ABSTRACT
The Indonesian government directly subsidises oil prices as a way of supporting the incomes of poor households. Consequently, oil-product prices in Indonesia are among the lowest in South-East Asia. These subsidies, which currently absorb more than 10% of the state budget, incur large economic, environmental and social costs. A recent government review of the subsidy policy concludes that eliminating subsidies would reduce government expenditure, increase foreign exchange earnings and reduce envi ronmental damage, particularly from airborne emissions of particulate matter and lead. The net economic cost of the subsidies applied to kerosene, automotive diesel, industrial diesel, motor gasoline and heavy fuel oil amounted to almost $4 billion in 2002. It is projected that between 2000 and 2005 a total of $36 billion would be spent on oil subsidies if they are left unchanged. In addition, the value of lost foreign exchange earnings caused by lower exports would reach $16 billion. Subsidy reform would allow financial resources to be redirected towards supporting the poor in more effective ways, such as through a voucher scheme. Such an alternative approach, however, would need to overcome practical problems. In addition, the removal or elimination of subsidies would reduce pollution exacerbated by over-consumption of oil products.
