Fuel subsidy has become like an illicit drug. It is addictive.
In Indonesia, a policy meant to shield the poor from the cost of fuel has quietly become one of the most generous gifts the state offers to the wealthy. Each year, the government spends the equivalent of 1.6 percent of its entire economic output holding petrol prices below market rates — and more than half of that money flows to the richest fifth of the population. The World Bank has urged a fundamental rethinking: replace universal subsidies with direct cash transfers to those who genuinely need them. The obstacle is not technical but deeply human — decades of cheap fuel have transformed a government benefit into something that feels, to many Indonesians, like a right.
- A fuel subsidy designed for the poor has become, in practice, a windfall for the wealthy — the richest 20% of Indonesians capture more than half its value while the vulnerable receive far less than intended.
- Rising global oil prices and a weakening rupiah are pushing subsidy costs beyond budget projections, threatening fiscal stability and crowding out spending on genuine poverty relief.
- The World Bank recommends a phased shift to market-rate fuel prices paired with direct cash transfers to the poorest 40% of households — a model that economic modelling suggests could actually reduce poverty overall.
- Indonesia's cash transfer infrastructure is undermined by outdated beneficiary rolls, village-level corruption, and a distribution system that routinely fails to reach its intended recipients.
- Political leaders face a near-impossible calculus: raising fuel prices risks electoral backlash from a public that has come to experience cheap petrol not as a subsidy but as a birthright.
- Without reform, the fiscal drain persists and the paradox deepens — a state spending vast sums in the name of the poor, while the money continues flowing upward.
Indonesia spends roughly 1.6 percent of its GDP each year holding fuel prices below market rates — a sum so large and so volatile that it threatens the national budget's stability. A World Bank report released in mid-June made the central problem plain: more than half of that spending benefits the wealthiest fifth of the population. The system fails not through malice but through indifference — it was built to treat everyone equally, and equality, in this case, means generosity toward those who need it least.
Anyone in Indonesia can fill a tank with Pertalite at a fixed price of 10,000 rupiah per litre, whether they ride a motorcycle or a Mercedes. The government absorbs the gap between that price and global market rates. When crude prices spike — as they have amid Middle East tensions and a weakening rupiah — the state's bill climbs, yet pump prices hold steady. Economists estimate that around 30 percent of all subsidy and social programme spending never reaches its intended recipients, lost to outdated beneficiary lists and grassroots corruption.
The World Bank's prescription is clear: gradually raise subsidised fuel prices toward market rates while directing cash transfers to the poorest 40 percent of households. Modelling suggests this approach would more than compensate lower-income groups for the price increase and could reduce overall poverty by freeing fiscal space for better-targeted programmes. The technology and digital infrastructure to deliver such transfers already exist in Indonesia. What is missing is political will.
That will is hard to summon. Decades of cheap fuel have transformed a policy into something closer to a social contract — a sense, widespread and deeply felt, that low petrol prices are owed rather than granted. Scholars compare the dynamic to addiction. Leaders who have raised fuel prices in the past faced electoral punishment, and the current administration has made protecting ordinary households a defining commitment. Even economists who understand the reform's logic acknowledge the bind: higher prices ripple through food costs and transport, and the distribution machinery for compensatory cash transfers remains unreliable. The fiscal strain will persist, and the money meant for the poor will keep flowing upward, until Indonesia finds a way to reframe cheap fuel as a benefit — not a birthright.
Indonesia spends roughly 1.6 percent of its gross domestic product on fuel subsidies each year—a sum so large and so volatile that it threatens to destabilize the entire national budget. The World Bank, in a report released in mid-June, laid out the problem with surgical precision: more than half of that money flows to the richest fifth of the population, while the poor receive a pittance. The system is broken not because it was designed badly, but because it was designed not to discriminate at all.
Anyone in Indonesia can pull up to a petrol pump and buy Pertalite, the country's most common fuel, at 10,000 rupiah—about 72 Singapore cents—per litre, regardless of whether they drive a motorcycle or a Mercedes. The government absorbs the difference between that fixed price and what oil actually costs on global markets. When crude prices spike, as they have in recent months due to Middle East tensions and a weakening rupiah, the state's bill climbs. Officials keep the pump price steady anyway, treating cheap fuel as a political necessity rather than a policy choice. The result is a subsidy system that leaks money upward, rewarding the people who need help least.
