Deni Ghifari, Jakarta – The government has doubled down on its growth target for gross domestic product, insisting that it will achieve or even exceed the figure set in the state budget despite the shock from the United States-Israel war on Iran, which has prompted the World Bank to downgrade its projection for Indonesia.
Coordinating Economy Minister Airlangga Hartarto told reporters on Thursday that GDP growth this year would be "greater than or equal to" the 5.4 percent targeted in the budget.
However, he added: "All of this will be dependent on the geopolitical conditions, [whether things are] stable or not. The war is still ongoing, [...] so we will certainly adjust accordingly with the dynamics playing out."
The World Bank, in its East Asia & Pacific Economic Update published on Wednesday, lowered Indonesia's 2026 growth projection to 4.7 percent from the 4.8 percent it forecast last October, though its 2027 projection puts the country's economic growth at 5.2 percent.
According to the report, the downgrade is on account of "headwinds" from the Iran war, to which Indonesia is less exposed than other countries in the region. It points to the country's strategic reserves, domestic refining capacity and commodity export revenues as providing a "natural hedge", giving Indonesia a "greater capacity to absorb the shock".
Similarly, the Organisation for Economic Co-operation and Development (OECD) also downgraded its 2026 growth projection for Indonesia to 4.8 percent from 5 percent forecast in December, according to its Economic Outlook published in late March.
For weeks the war has pushed global oil prices beyond US$100 per barrel, far above the $70 assumption in Indonesia's state budget plan.
Prices cooled slightly last week after Washington and Tehran announced a ceasefire, with Brent crude trading at around $96 per barrel on Friday.
Subsidy dilemma
If average oil prices remain above the budget assumption for the full year, the government must set aside additional funds for subsidies to bridge the gap between elevated global oil prices and the fixed domestic prices of subsidized gasoline and diesel.
Airlangga said the state had to allocate "a bit more than" Rp 6 trillion ($350.6 million) for additional subsidy spending for every dollar increase beyond the oil price assumption.
That number represents the net difference in state coffers, taking into account revenue gains from increased prices of Indonesian export commodities.
The Middle East oil and gas supply disruption has driven demand for alternative energy sources, including key Indonesian exports coal and crude palm oil (CPO). As a result, the two commodities' prices rose and state revenue increased from taxes on their export.
To offset the oil price burden, the government toyed with the idea of introducing new windfall taxes on coal and CPO, but Airlangga dismissed that idea on Thursday. Instead, the government would introduce new exit duties for coal and nickel alongside royalty adjustments, he said, without disclosing details.
The government has delayed plans to introduce an exit duty for coal multiple times since late last year.
The senior minister said CPO levies would not change, since the commodity was already subject to higher duties when global prices rose.
Increased revenue from commodity exports partly offsets the fiscal burden caused by the global oil price surge, creating some wiggle room for policymakers and softening the blow on Indonesia's economic growth due to the Iran war.
The World Bank notes that Indonesia's current growth, which regularly touches 5 percent per annum, "exceeds estimates of potential growth, largely thanks to government support", and that the measures to sustain such a pace "may not be conducive to growth tomorrow".
"Reforms, such as addressing nontariff barriers, especially in services, as well as deregulation and business licensing simplification [...] could enhance potential growth and productive job creation," the report states, emphasizing the need for structural reforms to maintain future growth as opposed to constant reliance on the state budget for economic stimulus.
Finance Minister Purbaya Yudhi Sadewa, who is gunning for 6 percent growth this year, called the World Bank's downward revision a "miscalculation". He alleged the institution had "committed a grave sin" in generating negative sentiment by downgrading Indonesia's growth projection.
"I'm sure the World Bank calculated that [based on] the impact of high oil prices. If a month from now, oil prices go back down to the normal level, the World Bank will change its prediction all over again," Purbaya said on April 9.
"I will be waiting for their apology when oil prices go back to the normal level and they proceed with changing their economic prediction again," he continued.
"The World Bank may be right, but I don't know. What I know is the numbers that I have are improving, and we'll maintain that."
Permata Bank chief economist Josua Pardede told The Jakarta Post on Friday that the adjusted projections from the World Bank and the OECD did not signify "Indonesia losing resilience as much as it signifies that our domestic pillars face mounting external challenges".
In particular, Josua noted the "wide" gap between the two institutions' growth projections on the one hand and the state budget target on the other.
He said the government's goal was achievable only if several requirements were met, namely a decline in global volatility, eventual stabilization of energy prices at a not-too-high level, timely execution and productivity of government spending and recovery of investments.