Jakarta (05/28/2026)

Indonesia is facing one of the most severe economic pressures in recent years. The rupiah’s exchange rate against the US dollar has been declining consistently since the start of 2026, and by the end of May the figure has even approached Rp18,000 per dollar  a level not seen since the monetary crisis era of 1998. Far more than just a number on a trading screen, this weakening is slowly eroding public purchasing power, burdening the state budget, and shaking investor confidence.

At the same time, the country’s fiscal condition is not at its best. The state budget deficit continues to widen, budget allocations remain not fully on target, and an ever-growing debt burden is narrowing the government’s room for maneuver. The question is no longer simply why the rupiah is weakening, but rather how prepared Indonesia is to face its consequences and what must be done now.

The Beginning: How the Rupiah Started to Slip

The rupiah’s weakening did not happen overnight. Structurally, the pressure on the rupiah is a natural consequence of Indonesia’s current account deficit. When demand for dollars rises driven by import needs, foreign debt repayments, and the repatriation of foreign investment profits pressure on the rupiah becomes difficult to avoid.

The primary trigger in 2026 was the United States’ sustained high interest rate policy, compounded by global geopolitical uncertainty from Middle Eastern conflicts to escalating trade tensions between major powers. The Head of Bank Indonesia’s Communications Department, Ramdan Denny Prakoso, emphasized that nearly all currencies worldwide have similarly weakened under the same conditions, meaning the rupiah is not the only one affected.

At the domestic level, seasonal factors have also played a role. Bank Indonesia Governor Perry Warjiyo explained that pressure on the rupiah tends to intensify every year between April and June, due to high dollar demand for corporate foreign debt repayments, dividend repatriation, and foreign exchange needs for the Hajj pilgrimage season. Additionally, new policies surrounding export controls have been seen as affecting investor confidence, with investors tending toward caution when trade policies are perceived as creating economic uncertainty.

From Rp17,000 Toward Rp18,000

The exchange rate surge has been rapid. On Tuesday, May 19, 2026, the rupiah touched Rp17,700 per US dollar. Just a few days later, on May 28, 2026, the rupiah depreciated again to around Rp17,871 per dollar on the spot market. By the close of that same day, the figure had briefly exceeded Rp17,845 approaching the psychological level of Rp18,000 that has now become a shared concern.

For context, the exchange rate assumption set by the government in the 2026 State Budget was only around Rp16,500 per US dollar, within a range of Rp16,200 to Rp16,800. This means the actual exchange rate has already far exceeded the government’s official projections —a signal that cannot be ignored.

The government’s response so far has been largely defensive. President Prabowo Subianto, while inaugurating the Marsinah Museum in Nganjuk on May 16, 2026, urged the public not to worry too much, on the grounds that rural residents do not transact in dollars. Finance Minister Purbaya Yudhi Sadewa subsequently clarified that the President’s statement was purely intended to reassure the public, while affirming that Indonesia’s economic and fiscal fundamentals remain solid.

The State Budget in Double Jeopardy

The rupiah’s weakening does not only affect the private sector, it hits state finances directly. When the exchange rate weakens, every component of the state budget tied to dollar transactions automatically balloons.

Energy subsidies have been the hardest hit. The cost of crude oil imports surges sharply when converted to rupiah, while the government faces a dilemma: if subsidies are increased, the budget deficit widens further; if fuel prices are raised, the burden on an already pressured public grows heavier.

Foreign debt obligations also rise automatically. Although their nominal dollar value remains unchanged, conversion into rupiah forces the government to allocate enormous additional funds. In 2026, the allocation for debt interest payments alone has reached approximately Rp600 trillion, with the debt service ratio relative to state revenue projected to approach 40% meaning nearly half of all state income goes solely toward servicing debt.

Fiscal data through March 2026 shows the state budget deficit has reached Rp240.1 trillion, or 0.93% of GDP. More worrying still, the primary balance has recorded a deficit of Rp95.8 trillion  already exceeding the 2026 State Budget’s maximum threshold of Rp89.7 trillion, despite the year having only just entered its first quarter. Bank Permata Chief Economist Josua Pardede views this as a signal that fiscal pressure is emerging faster than anticipated, and has warned that the budget deficit could widen to between 2.75% and 2.95% of GDP.

Behind these figures lies a more fundamental problem: budget allocations that are not yet fully efficient. Of the 98 ministries and institutions in the 2026 State Budget, 77 have experienced budget reductions, including in sectors that directly serve the basic needs of the public. Meanwhile, certain priority programs absorb a large share of the limited total expenditure. When state budget allocations do not function optimally, it is the most vulnerable in the lower classes who feel the effects first from declining healthcare service quality to neglected basic infrastructure.

Impact on the Halal Industry and Islamic Banking

Indonesia: The World’s Largest Muslim Market

Amid the exchange rate turmoil, one sector deserves particular attention: the halal industry and Islamic finance. Indonesia is not merely home to the world’s largest Muslim population for more than 241 million people while also the world’s largest consumer of halal products, accounting for 11.34% of total global halal spending (Ministry of Economic Affairs, 2022). In 2024, the value of Indonesia’s halal market was estimated at USD318.91 billion, with projected annual growth of 14.2% through 2032 (Data Bridge Market Research, 2024).

On the global stage, Indonesia climbed to third place in the Global Islamic Economy Indicator in the State of the Global Islamic Economy Report 2023/2024, surpassing the United Arab Emirates and Bahrain. Indonesia’s halal product trade even surpassed USD53.73 billion in just the first ten months of 2024.

