Heeding the advice of economists and international credit rating agencies, Indonesia has decided to limit fuel subsidies to consumers, which kept the price of fuel in Indonesia artificially low. As oil prices have soared in recent months, Indonesia has been forced to devote an ever-higher fraction of its federal budget to these subsidies, straining its finances. The decision to reduce fuel subsidies was not made lightly, for the country’s improved credit rating may come at the expense of reduced economic growth. In addition, the Indonesia Rupiah benefited from the announcement, but remains down 6% from only 3 months ago. The Financial Times reports:

Indonesia’s senior finance minister, Aburizal Bakrie, said he expected economic growth to be 5.9 per cent this year, down only marginally from a budget forecast of 6 per cent, and for inflation to be back below 10 per cent by the year’s end.

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