JAKARTA, June 11 (Reuters) - The World Bank said on Thursday that Indonesia's economic growth was expected to slow to 5% in 2026 as it comes under increasing fiscal strain from an ambitious spending programme and the rising cost of fuel subsidies in the wake of the Iran war.
The forecast by the World Bank is lower than Indonesia's growth projections of 5.4% to 6%.
Indonesia has been dogged by heavy capital outflows this year, with the rupiah sinking to record lows and the stock market plunging more
than 30% in response to investor concerns about President Prabowo Subianto's big spending plans, even as fuel subsidies from the state budget balloon.
"The 2026 projection reflects stronger-than-expected Q1 outcomes and frontloaded public spending, rather than a more benign external environment or assessment of risks," the World Bank's assessment of Indonesia's economy said.
It said the growth rate relied on the ability of the government's fiscal stimuli to drive public consumption, which brings about risk because of the country's limited room to manoeuvre when it comes to spending.
"Higher oil prices raised the cost of energy subsidies and compensation, while rupiah depreciation increased external debt-servicing costs," the report said.
The World Bank called on the government to gradually readjust fuel subsidies to stem the rising fiscal pressure.
Indonesia has been using state finances to keep fuel prices unchanged, a move aimed at shoring up public support. It raised prices for only two types of widely used gasoline by 32% earlier this week in a move analysts interpreted as a recalibration of policy.
The World Bank report warned that generalised subsidies end up benefiting richer households rather than vulnerable sections of the population.
Fuel prices are politically sensitive in Indonesia, and raising them has sparked protests across the archipelago of 280 million people.
The report said the oil shock presented a window to reform the subsidy programme and shift towards more targeted aid, including cash transfers to the poorest 40% of households and the reallocation of savings for social protection and investment.
(Reporting by Stanley Widianto; Editing by David Stanway)
