As sorely-needed infrastructure investment remains elusive, reducing contentious fuel subsidies is crucial for Indonesia's next president.
Indonesians head to the polls on July 9 to elect a new president in the world's third largest democracy.
"Fuel subsidies are one issue the next government must address quickly," said Budi Sadikin, chief executive officer of Bank Mandiri – Indonesia's largest bank by assets. "When you relieve money from subsidies, it can be used for something much more productive, such as infrastructure investment."
Fuel subsidies are among Indonesia's biggest budget expenditures – greater than healthcare and infrastructure spending, according to IHS.
In 2013, the government allotted $16.5 billion – from a total budget of about $95 billion – to fuel subsidies, and spent an extra $2 billion due to higher oil prices. This year, it budgeted $18 billion.
However, fuel subsidies are inefficient as those most in need of government assistance do not own cars, analysts said. Furthermore, energy imports contribute significantly to Indonesia's trade deficit.
Indonesia is grappling with twin budget and current account deficits, which stood at 2.2 percent and 3.3 percent of gross domestic product (GDP), respectively, in 2013. Twin deficits broadly reflect a situation where government spending exceeds revenues and the economy is importing more than it is exporting.
This is a source of concern among investors particularly given a backdrop of a slowing economy. Indonesia's economy grew 5.2 percent on year in the January-March quarter, its slowest pace in more than four years, down from 5.7 percent in the fourth quarter of 2013.
The economic rationale for gradual fuel subsidy cuts as interim steps towards a complete elimination is evident, said Anton Alifandi and Simona Mocuta, analysts at IHS.
Raising fuel prices would reduce demand for government-funded fuel while freeing up funds for infrastructure construction.