By Michael Taylor and Kanupriya Kapoor
JAKARTA (Reuters) - Indonesia's president on Monday announced a more-than 30-percent increase in subsidised gasoline and diesel prices, a move that is expected to save the government more than $8 billion next year.
Joko Widodo, who became Indonesia's seventh president on Oct. 20, raised the price of gasoline and diesel by 2,000 rupiah ($0.16) per litre. Gasoline previously cost 6,500 rupiah a litre, and diesel 5,500 rupiah.
"The government has decided to redirect fuel subsides from consumptive sectors to productive sectors," Widodo told reporters at the presidential palace. "All this while the country has needed a budget for infrastructure, healthcare and education. But that has been spent on subsidizing fuel."
Although the price rise is a highly unpopular step, Widodo has to urgently address Indonesia's biggest fiscal problem - a $23 billion fuel subsidy bill that is the main driver behind the country's twin budget and current account deficits.
Indonesia's gross domestic product grew 5.01 percent in the third quarter from a year earlier, its slowest in five years, highlighting the challenge that Widodo faces trying to turn around the economy. [ID:nL4N0SV2NR]
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Finance Minister Bambang Brodjonegoro said he expected inflation to rise 2 percent to 7.3 percent this year after the fuel price rise, and that the inflationary impact would be felt through February 2015.
The rupiah was unchanged after the announcement, down 0.2 percent at 12,202 per dollar.
Raising fuel prices is a sensitive issue that typically sparks protests and contributed to the downfall of long-serving autocrat and then president Suharto in 1998.
There were no reports of major civil unrest on Monday, but the move to raise fuel prices was criticised by trade unions and opposition politicians.
"This is not a wise decision right now," said Bobby Rizaldi, a member of the Golkar party, part of the opposition majority coalition. "Electricity prices have just been raised recently, the currency has been under pressure, and now the inflation will be higher than we anticipated at the beginning of the year."
Officials within Widodo's government have said any money saved from reduced subsidies would be diverted to spending on infrastructure, agriculture, education, and health projects.
Social assistance will also be available to 15.6 million people from Tuesday, Chief Economics Minister Sofyan Djalil told reporters, in a government drive to soften the impact of the fuel price rise on the poor.
(1 US dollar = 12,202.0000 rupiah)
(Additional reporting by Gayatri Suroyo, Adriana Nina Kusuma, Eveline Danubrata, Fransiska Nangoy, Wilda Asmarini, Fergus Jensen, Nicholas Owen and Randy Fabi; Writing by Michael Taylor; editing by Keiron Henderson)