Indonesia’s Fuel Subsidies Reforms

This paper provides an assessment of the fiscal and social impacts resulting from the fuel price adjustments undertaken in 2022. The note lays out policy options and their potential fiscal and social impacts to inform future reforms. The policy simulations examine two scenarios: (i) a one-time increase in fuel prices; and (ii) a gradual price increase to align with the market price‒accompanied, in each scenario, by social assistance to safeguard poor and vulnerable households. The analysis suggests that a one-time price adjustment would generate immediate and sizeable fiscal savings. However, it imposes a large shock on households and requires a higher fiscal cost to fully offset the impact on poverty. A gradual price increase would generate smaller fiscal savings and impose a smaller shock on households. Under each scenario, compensating the bottom 60 percent would fully alleviate the adverse effects on the poorest households and would cost about 20-34 percent of fiscal savings. In the medium to long term, supporting the poor and vulnerable through improved, more integrated, and dynamic social protection programs will be essential to sustain gains and minimize the risk of policy reversal.