The Effect of External Debt, Current Account Balance, and Interest Rate on Indonesia's Exchange Rate 2014-2025

Abstract

The Rupiah has weakened steadily against the US dollar over the past decade. This article tests whether external debt, the current account balance, and Bank Indonesia's policy rate can account for that trend, using quarterly data from 2014 to 2025 and an Autoregressive Distributed Lag (ARDL) model. A Bounds Test confirms a long-run relationship among the variables. External debt depreciates the Rupiah in the long run but appreciates it in the short run, a reversal consistent with debt inflows temporarily boosting foreign-exchange supply before repayment obligations kick in. The current account carries the expected negative sign but has no significant effect, suggesting capital flows now matter more than trade flows for the Rupiah. The interest rate raises rather than lowers the exchange rate, a pattern better explained by Bank Indonesia raising rates in response to depreciation pressure than by classical interest-rate-parity capital inflows. The model corrects 16% of any short-run disequilibrium each quarter, passes all classical assumption tests, remains structurally stable, and forecasts the exchange rate with a MAPE of just 1.72%. External debt and interest rate policy, more than the trade balance, appear to be the variables policymakers should watch most closely.