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An Indonesian employee fills a car with subsidized fuel at a petrol station in Jakarta, Indonesia. - EPA file photo

JAKARTA: Indonesia’s spending on fuel subsidies might only be half the current budget figure for 2015, the finance minister said, if Southeast Asia’s largest economy introduces a fixed subsidy mechanism next year.

In his first major economic policy decision, President Joko Widodo last month raised subsidised gasoline and diesel prices by more than 30 per cent to help fund his reform agenda and tackle the country’s budget and current account deficits.

Indonesia currently sets domestic fuel prices below the market price, with the government subsidising the difference. The change would mean Indonesia could avoid ballooning subsidy spending when oil prices increase.

“Next year we will make a fixed subsidy, which will reflect fluctuations in international prices,” Finance Minister Bambang Brodjonegoro told reporters on Friday.

In the budget for 2015 proposed by Susilo Bambang Yudhoyono, whose term as president ended in October, spending on fuel subsidies was seen at 276 trillion rupiah (US$22.4 billion).

In January, President Joko Widodo is expected to submit proposed 2015 budget revisions to parliament, which is dominated by opposition parties.

The new system of fixed fuel subsidies could slash state spending on these by half to below 140 trillion rupiah (U$11.38 billion), Brodjonegoro said.

But a proposed subsidy cap of between 1,000 and 2,000 rupiah a litre still needs to be approved by the parliament.

Brodjonegoro said 2014’s fuel subsidy bill is expected to fall below this year’s budget target of 246 trillion rupiah as global fuel prices have fallen, but was still expected to top 200 trillion rupiah.

The move to a fixed fuel subsidy could also help narrow Indonesia’s current account deficit to between 2 per cent and 2.5 per cent of gross domestic product (GDP) in 2015, the minister said, from 2.5-3.0 per cent previously.

But the new system could also add to inflation pressure due to fluctuating domestic fuel prices. Brodjonegoro estimated next year’s inflation rate could by 0.3-0.5 percentage points higher than the assumed 4.4 per cent in the current 2015 state budget.

Due to the hike in fuel prices in mid-November, the annual inflation rate for last month shot up to 6.23 percent from 4.83 per cent in October. - Reuters