut spending for fuel subsidies next year by about 75 per cent, to only Rp 60 trillion.
Energy and Mineral Resources Minister Sudirman Said explained that the price of Premium gasoline would be adjusted every month in accordance with fluctuations in global oil prices, marking an end to the price-based fuel-subsidy system that Indonesia had imposed since the oil boom in the 1980s, when it was still an oil-exporting country.
This means that Indonesians must be prepared for higher fuel prices when global oil prices and the US dollar, two major indicators for the nation's fuel imports, are on the rise.
In the past, the plan to free-float the price of subsidized fuel has been met with no lack of controversy.
In response to a judicial review on the 2001 Oil and Gas Law, a Constitutional Court ruling in 2004 stated that the prices of local gasoline and gas were influential to many Indonesians' lives and thus obliged the government to fix prices and not float them to market mechanisms.
Sudirman, nevertheless, was optimistic that the new government's policy had a strong legal basis and thus would not be deemed as unconstitutional.
"Yes, it is indeed correct that there was once a judicial review filed in the Constitutional Court [relating to a fixed-subsidy policy], but in this policy we would remain in control of gasoline and gas prices," the minister stated at a press briefing on Wednesday.
"It has never been our intention to fully float the prices to the market as the government would maintain the authority in setting the prices."
The state could save at least Rp 200 trillion, about 75 per cent of the total fuel-subsidy spending of around Rp 276 trillion in the 2015 state budget, after the implementation of the new fuel-subsidy system, Finance Minister Bambang Brodjonegoro said.
"Fuel-subsidy allocation would shrink from the original Rp 276 trillion in the 2015 state budget to Rp 60 trillion in the budget's revised version," Bambang said in response to questions from The Jakarta Post.
BNP Paribas economist Philip McNicholas, who formerly worked as a Fitch Ratings sovereign analyst, argued that the government's latest fuel-subsidy overhaul might raise the prospect of rating agency Standard and Poor's (S&P) awarding Indonesia with an investment-grade rating.
"It is showing Jokowi is trying to walk the talk of his reform agenda," he commented on Thursday, referring to President Joko "Jokowi" Widodo.
"It addresses a number of previously chronic weaknesses of Indonesia's public finances: such as reducing fiscal sensitivity to oil prices and the exchange rate, bolstering budget flexibility and increasing the scope for investment spending," explained McNicholas.