Lyndon B. Johnson once observed that an economic speech can seem much more impressive to the person delivering it than to those listening. Johnson’s observation captures the gap that can exist between the enthusiasm with which economic achievements are presented and how they are actually perceived. That distinction is worth bearing in mind when considering Indonesia’s recent growth figures. The government touts first-quarter 2026 GDP growth of 5.61%, higher than in most other countries, yet the number warrants further examination.
This matters all the more because of the current military conflict between the United States and Iran. The conflict led to the closure of the Strait of Hormuz, disrupting shipping, driving up oil prices, and causing economic disruption and volatility worldwide.
Indonesia is no exception, given that imported oil made up 48% of its energy imports in 2023. The price of non-subsidised gasoline has risen sharply. In the first quarter of 2026, the government expenditure on subsidy for low-grade subsidised gasoline (Pertalite) and partly subsidised gasoline (Pertamax) was 266.6% more than in the same period a year earlier (Q1 2025), with 26.6% of the national budget going to subsidised petroleum products.
The pain from the increase in fuel prices, however, was not evenly spread. The fuel price increases drove up transportation and food costs, the two categories tAhat weigh most heavily in poorer households’ budgets. Therefore, the headline figure understates what ordinary families actually felt at the market.A
Still, the Hormuz Strait closure is not simply a story of external pressure damaging Indonesia’s economy. It is a stress test: a sudden shock that exposes the underlying troubles created by the bad economic policies Indonesia is currently pursuing in the name of efficiency, all to fund white elephant programs, namely the national Free Nutritious Meals (Makan Bergizi Gratis/MBG) and the Red and White Cooperatives (Koperasi Desa Merah Putih/KDMP).
On paper, both programs are beneficial, since each addresses real economic problems facing Indonesia’s poor. MBG provides free lunches for schoolchildren, while the KDMPs are meant to stimulate village economies by injecting liquidity: supplying essential goods such as cheap fertiliser, buying up local products, and offering savings and loans to villagers.
In reality, both programs are deeply problematic. Because they are national priorities under President Prabowo Subianto's administration, they command a large share of the budget. To keep MBG from blowing a hole in the deficit, the government creatively reclassified part of its costs as national education spending, thereby pushing almost 30% of the national education budget toward the program.
None of this would matter much if implementation were efficient. MBG has been marked by waste, with money going to overpriced items, students poisoned by poorly prepared meals, lost income for the small canteen owners who used to feed those students, and projects steered to the politically connected elite. KDMP has drawn its own controversies: its rollout consumed 58% of the national budget earmarked for village development, effectively cutting 70% of the villages’ own budget, money normally spent on building infrastructure.
With so much of the state budget absorbed by MBG and KDMP, Indonesia’s capacity to absorb the financial fallout from the Hormuz Strait closure was already compromised. Furthermore, the structure of the government makes matters worse: the Prabowo administration has the largest cabinet since the 1960s, thus increasing government expenditure while adding additional bureaucracy.
The result is overlapping responsibilities among special staff, ministers, and agencies, dragging down both the efficiency and the performance of the government. The administration has waved away the possibility of a crisis, insisting it is well prepared and pointing to the 5.61% first-quarter GDP figure. Yet according to Indonesia’s Central Statistics Agency (Badan Pusat Statistik/BPS), 21% of that growth came from government consumption, notably the Eid bonus payments and MBG itself.
When government expenditure is the primary driver of growth, and when that expenditure does not go toward improving productivity, the growth is real but not sustainable. The state cannot spend its way through a fuel subsidy crisis that it is simultaneously funding. In the meantime, private consumption is down amid the slowdown, weighed down by pessimism and uncertainty at home and abroad. The government, in short, is skating on thin ice. Not surprisingly, independent economists have warned that Indonesia could be bankrupt within three months.
The longer the Hormuz closure lasts, the sharper the political bind becomes. Fuel price increases have a long history of putting Indonesians in the street, from the unrest that helped end Suharto's rule to the protests that met subsidy cuts in 2013 and again in 2022.
The Prabowo administration now faces economic troubles, with a smaller fiscal cushion than any of his predecessors. If the price of oil stays high, he can hold pump prices down only by widening a deficit he is already straining to contain, or he can cut further and push more of the burden onto households that are already migrating to the cheapest subsidised grade. Neither path is comfortable, and both run through a population whose patience is finite. The economic stress test is therefore also a political one, and the administration's oversized, overlapping cabinet is not obviously built to manage it.
At the end of the day, the international crisis is not the root cause of Indonesia’s problems. It is merely the straw that breaks the camel’s back, the point at which a warm sensation is mistaken for proof of a well-oiled economy.
