Simulating Indonesian fuel subsidy reform: a social accounting matrix analysis

Abstract

The debate over phasing out fuel subsidies in Indonesia is quite intense. Recent studies pointed out an unfair distribution of subsidies. Besides this, the burden of fuel subsidies to Indonesian government is expected to increasingly continue in parallel with rising fuel consumption as well as international oil prices. However, recent experiences indicated that phasing out the fuel subsidy could potentially result in adverse effects in the economy. Then, the need for comprehensive economy-wide analyses in order to reveal diverse impacts of these subsidies, has emerged. The main objective of this study is to estimate the impacts of fuel subsidies from the economic, social, and environmental perspective, and to propose policy options for a subsidy reform. For this purpose, a social accounting matrix model is employed to simulate the impact analysis. Scenarios including reallocation of subsidy to either other sectors (sectoral subsidy) or income groups (target subsidy) are simulated and the social, economic and environmental impacts of these scenarios are presented. The results show that reallocation of fuel subsidy to other sectors will be able to positively increase the overall economic development, while compromising environmental aspects. The direct reallocation of subsidy to the low income households, on the other hand, will slow down overall economic development but show a positive result for social welfare.