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Financing Development With Fossil Fuel Subsidies: The reallocation of Indonesia's gasoline and diesel subsidies in 2015

At the very end of December 2014, Indonesia introduced major reforms to its fossil fuel subsidies, removing subsidies to gasoline (except for distribution costs outside of the central islands of Java, Bali and Madura) and introducing a “fixed” subsidy of IDR 1,000 per litre for diesel.

At the same time, world oil prices plummeted. Together, these changes led to massive fiscal savings, equal to IDR 211 trillion (USD 15.6 billion)—over 10 per cent of state expenditure.

This study investigates two central questions: Where were these savings reallocated? and Is the new expenditure doing a better job for Indonesia’s development than subsidies? It concludes that fuel subsidy reform and reallocation in Indonesia have been a major step forward in improving public expenditure.

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