Direct Cash Transfers: Why They Remain Essential in Indonesia’s Fuel Subsidy Cuts

The Indonesian government has recently cut fuel subsidies and raised fuel prices. Similar to the 2005 and 2008 fuel price hikes, the government provided unconditional direct cash transfers to poor households with the aim of helping them cope with the impacts of such price increases.

The recent decision to deploy the IDR 9.33 trillion (SGD 1.18 billion) worth of temporary direct cash transfers (BLSM) was controversial. Oppositions discern vested political interests as such disbursements inevitably heighten popular support for the ruling party. Such measures are also perceived to nurture hand-out mentalities and increase dependencies instead of empowering poor people to get out of poverty definitively. Questionable survey methods, lack of accuracy in identifying beneficiaries, protests and chaotic incidents during disbursement in some areas, and irresponsible use of the money given are among other criticisms directed towards this initiative.

While all these concerns are not baseless, the elimination of direct cash transfers in the face of fuel price increase is unthinkable. Despite some irregularities, the 2005 and 2008 direct cash transfers (BLTs) have set a precedent for subsequent social protection programs aimed at cushioning the impacts of fuel price rise. In March 2007, although possible statistical errors were acknowledged, the percentage of poor households was successfully stunted at 16.58% from a previous estimated rise to 22%. Contrary to the belief that the recipients would spend their money on cigarettes or alcohol, a large majority of them turned out to use the extra cash to buy rice. There was also lack of evidence that pointed to complacency and reduced labour force participation. In general, the distributed cash had resulted in stronger purchasing power and benefited the poor to meeting their daily needs.

The current disbursement of BLSMs is clearly modelled after the success of previous cash transfers. In comparison to medium to long-term social protection programs, such as job creation through funding for small to medium enterprises (SMEs), direct cash transfer is indeed very effective in mitigating the immediate sting of fuel price rises. Its winning advantage lies in its ability to temporarily curb swelling economic and social grievances while other measures are being taken to control the damage resulting from price changes. The 4-month disbursement period is drawn based on confidence that impacts of inflation would become insignificant in the fourth month. To date, it has successfully averted widespread protests, riots, and other destabilising occurrences.

In this light, it is apparent that direct cash transfers are indispensable in minimising aversion to price reforms. Admittedly, there is a wide room for improvements in terms of logistics and implementation. As far as the purpose is concerned, however, oppositions attempting to problematise these measures and label them as politically-charged initiatives would likely find their efforts futile. Fuel subsidies may further be reduced in the future and the expectation for extra cash would hold among poor households. What is critical therefore is in ensuring that such cash transfer programs are crafted within a wider long-term poverty eradication strategy and improvements are pursued to attain maximum impact.

This blog post has been written by Margareth Sembiring. She is a Research Analyst at the Centre for Non–Traditional Security (NTS) Studies in the S. Rajaratnam School of International Studies (RSIS).