Prasasti Reminds Government of Fiscal Discipline amid Global Uncertainty

Jakarta — The Prasasti Center for Policy Studies has urged the government to strengthen fiscal discipline and improve the efficiency of state spending to maintain Indonesia’s economic stability amid growing global uncertainty caused by escalating conflict in the Middle East.

Gundy Cahyadi, Research Director at Prasasti, stated in Jakarta on Tuesday that the escalation of the conflict between the United States and Iran has increased global geopolitical uncertainty.

“Prasasti estimates that tensions in the Middle East region have the potential to persist for a considerable period and carry implications for global economic stability, including Indonesia,” said Gundy.

According to him, the escalation of the conflict in the Middle East has the potential to create new pressures on the global economy, particularly through surging energy prices.

“At the beginning of the year, Indonesia’s economic outlook was actually relatively positive with growth projections in the range of 5.0–5.3 per cent. However, the conflict between the United States and Iran has begun to alter those projections,” Gundy explained.

Global oil prices that have risen above $100 per barrel have increased risks to the economies of energy-importing countries, including Indonesia, which still imports the majority of its oil requirements.

“Rising energy prices will increase production costs, undermine consumer purchasing power, and place pressure on the rupiah’s exchange rate,” said Gundy.

He stressed that if the surge in oil prices persists for a considerable period, the likelihood of Indonesia’s economic growth falling below 5 per cent becomes increasingly greater.

“The government must already begin to shift from business-as-usual mode to crisis mode,” he added.

Indonesia’s vulnerability to surges in global oil prices is also evident from a fiscal perspective. Indonesia’s strategic oil reserves are currently estimated to be sufficient for only approximately 23–26 days, far below the standard recommended by the International Energy Agency (IEA), which stands at 90 days of net imports.

In addition, rising oil prices have the potential to increase the burden of energy subsidies in the state budget.

In government simulations, he said, if the average oil price reaches approximately $92 per barrel, the 2026 budget deficit could widen to approximately 3.6–3.7 per cent of gross domestic product (GDP), exceeding the fiscal deficit limit of 3 per cent.

“This situation requires more careful fiscal management, particularly if global energy prices remain elevated,” said Gundy.

Piter Abdullah, Policy and Program Director at Prasasti, added that rising global oil prices will almost certainly drive pressure towards domestic fuel prices.

According to him, when global oil prices rise, the government basically faces two policy options: restraining the increase in fuel prices through larger subsidies or allowing domestic prices to rise with the consequence of increased inflation.

“If oil prices rise, there is certainly pressure for domestic fuel prices to rise as well, unless the government is prepared to bear larger subsidies,” said Piter.

However, the government’s fiscal space to restrain rising energy prices also has limits. Efforts to keep fuel prices from rising too sharply have the potential to significantly increase the subsidy burden in the state budget.

On the other hand, if the increase in fuel prices is released completely to the market, the impact can be felt directly on inflation. Fuel prices make a significant contribution to inflation, both directly and through cascading effects on transportation costs, logistics, and other commodity prices.

“With this rise in oil prices, inflationary pressure is likely to increase. At the same time, the government’s subsidy burden could also expand, thus the pressure on fiscal conditions will intensify,” he said.

In a situation of heightened global uncertainty, Piter believes the government needs to strengthen fiscal discipline and ensure that state spending is directed towards the most strategic programmes.

External pressures such as surges in energy prices, global market volatility, and potential economic slowdown require the government to be more selective in managing the state budget.

“The government needs to ensure that every rupiah of state spending is truly directed towards programmes that deliver the greatest economic impact,” he said.

He added that in a situation of geopolitical conflict with the potential to persist for an extended period, fiscal policy can no longer be implemented in a business-as-usual manner.

Sharpening budget priorities and improving the efficiency of state spending have become important measures to maintain economic stability.