June 22, 2026
JAKARTA – Indonesia should gradually phase out fuel subsidies and replace them with targeted cash transfers to poorer households to reduce fiscal risks and improve equity, according to the World Bank.
The global lender said more than half of the subsidies currently benefit the richest 20 per cent of households.
It noted that energy subsidy spending remains a “significant and volatile” component of public expenditure, at 1.6 per cent of gross domestic product.
Sustained increases in oil prices could push subsidy spending above budgeted levels, further straining public finances and eroding fiscal buffers, the World Bank warned in its Indonesia Economic Prospects report on June 11.
“Generalised fuel subsidies are costly, with benefits concentrated among higher-income households,” it said, adding that the system absorbs scarce fiscal resources while providing limited support to the poor.
The warning comes as the Indonesian government largely keeps pump prices flat despite a surge in global oil prices driven by Middle East tensions and a weaker rupiah. By absorbing the rising costs, economists say, the state is bearing higher expenses to cover the gap between market prices and fixed pump prices.
Even though global oil prices have eased in recent days, experts warn that structural flaws in Indonesia’s subsidy system remain a “pressing concern”.
The fiscal strain stems from Indonesia’s blanket fuel subsidy system, including for Pertalite, the country’s most widely consumed petrol.
Anyone pulling up to a petrol pump – regardless of their income bracket – can buy the subsidised 90-octane fuel at 10,000 rupiah (73 Singapore cents) a litre. This makes the system prone to leakage, experts said, allowing affluent motorists who do not need financial assistance to consume a large share of the subsidy budget.
Senior economist Wijayanto Samirin, who served as economic adviser to Jusuf Kalla when he was Indonesia’s vice-president from 2014 to 2019, told The Straits Times that Indonesia needs comprehensive reform of its subsidy and social programmes, urging a shift away from universal, goods-based subsidies.
Instead, Indonesia should transition to a targeted, people-based system using direct cash transfers, he said. “Technologically, this is highly feasible and offers the potential for significant fiscal savings,” he added.
By that, Wijayanto meant improving government digital databases and payment systems so subsidies or assistance can be delivered directly to eligible households, rather than being tied to fuel prices at the pump.
Agreeing, Fabby Tumiwa, chief executive of Jakarta-based think-tank Institute for Essential Services Reform, said: “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, he added.
To fix the imbalance, the World Bank recommended gradually adjusting subsidised fuel prices to market rates while rolling out targeted cash transfers to the poorest 40 per cent of households.
“Removing subsidies would reduce household welfare across all income groups, leading to an increase in the poverty rate. However, time-bound cash transfers targeted to the poorest 40 per cent of households could fully compensate lower-income groups and reduce the poverty rate,” the World Bank said.
Cheap fuel seen as an entitlement
But reducing fuel subsidies is a formidable political challenge.
Decades of subsidies have shaped a public mindset that views cheap fuel as an entitlement rather than government assistance, said Muhamad Rosyid Jazuli, a managing director at Paramadina University’s public policy institute.
“Fuel subsidy has become like an illicit drug. It is addictive. People think it is their right to receive it, hence it is hard to remove it today,” Rosyid told ST.
He added that keeping fuel prices low is a key political narrative in Indonesia, and leaders who fail risk poor electoral outcomes.
Ebenezer Mesotuho Harefa, an economist at Jakarta-based investment bank BRI Danareksa Sekuritas, said raising subsidised fuel prices would increase food and transport costs, hitting lower- and middle-income groups the hardest.
He added that the current administration’s priority is to protect the most vulnerable, and it is likely to raise the price of Pertalite only as a last resort, given its commitment to maintaining affordability.
While the government has previously used cash transfers as a social buffer during past fuel price hikes, Ebenezer said distribution could be improved.
For example, government databases are not always kept up to date. He noted cases of individuals originally classified as low-income who later married into middle- or high-income families continuing to receive social aid because their status was never updated.
Distribution at the grassroots level also appears flawed. There have been complaints of “cronyism” in some villages, where well-off relatives of village heads receive social aid packages, while jobless villagers who genuinely deserve the assistance receive nothing, Ebenezer said.
“Currently, all government subsidies and social programmes amount to about 1,000 trillion rupiah yearly – an estimated 30 per cent is misallocated due to poor data quality and implementation irregularities on the ground,” said Wijayanto.
