JAKARTA, June 11 - The World Bank said on Thursday that Indonesia's economy is expected to decelerate to 5% growth in 2026 as fiscal pressures mount under a sizable government spending programme and escalating fuel subsidy costs in the wake of the Iran war.
The multilateral lender's forecast sits below Jakarta's own projections of 5.4% to 6% growth for the same period. The bank highlighted that the 2026 outlook rests more on stronger-than-expected first-quarter performance and the pre-positioning of public expenditures than on any reduction in external risks or a reassessment of those risks.
Indonesia has faced heavy capital outflows this year. Investor concerns about expansive government spending plans have contributed to a weakening rupiah, which has slid to record lows, and a stock market decline of more than 30%.
The World Bank noted that the growth trajectory assumes the government's fiscal stimuli will successfully bolster public consumption. It warned that this dependence is risky because of the country's limited fiscal headroom.
"Higher oil prices raised the cost of energy subsidies and compensation, while rupiah depreciation increased external debt-servicing costs," the report said. Those dynamics have pushed up the fiscal bill tied to energy support.
To manage the rising strain on public finances, the World Bank urged authorities to phase in adjustments to fuel subsidies. Indonesian policymakers have so far used state resources to keep fuel prices unchanged as a means of maintaining public support. Earlier this week, the government increased prices for two types of widely used gasoline by 32%, a step analysts interpreted as a recalibration of policy.
The report also warned that broad-based subsidies can disproportionately benefit higher-income households rather than the most vulnerable. Fuel price policy is politically sensitive in Indonesia and past increases have sparked protests across the archipelago of 280 million people.
According to the World Bank, the recent oil shock provides an opportunity to reform the subsidy framework toward more targeted assistance. The bank recommended measures such as cash transfers directed to the poorest 40% of households and reallocating savings from subsidy reductions into social protection and investment priorities.
Summary
The World Bank forecasts Indonesia's GDP growth will slow to 5% in 2026, below government targets, driven by mounting fiscal pressures from a large spending programme and rising fuel subsidy costs tied to higher oil prices and rupiah depreciation. The projection depends on frontloaded public spending boosting consumption, a strategy the World Bank characterises as risky given constrained fiscal space. It recommends gradual subsidy readjustment and a shift toward targeted support, including cash transfers to the poorest 40% of households, and redirecting savings to social protection and investment.
Key points
- World Bank projects 5% GDP growth for Indonesia in 2026, below Jakarta's 5.4% to 6% forecasts.
- Economic outlook relies on frontloaded fiscal spending to lift public consumption despite limited fiscal room; higher oil prices and rupiah depreciation raise subsidy and debt-servicing costs.
- Recommended policy shift toward gradual subsidy reform and targeted cash transfers to the poorest 40% of households, freeing resources for social protection and investment.
Risks and uncertainties
- Limited fiscal maneuverability raises the risk that stimulus may not sustainably drive consumption, affecting sectors dependent on domestic demand such as retail and services.
- Rising energy subsidy costs and rupiah depreciation increase government debt-servicing burdens, intensifying pressures on public finances and capital markets.
- Fuel price adjustments are politically sensitive and could trigger public protests, which may constrain policymakers' ability to implement targeted reforms and affect investor sentiment.
Note: The article reflects the World Bank's assessment and policy recommendations as presented in the report referenced above.