Strengthening Fiscal Resilience Amidst Global Conflict

The world is entering a phase of instability unprecedented since the Cold War’s end. Data from the Uppsala Conflict Data Program (UCDP) records significant increases in state-based conflicts, reaching their highest levels in recent decades. Conflicts have not only increased in number but also in intensity and duration.

Recent Global Peace Index (GPI) figures indicate that war casualties through 2025 have reached record highs for the twenty-first century, with hundreds of thousands of deaths and millions displaced by escalating armed conflicts.

Wars and armed violence continue unabated across various regions in 2026. Accordingly, the GPI projects that the Ukraine-Russia war will claim approximately 28,300 lives during 2026, while the Gaza conflict will result in roughly 7,700 deaths.

Meanwhile, the Institute for Economics and Peace (IEP) in the latest Global Peace Index estimates the economic impact of global violence has reached more than $19 trillion US annually—equivalent to approximately 13 per cent of global GDP. This figure reflects not only direct warfare costs but also lost productivity, refugee burdens, infrastructure damage, and systemic instability disrupting global economic architecture.

Geoeconomic Fragmentation and Its Impact on Developing Nations

Geoeconomic fragmentation is not merely academic terminology. It manifests in trade restriction policies, economic sanctions, supply chain relocation (friend-shoring), and formation of blocs based on political alliances. The consequences include rising production costs, distribution disruptions, and investment uncertainty.

Within macroeconomic frameworks, a nation’s growth can be understood through the expenditure identity in GDP: Y=C+I+G+(X−M), where C represents household consumption, I total investment, G total government expenditure, and X-M the difference between exports and imports.

When global conflict disrupts exports (X) or increases energy imports (M), external GDP components face pressure.

Governments often respond by increasing expenditure (G) to maintain domestic economic stability. However, limited fiscal space necessitates careful implementation.

For Indonesia as a developing nation with an open economy, global fragmentation presents a paradox. On one hand, opportunities exist for industrial relocation from conflict-affected nations. On the other, commodity price volatility and capital flow risks pose serious dangers.

Indonesia’s Fiscal Risks Amid Global Turmoil

As a member of Commission XI of the Indonesian Parliament overseeing finance and development planning, I believe Indonesia’s primary 2026 challenge is not merely growth, but fiscal resilience.

Several urgent challenges and risks require immediate attention: First, energy price and subsidy risks. Conflicts in energy-producing regions risk driving global oil and gas price surges. Price increases may boost state revenues short-term but risk expanding energy subsidies. Without properly targeted subsidy reform, the state budget faces significant pressure.

Second, capital flow and exchange rate stability risks. When global tensions rise, investors typically redirect portfolios to safe assets. Capital outflows can depress exchange rates and increase debt financing costs. Financial sector stability must be maintained through close coordination between government, central bank, and financial services regulators.

Third, global trade slowdown risks. If conflicts expand and reduce global demand, Indonesian exports will suffer. Dependence on raw commodities leaves us vulnerable to international price cycles. Market diversification and increased domestic value-added production become essential.

The State Budget as an Instrument of Protection and Transformation

The state budget is not merely an annual fiscal document. It is a strategic instrument for protecting citizens from external shocks whilst transforming economic structure.

In a globally uncertain environment, fiscal policy must meet three principles: prudence, flexibility, and accountability. Indonesia’s debt-to-GDP ratio remains relatively controlled compared to many nations, yet fiscal space remains limited.

Unthinking spending expansion risks increasing deficits and burdening future generations. Therefore, spending priorities must focus on productive sectors such as education, health, strategic infrastructure, and digital transformation.

Reform Agenda for Long-Term Resilience

Facing an increasingly fragmented world, Indonesia must do more than merely endure. We must implement structural reform strategies, including the following:

First, building a robust tax base. Indonesia’s tax ratio remains relatively low compared to middle-income country averages. Administrative reform, tax digitalisation, and tax base expansion will increase fiscal capacity without raising debt.

Second, enhancing spending efficiency and quality. Every rupiah in the state budget must deliver optimal impact. Performance-based evaluation and budget transparency must strengthen to enhance public trust.

Third, accelerating downstream processing and industrialisation. Dependence on raw material exports magnifies vulnerability to global volatility. Natural resource downstream development and strengthened high-value-added export-oriented manufacturing become crucial strategies.

Fourth, strengthening adaptive social safety nets. In global crises, vulnerable groups suffer most. Unified data-based social protection systems must respond rapidly without creating budget waste.

Economic Diplomacy and Active Free Foreign Policy

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