TEMPO.CO, Jakarta - The World Bank has urged Indonesia to reform its fuel subsidy system as global oil prices continue to surge. In its latest Indonesia Economic Prospect (IEP) report for June 2026, the international lender highlighted that more affluent citizens are benefiting from subsidized fuel intended for lower-income households.
The report, released on Sunday, June 14, 2026, noted, "The surge in global oil prices has again exposed the fiscal cost and weak targeting of generalized fuel subsidies: the richest 20 percent of households receive more than half of subsidy benefits."
The World Bank observed that the ongoing oil price shock is straining the state budget and shrinking fiscal space. Market and logistical disruptions have kept Brent crude hovering around US$94 per barrel, which is US$24 higher than the baseline assumption used in the 2026 state budget (APBN).
However, this challenging situation also presents a timely opportunity for subsidy reform. To that end, the World Bank outlined a three-step reform strategy for the government to follow. The first step involves gradually adjusting fuel prices and announcing these changes well in advance. This measure aims to narrow the gap between subsidized rates and real market prices.
The second recommendation focuses on rolling out targeted cash transfers to the poorest 40 percent of households to cushion the economic blow. According to the World Bank, the monthly financial assistance required would not create a major fiscal burden, as it would account for only 10 percent of the total savings generated from the subsidy cuts.
The final phase of the strategy is a transparent reallocation of the remaining subsidy savings into social protection programs, public infrastructure investments, and livelihood support for vulnerable groups.
The fiscal savings generated through this phased approach are projected to accumulate over time, reaching an equivalent of 1.3 percent of gross domestic product (GDP) within the first two years, and eventually rising to 2.1 percent once the price adjustments are fully implemented.
The World Bank recommends gradual implementation, clear public communication, and a robust delivery system powered by the Single National Socio-Economic Data (DTSEN) framework.
Ultimately, the government must clearly and transparently account for how the fuel subsidy savings are being reinvested in order to foster the public trust necessary to uphold the reforms.
Read: World Bank Forecasts Slower Economic Growth for Indonesia
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