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Last Updated: Wednesday, 31 August 2005, 14:25 GMT 15:25 UK
Indonesia plans to slash fuel aid
Pile of rupiah notes
Quick action is needed to prop up the rupiah, analysts said.
Indonesia plans to cut expensive and politically sensitive fuel subsidies in an effort to underpin its currency.

President Susilo Bambang Yudhoyono said Indonesia "must increase fuel prices and cut subsidies" to help the economy.

Aware that one of his predecessors was toppled by attempts to cut subsidies, the president insisted that the changes would not hurt the nation's poorest.

The rupiah has tumbled this month after being sold by Indonesia for US dollars to pay for crude oil imports.

Only an interest rate rise by Bank Indonesia on Tuesday halted the rupiah's slump and helped bring investors back to the stock market.

'Poor get the money'

Analysts said that while the government needed to address a number of factors, such as the speed of privatisation, the main problem it faced was the huge and growing cost of fuel subsidies.

At present, Indonesia spends about a fifth of its annual budget ensuring that its population has some of the cheapest petrol in Asia.

The government appears to be panicky, with cabinet members working without co-ordination
Jakarta's Republika

Speaking on national television, President Yudhoyono said that the subsidies were putting heavy pressure on the budget and unless changes were made then "fiscal sustainability" would be in jeopardy.

Looking to reassure his voters, the president added that nothing would happen until a system to compensate the poor was put in place.

That is unlikely to happen until the final months of this year, analysts said.

"We will make sure that the poor get the money before we increase fuel prices," the president said.

Steadying influence

Optimism about President Yudhoyono's announcement helped steady markets and the rupiah was trading at 10,200 against the US dollar, significantly stronger than the four-year low of 11,750 it slumped to on Tuesday.

It has shed more than 10% in value this year.

Man picking up a jerry can of kerosene
Increasing fuel costs helped topple President Suharto in 1998

In Jakarta, the main share index - the Composite Index - gained 1%, continuing Tuesday's strong recovery following Bank Indonesia's three quarter of a percentage point rate rise.

Analysts said that the benchmark interest rate - which was raised to 9.5% from 8.75% on Tuesday - may have to go above 10% for any lasting recovery in the rupiah to take place.

Speaking in Tokyo, the central bank's governor Burhanuddin Abdullah said he would not hesitate to raise borrowing costs again should the currency need propping up.


Rating agency Standard & Poor's warned that it may review the "positive outlook on the Indonesia government, if the underlying causes are not promptly addressed by a credible set of policy measures".

For some analysts, Wednesday's plans do not go far enough and they are concerned that the compensation scheme for the poor is simply a state subsidy with a new name.

"One way or the other the government will have to pay for it," said Lloyd Ong, an analyst at BNP Paribas. "The government is not taking the full pain at this point in time."

However, tampering with the subsidies carries political risks and fuel protests contributed to the downfall of former President Suharto in 1998.

Fuel costs have already been increased by 29% this year and a sudden change is unlikely to happen, analysts said.

"If the fuel price hikes again, I don't agree," said Endang Setyawati, a civil servant in Jakarta. "I have not gotten any pay raise yet. We will be miserable."

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