Because of its heavy subsidies, Indonesia the end of 2012 had the lowest fuel prices of any net oil-consuming nation in the world, the World Bank said. While the United States was ranked second-lowest, U.S. gasoline is nearly twice as expensive.
The budget approved Monday calls for prices to increase 44 percent per liter for gasoline and 22 percent per liter for diesel. It is the first fuel price increase since 2008.
While Indonesia's fuel subsidies are driving demand, they are also affecting the state budget.
The Finance Ministry has said spending on fuel subsidies could reach $23 billion this year compared with about $20 billion in 2012. When electricity subsidies are factored in, total subsidies could end up costing the government about $32 billion or 20 percent of its 2013 budget.
The ministry has projected the country will exceed the 2013 budget quota of of 46 trillion liters, or 12 trillion gallons, of subsidized fuel by at least 15 percent or more.
"They have to increase the prices because we are bleeding in our budget," Didik Rachbini, a prominent economist and member of the president's National Economic Council, was quoted as saying by The New York Times.
An attempt last year to increase the price of fuel was shelved after massive protests against the proposed hikes turned violent.
By contrast, only about 2,000 people participated Wednesday in a protest against the government's decision, a sign perhaps public discontent on the issue has calmed down, The Wall Street Journal reported.
A World Bank analysis showed 40 percent of the direct benefits to households from Indonesian gasoline subsidies go to the richest 10 percent, and less than 1 percent to the bottom 10 percent.
The World Bank and other international lenders have urged the government to abandon its subsidy program all together, saying spending from fuel subsidies should be redirected to more critical areas such as social programs and infrastructure investment.
The date when the fuel price increase goes into effect has not yet been announced. The bill must be signed by the president before it can become law.
"The government will increase the price of subsidized fuel but we will need time," The Jakarta Post quoted Finance Minister Chatib Basri as telling reporters Tuesday.