Issue logo

Jurnal Ekonomi Malaysia

55 (3) 2021 125 – 136

The Effect of Foreign Debt on the Economic Growth

Department of Economics
Faculty of Economics and Business
Universitas Tanjungpura
Jl. Prof. Hadari Nawawi
Kota Pontianak 78121


This study examines the effect of foreign debt on the economic growth. Using a time series Indonesian data over 1981 – 2017, we employ the Error Correction Model based on the debt overhang theory. Foreign debt was found to produce negative and significant effect on the economic growth both in the short- and long-run. The paper further found that Foreign Direct Investment (FDI) improves the economic growth. Foreign debt that continues to increase drastically in the long-run could slow down the economic growth which may indicate the economy experiencing a debt overhang. It is thus imperative for the government to ensure the debt ratio remain below a certain threshold. Further, foreign debt should be prioritized to develop infrastructure with a broad multiplier effect and the FDI likewise prioritized for labor-intensive sectors.


economic growth; error correction model; Foreign debt; Foreign direct investment; Indonesia

JEL Codes

E22, F34, O47

Author’s Acknowledgement

Many thanks to Nindya Lestari for enlightening the statistical results and support from the MIICEMA committee


Export Bibliography

Kurniasih, E. P. (2021). The Effect of Foreign Debt on the Economic Growth. Jurnal Ekonomi Malaysia, 55(3), 125–136.

  title={The Effect of Foreign Debt on the Economic Growth},
  author={Kurniasih, Erni Panca},
  journal={Jurnal Ekonomi Malaysia},


Receive updates when new articles are published.