Indonesia's Fuel Subsidies Favor the Rich, Economists Urge Targeted Aid

Indonesia's extensive fuel subsidy program, while intended to ease the burden on citizens, is increasingly criticized by economists and international bodies for unfairly benefiting the rich and creating significant fiscal risks. The World Bank highlights that over half of the subsidies are captured by the wealthiest 20% of households, representing a substantial and volatile expenditure for the nation, equivalent to 1.6% of its gross domestic product.

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Generalised fuel subsidies are costly, with benefits concentrated among higher-income households.

This blanket approach, which keeps subsidized 90-octane Pertalite fuel at a fixed low price for all consumers, regardless of income, is seen as a major structural flaw. Experts argue that this system is prone to leakage, allowing affluent motorists to consume a disproportionate share of the subsidy budget, while providing minimal support to the poor. The government's effort to maintain flat pump prices, even amidst rising global oil costs driven by Middle East tensions and a weaker rupiah, further exacerbates the strain on public finances.

Economists like Wijayanto Samirin, former economic adviser to the vice president, advocate for a comprehensive reform. He suggests a shift away from universal, goods-based subsidies towards a targeted, people-based system utilizing direct cash transfers. This approach, he argues, is technologically feasible and offers significant potential for fiscal savings by improving digital databases and payment systems to deliver aid directly to eligible households.

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Technologically, this is highly feasible and offers the potential for significant fiscal savings.

Fabby Tumiwa, chief executive of the Institute for Essential Services Reform, agrees that fuel subsidies should guarantee energy access and reduce costs for poor households. However, he notes that weak controls over who purchases subsidized fuel undermine this goal. The World Bank recommends a gradual adjustment of subsidized fuel prices toward market rates, coupled with the rollout of targeted cash assistance programs to ensure that support reaches those genuinely in need and alleviates the fiscal burden on the state.

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Fuel subsidies are meant to guarantee energy access and reduce poor households’ energy spending. But this is undermined by weak controls over who actually buys subsidised fuel.