Damian Shahfazli | Indo-Pacific Fellow
Image sourced from Rama via Wikimedia Commons.
In early February, Indonesia faced a nationwide shortage of 3-kilogram liquefied petroleum gas (LPG) cylinders, a historically subsidised cooking fuel source for the nation’s poorest. These shortages highlight the current state of fuel subsidies — while well-intentioned, they have become ecologically unsustainable, strain government budgets and fail to effectively target those in need. A long history of fuel subsidies in Southeast Asia has perpetuated a narrow view of welfare, where access to cheap fuel is seen as the primary solution to poverty. As Indonesia and Malaysia implement budgetary cuts to fuel subsidies this year, they have the opportunity to redefine their welfare strategies. By reinvesting subsidy savings into targeted infrastructure, electronic cash transfers, renewable energy and education programs, Indo-Pacific nations can successfully navigate the shift away from fossil fuels, while providing economic assistance to their most vulnerable populations.
Recent Upheaval
Indonesia’s LPG subsidy program was introduced in 2007 as part of a government initiative to transition low-income households from kerosene to a more affordable, efficient cooking fuel. In an attempt to regulate purchases, prevent price gouging and purchasing from upper-income families, the Indonesian government recently restricted sales of LPG by small retailers, only allowing state-owned Pertamina bases to sell LPG cylinders. However, this policy led to widespread shortages, disproportionately impacting low-income families who rely on the subsidised gas for daily cooking. Recognising the severity of the crisis, the government repealed the measures on the 4th of February, underscoring the challenges of repealing longstanding fuel subsidies entrenched in citizens’ everyday lives.
Budgetary Pressures
In 2022, fuel subsidies accounted for 2.8 per cent of Indonesia’s entire budget. As a net importer of oil and gas, this rise in expenditure from the previous year was prompted by a global rise in commodity prices following the Russian invasion of Ukraine, highlighting vulnerabilities to external market forces. Similarly, since the 1980s, Malaysia has subsidised RON95 petrol, accounting for nearly a quarter of the country’s total expenditure dedicated toward all subsidies, grants, and financial aid programs. Both the Malaysian and Indonesian governments are now attempting to address these fiscal pressures through fuel subsidy restructures in efforts to reduce their budget deficits. The funds saved from these cuts should be re-invested into social protection measures to ensure vulnerable populations are not affected by rising energy costs.
Electronically administered cash transfers have emerged as an effective approach for alleviating the financial pressures that come with removing subsidies. By giving consumers personal agency to purchase essential items, this method avoids the inefficiencies associated with direct government distribution of subsidised goods which caused the initial LPG crisis. Indonesia has already achieved success in implementing digital cash transfer systems, while Malaysia’s proposed subsidy restructures include higher cash handouts and minimum wage increases. These changes mark a welcome shift towards redefining social assistance beyond fossil subsidy schemes.
Ecological Sustainability
Research indicates nations with extensive fossil fuel subsidies emit up to 11.4 per cent more greenhouse gases than those implementing fossil fuel taxes. In the Indo-Pacific, where climate change disproportionately affects poorer communities, the continuation of these programs only exacerbates the same inequalities fuel subsidies aim to address. Accordingly, since 2009, G20 and APEC signatories have agreed to phase out fossil fuel subsidies as the global energy landscape shifts toward renewable energy. Redirecting funds toward renewable energy subsidies can replicate the success of past fuel subsidies by incentivising domestic solar and wind energy sources. This would cushion the impact of global energy price fluctuations and supply chain disruptions Indonesia faces as a net importer of fuel.
Targeting Inequities
Currently Malaysia’s RON95 subsidy is enacted through a blanket subsidy system, extending benefits of subsidised fuel indiscriminately regardless of income. This untargeted approach disproportionately benefits high-income households, as wealthier individuals tend to own larger vehicles with higher fuel capacities. Similarly, Indonesia’s LPG scheme, while nominally targeted toward low-income households, has been taken advantage of by middle- and upper-income families due to a lack of effective income-based restrictions.
Equitably reinvesting subsidy funds will thus require addressing infrastructure hindrances for vulnerable populations. Overreliance on RON95 fuel in Malaysia should be curbed through increased investment in public transport infrastructure, a more equitable solution than its current strategy targeted toward electric vehicle transitions. In Indonesia, LPG shortages will continue to affect low-income households until alternative household infrastructure is implemented. Promoting the use of induction stoves provides a viable alternative, however the country has only reached a 0.76 per cent induction stove usage rate, far below the government’s objective of 22 per cent by 2030.
Rethinking Welfare
Finally, public awareness campaigns will be critical in achieving a successful transition from fuel subsidies. Many communities remain reliant on subsidised fuel due to a lack of knowledge of alternative solutions, such as induction stoves. While restructuring of subsidies will cause resistance due to fuel price hikes, educating communities on the benefits of alternatives can increase public acceptance of these changes.
The gradual removal of fuel subsidies in Indonesia and Malaysia marks a turning point in the region’s approach to welfare and sustainability. While these subsidies were once a necessary tool for poverty alleviation, a contemporary context of global renewable energy transitions, budgetary strains and inequities has necessitated change. As both nations implement budgetary cuts to their fuel subsidies, the savings should be reinvested in welfare, infrastructure and education. This will simultaneously support renewable energy transitions and provide long-term financial assistance to the low-income communities that fuel subsidies originally intended to benefit.
Damian Shahfazli is the Indo Pacific Fellow for Young Australians in International Affairs. He recently completed a Bachelor of Arts and Bachelor of International Studies majoring in International Relations, Chinese Studies, and minoring in Politics at Macquarie University. Through his studies Damian had the opportunity to study abroad in Taiwan in 2023 for 6 months as a New Colombo Plan Mobility Grant recipient which drew his interest deeper into the Indo-Pacific. His research areas of interest surround cross-strait relations, diaspora studies and developmental state models in the region, which he wishes to explore throughout his fellowship.
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