World Bank Forecasts Indonesian Economy Will Slow to 5%

The World Bank stated on Thursday that Indonesia’s economic growth is expected to slow to 5% in 2026 due to increasing fiscal pressure from ambitious spending programmes and rising fuel subsidy costs following the Iran war. The World Bank’s forecast is lower than Indonesia’s growth projection of 5.4% to 6%. Indonesia has been hit by large capital outflows this year, with the rupiah plunging to an all-time low and the stock market slumping more than 30% in response to investor concerns about President Prabowo Subianto’s major spending plans, even as state budget fuel subsidies have ballooned. “The 2026 projection reflects stronger-than-expected first-quarter results and public spending concentrated at the beginning of the year, not a better external environment or risk assessment,” the World Bank assessed regarding the Indonesian economy. It noted that the growth rate depends on the government’s fiscal stimulus ability to drive public consumption, which poses risks owing to the state’s limited spending room. “Higher oil prices increase the cost of energy subsidies and compensation, whilst the rupiah’s depreciation raises the cost of foreign debt payments,” the report said. The World Bank called on the government to gradually adjust fuel subsidies to curb mounting fiscal pressure. Indonesia has used state finances to keep fuel prices unchanged, a move aimed at bolstering public support. The government raised prices for only two widely used petrol types by 32% earlier this week, a move interpreted by analysts as a policy adjustment. The World Bank report warned that general subsidies ultimately benefit wealthier households more than vulnerable groups. Fuel prices are a politically sensitive issue in Indonesia, and price hikes have triggered protests across the archipelago of 280 million people. The report said the oil price shock provides an opportunity to reform subsidy programmes and shift to more targeted assistance, including cash transfers to the poorest 40% of households and reallocating savings towards social protection and investment.