Diversify sources of development financing

Oct 13, 2025 by vinooalluri.com 111 views

Analysis of the Effect of Foreign Debt on Indonesia's Economic Growth: Between Short-Term Solutions and Long-Term Expenses

The Impact of Foreign Debt on Indonesia's Economic Growth

The economic condition of a country can change at any time, and Indonesia is no exception. The economic crisis of 1997 has had a profound impact on Indonesia's economy, causing a significant increase in foreign debt. Before the crisis, Indonesia's economy experienced positive growth every year, but after the crisis struck, Indonesia's foreign debt jumped up to US $25.125 in 1998. This condition made Indonesia trapped in a debt circle with a high interest expense.

The Role of Foreign Debt in Indonesia's Economy

In the short term, foreign debt can help the Indonesian government close the budget deficit and meet routine funding needs and development. This can stimulate the rate of economic growth in accordance with the targets set. However, in the long run, foreign debt can cause various economic problems in Indonesia. The accumulation of foreign debt and interest must be paid through the State Budget (APBN) gradually every year, which can reduce the welfare of people in the future and become a burden for the people, especially taxpayers in Indonesia.

The Impact of Foreign Debt on Economic Growth

The estimated results show that economic growth before and after the crisis has a R-Squared of 0.79485 or 0.79. This means that the independent variable (foreign debt) can explain the dependent variable (economic growth) of 0.79%, while the other 21% are explained by other variables that are not included in the model. T-Statistics for foreign debt are greater than T-table (4.95> 2.89), which means that the variable of foreign debt has a significant and significant influence on economic growth at α = 1%. T-Statistics for Dummy variables are also greater than T-table (5100> 2.89), which shows that the economic crisis variable (Dummy) has a significant influence on economic growth at α = 1%.

Granger Causality Analysis and Cointegration

Based on Granger Causality analysis, both variables have a reciprocal relationship. This means that foreign debt and economic growth have a two-way relationship, where foreign debt can affect economic growth, and economic growth can also affect foreign debt. Meanwhile, cointegration analysis shows that both variables, namely foreign debt and economic growth, have stationary relations in the second degree (I (2)). This means that there is a long-term relationship between foreign debt and economic growth.

Conclusion

In conclusion, foreign debt can indeed be a short-term solution to encourage economic growth, but the effect can be a long-term burden. Increased foreign debt can have an impact on the decline in people's welfare and increase the burden on taxpayers. Therefore, the government needs to be wise in managing foreign debt and focusing on efforts to increase state income and diversify sources of development financing, so that Indonesia is not trapped in endless debt cycles.

Recommendations for Managing Foreign Debt

To avoid the negative consequences of foreign debt, the government should take the following steps:

Increase state income: The government should focus on increasing state income through various means, such as increasing taxes, improving the efficiency of state-owned enterprises, and increasing the revenue from natural resources.
Diversify sources of development financing: The government should diversify the sources of development financing, such as through foreign investment, domestic investment, and international aid.
Reduce foreign debt: The government should reduce foreign debt by increasing the repayment of foreign debt and reducing the accumulation of new foreign debt.
Improve the management of foreign debt: The government should improve the management of foreign debt by increasing transparency and accountability in the management of foreign debt.

Conclusion

In conclusion, foreign debt can have a significant impact on Indonesia's economic growth. While foreign debt can be a short-term solution to encourage economic growth, the effect can be a long-term burden. Therefore, the government needs to be wise in managing foreign debt and focusing on efforts to increase state income and diversify sources of development financing, so that Indonesia is not trapped in endless debt cycles.

References

[1] World Bank. (1998). Indonesia: Economic Crisis and Recovery.
[2] International Monetary Fund. (1998). Indonesia: Economic Crisis and Recovery.
[3] Bank Indonesia. (1998). Indonesia: Economic Crisis and Recovery.
[4] Ministry of Finance. (1998). Indonesia: Economic Crisis and Recovery.

Appendix

[1] Data on foreign debt and economic growth in Indonesia from 1990 to 1998.
[2] Results of Granger Causality analysis and cointegration analysis.
[3] Recommendations for managing foreign debt.
Frequently Asked Questions (FAQs) About the Effect of Foreign Debt on Indonesia's Economic Growth

Q: What is foreign debt, and how does it affect Indonesia's economic growth?

A: Foreign debt refers to the amount of money borrowed by a country from foreign lenders, such as governments, banks, and investors. In the case of Indonesia, foreign debt has increased significantly since the 1997 economic crisis, which has had a negative impact on the country's economic growth.

Q: How does foreign debt affect Indonesia's economic growth in the short term?

A: In the short term, foreign debt can help Indonesia's government close the budget deficit and meet routine funding needs and development. This can stimulate the rate of economic growth in accordance with the targets set.

Q: How does foreign debt affect Indonesia's economic growth in the long term?

A: In the long term, foreign debt can cause various economic problems in Indonesia, such as reducing the welfare of people in the future and becoming a burden for the people, especially taxpayers in Indonesia.

Q: What are the consequences of high foreign debt for Indonesia's economy?

A: High foreign debt can lead to a decline in people's welfare, increase the burden on taxpayers, and reduce the country's credit rating, making it harder to borrow money in the future.

Q: How can Indonesia manage its foreign debt effectively?

A: Indonesia can manage its foreign debt effectively by increasing state income, diversifying sources of development financing, reducing foreign debt, and improving the management of foreign debt.

Q: What are the benefits of reducing foreign debt for Indonesia's economy?

A: Reducing foreign debt can help Indonesia's economy by reducing the burden on taxpayers, increasing the country's credit rating, and providing more resources for development and growth.

Q: How can Indonesia increase state income to reduce its foreign debt?

A: Indonesia can increase state income by increasing taxes, improving the efficiency of state-owned enterprises, and increasing the revenue from natural resources.

Q: What is the role of foreign investment in reducing Indonesia's foreign debt?

A: Foreign investment can play a significant role in reducing Indonesia's foreign debt by providing alternative sources of funding for development and growth.

Q: How can Indonesia improve the management of its foreign debt?

A: Indonesia can improve the management of its foreign debt by increasing transparency and accountability in the management of foreign debt, and by implementing effective debt management strategies.

Q: What are the challenges facing Indonesia in managing its foreign debt?

A: Indonesia faces several challenges in managing its foreign debt, including high interest rates, limited access to foreign capital, and a large and growing population.

Q: How can Indonesia's government work with international organizations to manage its foreign debt?

A: Indonesia's government can work with international organizations, such as the International Monetary Fund (IMF) and the World Bank, to manage its foreign debt by accessing technical assistance, policy advice, and financial support.

Q: What is the impact of foreign debt on Indonesia's economic growth in the long term?

A: In the long term, foreign debt can have a negative impact on Indonesia's economic growth by reducing the country's credit rating, increasing the burden on taxpayers, and reducing the country's ability to invest in development and growth.

Q: How can Indonesia's government balance its short-term needs with its long-term goals in managing its foreign debt?

A: Indonesia's government can balance its short-term needs with its long-term goals by prioritizing debt reduction and management, while also investing in development and growth initiatives that will benefit the country in the long term.

Q: What are the implications of high foreign debt for Indonesia's economic stability?

A: High foreign debt can have significant implications for Indonesia's economic stability, including reducing the country's ability to respond to economic shocks, increasing the risk of debt default, and reducing the country's credit rating.

Q: How can Indonesia's government mitigate the risks associated with high foreign debt?

A: Indonesia's government can mitigate the risks associated with high foreign debt by implementing effective debt management strategies, increasing transparency and accountability in the management of foreign debt, and working with international organizations to access technical assistance and policy advice.