The Influence of Foreign Exchange Reserves and Trade Balance on Indonesia's Foreign Debt

Abstract

This study examines the influence of foreign exchange reserves and trade balance on Indonesia’s foreign debt from 2002 to 2024, using quarterly time-series data from Bank Indonesia. Analyzed through the Ordinary Least Squares (OLS) method and econometric techniques, the findings reveal that foreign exchange reserves have a significant positive impact on foreign debt, reflecting their dual role as both a stabilizer and a debt-derived asset. In contrast, the trade balance shows a significant negative effect, as surpluses reduce dependency on external borrowing. Together, these variables account for 50% of the variance in foreign debt. From an Islamic perspective, the study aligns with the principle of minimizing debt, as outlined in Qur’an 2:280, by advocating for trade-driven self-sufficiency to avoid excessive reliance on debt. The results emphasize the need for policies that enhance export competitiveness and reduce imports, fostering sustainable reserves and debt reduction in line with Sharīʿah objectives. This research contributes to the literature by integrating Islamic economic principles into macroeconomic stability strategies for developing economies.