The Ministry of Finance informed the Parliamentary Committee on Finance that the ongoing conflict in West Asia could have a fiscal impact during 2026–2027 (FY27).
According to the committee's report presented to Parliament on Wednesday, the Department of Economic Affairs (DEA) of the Ministry of Finance noted that the developing conflict in West Asia is beginning to put pressure on economic activity and may have fiscal consequences in 2026–2027.
The government aims to reduce its fiscal deficit to 4.3 percent of gross domestic product (GDP) in FY27, compared to 4.4 percent last year.
An analysis previously submitted to the committee by the Chief Economic Advisor (CEA) V. Ananthy Nageswarana showed that the fiscal deficit could be around 4.3–4.4 percent of GDP if crude oil prices reach $90 per barrel. However, if crude oil prices rise and remain close to $130 per barrel, the fiscal deficit will increase to 5.6 percent of GDP.
The committee pointed out that the war in West Asia could lead to a 'triple blow' due to rising crude oil prices, market volatility, and delays in sea transport. Nevertheless, the Ministry of Finance's DEA informed the committee that the central government is starting the fiscal year from a position of relative caution.
The fiscal consolidation path followed in recent years, combined with a conservative budget assumption of gross tax revenue growth at 0.8 (which is below the historical average) and the creation of an Economic Stabilization Fund (ESF) in public accounting, provides opportunities for fiscal intervention.
The Ministry specified that the ESF fund of approximately 1 trillion gives the government flexibility to absorb short-term shocks of moderate intensity without immediately deviating from the target fiscal deficit.
These fiscal concerns arise against the backdrop of the Center maintaining tight control over its fiscal deficit in the first quarter of FY27. According to public finance data, the deficit expanded by 9.6 percent year-on-year (Y-o-Y) to approximately 3.1 trillion between April and June.
However, the limited growth in the deficit was largely due to the timing of tax revenue transfers to states, rather than broad improvements in income or slowdowns in spending.
To ensure long-term stability amid volatile crude oil prices, the committee recommended that the DEA develop a strategic framework for mitigating energy risks to protect the economy from oil shocks exceeding the $90 threshold. The Ministry of Finance also emphasized that the Union's fiscal space must be complemented by a sound and stable fiscal position at the state level, given the critical role of states in aggregate public expenditures.
The Ministry of Finance noted that the 'Economic Review 2025–26' indicated that the aggregate fiscal deficit of state government agencies as a percentage of GDP has been gradually increasing over the past three years, reflecting growing pressure on state finances. The review also highlighted a structural shift in the composition of state expenditures towards revenues, with an increase in the share allocated to unconditional cash transfers and other mandatory expenses. As these transfers consume a growing share of available fiscal space, opportunities to expand capital productive expenditures are becoming increasingly limited, especially amid constrained revenues and higher deficits.
In the DEA's April Monthly Economic Review, nine out of 18 analyzed states forecast revenue deficits for FY27, and 10 are expected to exceed the 3 percent fiscal deficit threshold.



