Posted on 12 Mar 2012
As the government plans to pass on rising energy prices to the public through energy subsidy cuts, industrial leaders say they will be forced to recalculate performance targets.
Indonesian Food and Beverage Association (Gapmmi) secretary-general Franky Sibarani said the local food and beverage industry would not be able to achieve its targeted growth of between 8 and 10 percent due to rising fuel prices and electricity rates.
“The industry will likely grow only by 7 percent due to the price hike of these two components,” he told The Jakarta Post.
Franky said the increase in production and distribution costs would automatically translate into higher sales prices of about 10 percent. At the same time, he said, consumer purchasing power would be affected by fuel price hikes.
In a move to avert a bigger budget deficit amid soaring world oil prices and to increase efficiency, the government has pledged to raise fuel prices by Rp 1,500 (17 US cents) per liter in April and gradually increase electricity rates beginning in May.
State electricity company PT Perusahaan Listrik Negara (PLN) purchases non-subsidized diesel to fuel its generators. As a result of ballooning global oil prices, PLN thus decided to raise electricity rates by 10 percent to Rp 796 per kWh. PLN’s power production cost is around Rp 1,100 per kWh. The remainder is subsidized by the government.
Should the plan to raise fuel prices and electricity rates be approved by the House of Representatives, the government said that it would spend Rp 230.4 trillion on energy subsidies this year, up 36.7 percent compared to the initial budget allocation. Approximately 137.4 trillion is expected to be spent on fuel and gas subsidies, higher by 11.1 percent than previously expected. Despite the rate increases, electricity subsidies would skyrocket by more than 200 percent to Rp 93 trillion from Rp 44 trillion as stipulated in the current state budget.
With the new realities at hand, the government is set to revise its economic growth target to 6.5 percent from 6.7 percent previously and increase its budget deficit estimate to between 2 and 2.4 percent from 1.5 percent previously.
The government has also changed its inflation target to between 6 and 7 percent from 5.3 percent.
Deliberations to discuss proposals for a revision to the 2012 state budget is expected to officially begin next week after House Commission VII overseeing energy approves the fuel price increases.
Indonesian Iron and Steel Industry Association (IISIA) executive director Edward Pinem shared a similar view with Franky, saying that the fuel and electricity price increases would have a major impact on the industry.
“In general, electricity and fuel prices represents between 15 and 20 percent of the product price. So just multiply this by the percentage of the increase,” he said in a text message.
In a recent study by the Industry Ministry revealed on Wednesday, the government estimated that increasing fuel prices by 33 percent and the electricity base rate by 10 percent would cut industrial growth by 0.26 percent.
The growth of the base metal, iron and steel sector will be impacted most by the price increases as its growth would be reduced by 1.32 percent, after last year recording a 16.26 percent growth year on year. Meanwhile, the food and beverage industry is projected to become the least affected as its growth will drop modestly by 0.13 percent.
Indonesian Employers’ Association (Apindo) deputy chairman Anton Supit said on Wednesday that the government should improve the business climate in order to sustain the competitiveness of local manufacturing companies.
“The industry will be burdened by higher logistical costs and production costs. At the same time, the people’s purchasing power will be pressurized by the prices. So, it will certainly reduce the rate of growth of our industry,” he told the Post in a telephone interview.