Essential Halal Needs: A Market That Endures

On the consumption side, halal products for primary needs such as food, beverages, and medicines are expected to maintain a strong market even as purchasing power comes under pressure. The reason is straightforward: Muslim consumers have no alternative but to continue consuming halal products for their daily needs. The food and beverage segment, which dominates the largest market share, will retain stable demand.

However, conditions are different for tertiary needs, such as premium Muslim fashion, high-end halal cosmetics, halal tourism, and other lifestyle products. Amid economic pressure, consumers are beginning to tighten spending in these categories. Those who were previously active buyers of non-essential halal products now tend to postpone or reduce purchases, potentially dampening growth across the tertiary segment of the halal industry.

Islamic Banking: Not Immune, But Structurally Advantaged

Academic Dimas Bagus Wiranatakusuma of Muhammadiyah University of Yogyakarta has asserted that the myth of Islamic banking’s immunity to global crises is now facing a genuine test. The rupiah’s weakening creates a chain reaction through imported goods inflation, which ultimately erodes the repayment capacity of borrowers particularly in trade, manufacturing, textiles, pharmaceuticals, and import-dependent SMEs. This is what has the potential to drive up non-performing financing (NPF) ratios.

On the liquidity side, when Bank Indonesia maintains high interest rates to defend the rupiah, funding costs across the financial sector rise as well as a condition that still affects Islamic banks, even though this system does not recognize interest.

Nonetheless, Islamic banking holds a structural advantage: its exposure to foreign currency instruments and international derivative transactions is relatively limited compared to conventional banks. Bank Syariah Indonesia (BSI) in its Sharia Economic Outlook 2026 projects total national Islamic financial assets to grow from Rp3,158 trillion in 2025 to approximately Rp3,508 trillion in 2026 around 14.8%. The principles of asset-backed financing, risk-sharing, and the prohibition of speculation may in fact serve as a foundation of stability amid market turbulence.

Exports and Imports: Two Sides of the Same Coin

The rupiah’s weakening produces an asymmetric impact on Indonesia’s trade balance.

On the export side: A weak rupiah theoretically makes Indonesian products more competitive and cheaper in international markets. However, this benefit cannot be felt immediately, as the export process requires preparation time. More importantly, this advantage is only enjoyed by exporters using local raw materials, particularly commodity-based products such as palm oil, coal, and rubber. Industries that still rely on imported raw materials, by contrast, face a double squeeze: production costs rise while domestic purchasing power falls.

On the import side: The impact is far more uniform and immediately felt by the public. Indonesia remains heavily dependent on imports for industrial raw materials, fuel components, and nearly 90% of active pharmaceutical ingredients. Higher import costs mean higher production costs across virtually every industry, ultimately translating into higher consumer prices.

How Long Will This Last? 

Bank Indonesia projects that pressure on the rupiah will begin to ease in July to August 2026, following the conclusion of the Hajj season, corporate dividend repatriation, and the foreign debt repayment cycle. Governor Perry Warjiyo affirmed that, based on historical experience, the rupiah typically regains strength during that period and is expected to return to the Rp16,200–Rp16,800 per dollar range in line with the State Budget’s macroeconomic assumptions.

Research from BRI’s Office of Chief Economist is consistent with this, projecting the average rupiah exchange rate at year-end 2026 to return to around Rp16,959 per US dollar, provided global market sentiment improves and foreign capital inflows resume.

However, economists caution that these projections are heavily contingent on three conditions: fiscal discipline from the government, domestic political stability, and Indonesia’s ability to attract foreign capital flows back. Senior Economist at Paramadina University, Wijayanto Samirin, has warned that if the rupiah were to break through Rp20,000 per dollar, the greatest threat would not be the figure itself, but rather the psychological factor  such as loss of market confidence and public panic far more difficult to contain.

Wijayanto recalled the precedent of the 1998 crisis: when President Soeharto stepped down on May 20, 1998, the rupiah stood at Rp10,000 per dollar. Within just a few weeks, it collapsed to Rp16,800 not because of fundamental factors, but purely because of panic and the collapse of confidence. He stressed that similar panic is typically triggered when the public and the business community do not perceive any genuine sense of crisis or serious commitment from the government.

Summary: A Momentum That Must Not Be Wasted

The rupiah’s weakening is an alarm, not merely a routine market correction. On one hand, the government and Bank Indonesia assure the public that economic fundamentals remain strong  and there are arguments to support that view. On the other hand, the fiscal figures and the pressures felt by the public tell a different story.

Most concerning is the state of the budget: when nearly half of state revenue is consumed by debt interest payments, and when budget allocations for the public’s basic needs healthcare, basic education, and rural infrastructure. Must be cut in the name of efficiency that is not always well-targeted. The rupiah’s weakening is no longer merely a monetary problem, it becomes a mirror of deeper structural vulnerability.

Indonesia possesses formidable assets: the region’s largest domestic market, a strategic position in the global halal economy, abundant natural resources, and favorable demographics. But those assets will only bear fruit if managed through policies that are sound, transparent, and genuinely oriented toward the welfare of the people.

The rupiah’s weakening should serve as a momentum for reform, not merely a temporary condition to be waited out. Strengthening domestic industry, improving fiscal governance, ensuring trade policies that do not destabilize investor confidence, and deepening the Islamic financial ecosystem are steps that can no longer be indefinitely deferred.

Because ultimately, those who bear the heaviest burden of every economic policy decision are ordinary people: small traders whose raw material costs have risen, patients facing inflated medicine prices, families whose debt installments feel ever harder to meet. They cannot afford to wait much longer.

Written by: Alhayya Maritza

REFERENCES

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Yustika, A. E., et al. (2015). Berselancar di atas ombak: Refleksi ekonomi Indonesia 2015–2018. Penerbit Buku Kompas.

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