Simulating Indonesian fuel subsidy reform: a social accounting matrix (SAM) analysis

Fathurrahman, Fahman
The debate over phasing out fuel subsidies in Indonesia is quite intense. One thing is clear: fuel subsidy needs to be removed due to a pressure to government budget and misallocation of subsidy. Based on National Social Economic Survey (SUSENAS 2008), the richest 40% household group gets 70% of fuel subsidies while the poorest 40% benefitted only from 15%. In addition, in 2012, fuel subsidies accounted for about 1.7% of GDP and this share is expected to grow as oil price and consumptions increase. However, phasing out the fuel subsidy could potentially result in adverse effects in the economy. The main objective of this study is to estimate the impacts of fuel subsidy in terms of sustainable development indicators from the economic, social, and environmental perspective. Another objective is to propose the policy options for the subsidy reform. Social Accounting Matrix (SAM) model is being used to simulate the impact analysis. The simulation results show that reallocation of fuel subsidy to other energy-related sector (i.e. Gas sector) would positively improve the economy. However, the policy would be paid off by increasing energy demand and CO2 emissions. On the other hand, the reallocation of the subsidy directly to the poorest household groups will decrease the overall economic development, but positively impacts social development. Nevertheless, this option will also increase CO2 emissions, but lowering down energy demand. Our results show that Indonesian government should consider a reallocation scheme of the fuel subsidy by taking economic, social, and environmental impacts into account.
Citation Formats
F. Fathurrahman, “Simulating Indonesian fuel subsidy reform: a social accounting matrix (SAM) analysis,” M.S. - Master of Science, Middle East Technical University, 2014.