Indonesia's government has been allocating more and more of its state budget to fuel subsidies over the years. From IDR 45 trillion (US $4.62 billion) in 2009 to IDR 211.9 trillion (US $21.7 billion) in 2012. This year, the government intends to spend IDR 193.8 trillion (US $19.9 billion) on the country's fuel subsidies but history has shown that an extra allocation later in the year is possibly needed to meet demand. Most Indonesian politicians realize the need to reduce these subsidies (and instead spent it on infrastructure or healthcare), but it would imply large political risks as public outrage will follow due to inflationary pressures. Considering that national elections are to be held next year, it would not boost popularity to increase fuel prices now. In combination with weak national oil & gas production and a rising international oil price, it seriously burdens the government budget balance as well as the country's trade deficit.

Initially, these energy subsidies (fuel and electricity) were introduced to support basic needs of the poor. However, by keeping these energy prices artificially low, price signals are blurred, consumption and investment decisions are distorted, and the vulnerability of public finances to international oil-price volatility is increased. It is also assumed that richer households benefit more of these subsidies than poorer households do. This year the government is increasing the electricity tariff gradually. Up to the end of this year, electricity rates will increase every quarter by about four percent to reach a total increase of 15 percent.

The IDR rupiah is currently on a seven quarter losing streak, its longest losing streak since 1998. It has weakened 0.83 percent to the US dollar so far this year.

| Source: Bank Indonesia