Jakarta. An analyst recently warned that war-induced oil price hikes would cause Indonesia's budget shortfall to widen to almost 4% of the gross domestic product (GDP), thereby breaching its legal cap.

The US-Israeli strike against Iran has triggered closure risks of the Strait of Hormuz, which handles 20% of the global oil shipments. Hakam Naja, an economist at the think-tank Indef, said that disruptions to the strait could cause oil prices to skyrocket. And this can spell bad news for Indonesia’s budget deficit. 

“If oil prices reach $100 per barrel, our state budget deficit can near 4% of the gross domestic product [GDP],” Nakam said over the weekend.

Indonesia’s 2026 budget assumed a domestic crude oil price of around $70 per barrel. Prices had reached around $92 per barrel when Nakam made his statement. The global oil benchmark, known as Brent, has now topped $100 a barrel. According to Nakam’s estimates, a $1 per barrel increase in oil prices can cause the Indonesian budget deficit to soar by around Rp 6.8 trillion (almost $400 million). Over the years, Indonesia has been aiming to keep its deficit at no more than 3% of the GDP.

As a widening deficit looms, Nakam suggested Indonesia should improve its budget efficiency, among others, by focusing spending on sectors that are closely related to public needs, be it social aid, energy, or education, among others. Finance Minister Purbaya Yudhi Sadewa recently said that the government would cut the budget for the cost-heavy free meal rollout to keep the deficit below the 3% limit. This year, the government has set aside Rp 335 trillion (almost $19.7 billion) to dish out free meals for schoolkids and expectant mothers.

“We have made the calculations. If oil prices stand at around $92 throughout the year on average, the budget shortfall will stand at 3.6% of GDP. We will take measures to prevent that from happening. So perhaps we can cut the free meal budget,” Purbaya told reporters in Jakarta on Friday.

The government is also open to postponing spending on infrastructure projects.

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