LPG Subsidy Reform in Indonesia: Lessons learned from international experience

Indonesia’s liquefied petroleum gas (LPG) subsidies are not only an increasing drain on the country’s budget, but they are also inefficient from a social equity perspective, as most of the subsidies go to the wealthier classes of society. The Indonesian government is therefore planning to target LPG subsidies through a closed distribution system so that access is limited to the poorer segments of society. Despite a commitment from the government to change the policy, the implementation of such a closed system was delayed repeatedly over the last few years, justified by, among others, the hardship of the COVID-19 crisis.

Yet, other emerging economies have shown that times of crisis do not necessarily need to result in backtracking intended policy reforms—they can also provide an opportunity to reform fossil fuel pricing and strengthen a country’s welfare state. Three case studies and an analysis of the lessons learned from each country’s experience are at the heart of this report.

Based on that analysis, we have the following four recommendations for Indonesia’s LPG subsidy reform:

1. Indonesia should shift LPG subsidies away from the wealthy and use the money to support those who suffer most from the crisis.
2. Indonesia should accompany LPG subsidy reform with a robust data collection process to ensure that all intended beneficiaries retain access to subsidized LPG.
3. Indonesia should accompany LPG subsidy reform with a robust public endorsement plan to proactively engage other political and influential groups, as well as communicate objectives, benefits, and potential compensatory measures.
4. Indonesia should make use of the momentum of the low oil prices, as they can act as a buffer to potential economic shocks and help limit opposition to reform.