Wednesday, May 7, 2008
Fuel Price Hikes May Cause Unemployment Rate to Grow 16.92 pct per Year
Source: Antara News

Jakarta (ANTARA News) - The government’s plan to raise fuel oil prices by about 30 percent, if realized, may cause the unemployment rate in the country to grow by 16.92 percent a year, a research institute said.

"A simulation using a `time-series` model has shown that a 30-percent increase in the prices of various fuel oils such as kerosene, diesel oil and premium gasoline will cause the unemployment rate to grow by about 16.92 percent a year," Pri Agung Rakhmanto, executive director of Reforminer Institute, an energy and mining reform research institute, said at a discussion on the impact of fuel oil price hikes here on Wednesday.

He said the price of diesel oil had the greatest effect on the unemployment rate. An increase of 30 percent in the diesel oil price would boost growth in the unemployment rate by 10.83 percent. This would happen because the higher diesel oil price would affect industries` and companies` capability to continue their productive operations.

"An increase of just 10 percent in fuel oil prices will result in an inflation rate of more than eight percent and an unemployment rate of 5.6 percent. The impact will obviously be much worse if the fuel oil price increase is 30 percent. Unemployment may swell 24 times its present figure," he said.

Rakhmanto said that the simulation also showed that an increase of 30 percent in fuel oil prices would lead to an annual growth of 8.55 percent in the poverty rate. Kerosene had the most profound effect on the poverty rate. An increase of 30 percent in the kerosene price would contribute 4.26 percent to the poverty rate.

When the simulation was done using the consumer price index model, it was found that an increase of 30 percent in fuel oil prices would lead to a growth of 26.94 percent per year in the inflation rate. Kerosene had the greatest effect on the inflation rate and a 30-percent hike in the kerosene price would contribute 16.17 percent to the inflation rate. The same increase in the diesel oil price would add 4.56 percent and in the premium gasoline price 6.21 percent to the inflation rate, he said.

According to a simulation using the Gross Domestic Product (GDP) model, Rakhamanto said, a 30-percent fuel oil price hike would also reduce the country’s GDP to about -4.11 percent, with diesel oil contributing a reduction of about -2.30 percent, kerosene -0.71 percent and premium -1.11 percent.

"In short, an increase by 30 percent in the fuel oil prices will boost the inflation rate, slow down economic growth, increase the unemployment and poverty rates," he said.