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Indonesia hikes fuel prices despite popular anger

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Demonstrators tussle with police during a protest against the impending oil price increase in Surabaya city in eastern Java island on June 21, 2013. Indonesia on Friday announced the first hike in fuel prices since 2008 despite violent protests against the unpopular measure, as Southeast Asia's top economy seeks to reduce crippling subsidies. (AFP)

Indonesia on Friday announced the first hike in fuel prices since 2008 despite violent protests against the unpopular measure, as Southeast Asia's top economy seeks to reduce crippling subsidies.

Energy Minister Jero Wacik said the price of fuel would go up more than 30 percent on average from Saturday, in a bid to slash handouts which gobble up a huge chunk of the national budget and have caused concern among investors.

"This is a very difficult decision and the government made this choice as a last resort," Hatta Rajasa, coordinating minister for the economy, said in a televised address to the nation.

"The global crisis has impacted our economic growth... We need to take steps to improve the health of our economy."

The move to cut one of the few government handouts in Indonesia has already sparked anger, with thousands fighting running battles with police outside parliament Monday as lawmakers voted on measures paving the way for an increase.

In the hours leading up to the hike, long lines formed at petrol stations as car and motorbike owners sought to fill up with subsidised fuel before the price rocketed. Police were standing guard at many stations.

Police were out in force in major cities across the country as the announcement was made, but protests were small and largely peaceful.

The price of a litre of petrol will go up 44 percent from 4,500 rupiah ($0.46) a litre, one of the cheapest in Asia, to 6,500 rupiah. For a litre of diesel, the price will rise 22 percent to 5,500 rupiah.

Following a marathon parliamentary session on Monday, lawmakers agreed on a revised budget that included a package of measures to compensate the millions of poor people likely to be hit hardest.

Poor households will receive $15 a month each for the next four months to offset the impact of the fuel hike, which is expected to cause the cost of everyday goods to go up as they will be more expensive to transport.

President Susilo Bambang Yudhoyono had insisted on the measures before any fuel hike, which comes at a sensitive time as parties gear up for elections in 2014.

"The government is aware that the policy will result in inflation which will affect the purchasing power of those on low incomes," Rajasa admitted on Friday, but added that the government was providing "social protection".

Yudhoyono has been seeking to lower the huge subsidies for some time and last year came close. But parliament rejected the measure in the face of huge protests, which were far bigger and more violent than this year's.

Concern has been growing among international investors about the failure to cut the subsidies which are blamed for a widening current account deficit, as demand for fuel increases and the government is hit with ever bigger bills.

The urgency for action increased last week after the rupiah, which had already lost value due to the ballooning deficit, plunged to four-year lows after a sell-off on emerging markets that hit Indonesia hard.

However, the price hike could lead to economic pain in the short term, analysts have warned.

Credit-Suisse said in note the hike "will likely hit already weakening investment growth, dragging down GDP growth further".

Indonesia's economy grew at 6.02 percent in the first quarter, the slowest pace in more than two years.