Wijayanto Samirin, an economist who once advised Indonesia's vice president, frames the challenge plainly: the country is spending roughly 1,000 trillion rupiah annually on all government subsidies and social programmes combined, yet an estimated 30 percent of that money never reaches its intended recipients. Some goes to people whose circumstances have changed but whose names remain on outdated government rolls. Some disappears into village-level corruption, where the relatives of local officials receive aid packages while unemployed neighbours go without. The digital infrastructure exists to do better. The technology to deliver cash directly to verified poor households is not exotic or expensive. Indonesia simply has not built the political will to use it.
The World Bank's recommendation is straightforward: gradually raise subsidised fuel prices toward market rates while launching direct cash transfers to the poorest 40 percent of households. Modelling suggests this swap would fully compensate lower-income groups for the price increase and might even reduce the overall poverty rate by freeing up fiscal space for other programmes. Fabby Tumiwa, who runs a Jakarta-based think-tank focused on essential services, echoes the logic: fuel subsidies were meant to guarantee energy access for the poor, but a system that gives free money to the wealthy has lost sight of that purpose.
Yet reform remains politically treacherous. Decades of cheap fuel have calcified into something deeper than policy—a sense of entitlement, almost a right. Muhamad Rosyid Jazuli, a public policy scholar, compares it to addiction. People no longer see the subsidy as government assistance; they see it as something owed to them. Leaders who raise fuel prices risk electoral punishment, and the current administration has made protecting the vulnerable a cornerstone of its platform. Raising the price of Pertalite, officials suggest, would be a last resort.
Ebenezer Mesotuho Harefa, an economist at a major Jakarta investment bank, acknowledges the bind. Higher fuel prices would ripple through the economy—food costs would climb, transport would become more expensive, and the squeeze would fall hardest on lower- and middle-income families. The government has used cash transfers as a cushion during past price hikes, but the distribution machinery is rusty. Databases go unupdated. Grassroots implementation falters. The political economy of subsidy reform in Indonesia is not a technical problem waiting for a clever solution. It is a governance problem, rooted in decades of choices that have made cheap fuel feel like a birthright rather than a benefit. Until that changes, the fiscal strain will persist, and the money meant for the poor will continue flowing upward.
Citações Notáveis
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.— Fabby Tumiwa, Institute for Essential Services Reform
Indonesia needs to shift away from universal, goods-based subsidies toward a targeted, people-based system using direct cash transfers, which is technologically feasible and offers significant fiscal savings.— Wijayanto Samirin, economist and former economic adviser
A Conversa do Hearth Outra perspectiva sobre a história
Why does Indonesia keep the fuel price so artificially low if it's costing them so much?
Because for forty years, cheap fuel has become woven into how people think about their government's job. Raising the price feels like a betrayal, even if the subsidy itself is wasteful.
But the World Bank says more than half the benefit goes to rich people anyway. Wouldn't poor households actually come out ahead if the government switched to direct cash transfers?
In theory, yes. The math works. But the poor don't see it that way—they see fuel prices as something concrete and immediate, something they can control. A cash transfer feels like charity. Fuel subsidies feel like a right.
So it's purely political? There's no economic reason to keep the system?
There are real economic costs to raising prices suddenly. Food and transport would get more expensive overnight. The government would need to move fast on cash transfers to cushion the blow, and their track record there is spotty—databases are outdated, corruption happens at the village level.
How much money are we talking about that gets lost to misallocation?
About 30 percent of the entire subsidy and social spending budget—roughly 300 trillion rupiah a year. Some of it goes to people who no longer qualify but are still on the rolls. Some goes to the well-connected in villages who don't actually need it.
If the technology exists to target cash transfers more precisely, why hasn't Indonesia done it?
The technology exists, but the political will doesn't. And there's a chicken-and-egg problem: you need to invest in better databases and payment systems, which costs money upfront, before you can prove the savings. It's easier to keep doing what you've always done.
What happens if oil prices stay high?
The subsidy bill keeps climbing, crowding out spending on schools, hospitals, infrastructure. Eventually something has to give. The World Bank is warning that if prices spike again, Indonesia's fiscal buffers could erode dangerously.