Indonesian leaders in talks on raising fuel prices before Oct

JAKARTA - Indonesia's outgoing president is in talks with his successor to increase heavily subsidised fuel prices before the new leader takes power, two sources close to the matter told Reuters.

Subsidies are seen by many as the most urgent issue facing Southeast Asia's biggest economy.

The former OPEC member, and now major oil importer, has some of the world's cheapest fuel prices, but the subsidies are eating up an already tight budget and threatening investor confidence by widening the current account deficit.

"Now that we have a winner, we are speaking to the elected president," said a senior government official close to the talks, who declined to be identified due to the sensitivity of the matter.

"Maybe if they agree, we can increase it now ... the sooner the better."

Mindful of past mass protests, the current government has been slow to cut subsidies, though a 33 per cent average fuel price hike last year triggered only limited protests and its inflationary impact lasted little more than 2-3 months.

Jakarta Governor Joko Widodo, who earlier this week was declared the winner of a hotly contested presidential election, will succeed President Susilo Bambang Yudhoyono on Oct. 20 to serve a five-year term.

In an interview with Reuters last week, Widodo said he wanted to shift spending on subsidies - which account for about 20 per cent of the budget - to productive areas of the economy such as agriculture.

A second source close to Widodo said talks were being held between the two political leaders over the timing of a fuel subsidy cut.

The subsidies, which mainly benefit the rich, cost the government around $20 billion a year and are the main factor behind a current account deficit that is expected to be above 3 per cent of gross domestic product this year

Bank Indonesia's deputy chief, Mirza Adityaswara, told Reuters last week that unless the government addressed the issue the central bank would not be able to bring down high interest rates, imposed to slow economic growth and therefore imports.

In the talks, both leaders were considering a cut to take place before Yudhoyono leaves office in August or September, said the source close to Widodo.

"The interesting thing is if the (fuel) price is raised this year, it will not only help the budget this year but also next year," said the government official, adding that discussions involved a hike of around 1,000 rupiah ($0.09) a litre.

Indonesian fuel prices are among the world's cheapest, currently at 6,500 rupiah a litre for gasoline and 5,500 for diesel.

When asked if a subsidy cut could take place this year, Finance Minister Chatib Basri told Reuters: "Don't rule out any possibility of subsidy reform. I also said a few months before that you have to see that the next government will not be burdened."

Vice President-elect Jusuf Kalla told Reuters last week that the next government planned to cut fuel subsidies within the first 100 days of office. He declined to say by how much it would initially reduce fuel subsidies which he said were the world's biggest after Iran and Venezuela.

Widodo has previously said he would gradually reduce fuel subsidies over a four or five-year period.