Beyond Oil Prices: Import Dependency and Macroeconomic Fundamentals as Drivers of Exchange Rate Stability in Indonesia
DOI:
https://doi.org/10.64137/31080030/IJFEMS-V2I1P106Keywords:
Energy Import Dependency, Exchange Rate, Trade Openness, Economic Growth, Foreign Direct InvestmentAbstract
Exchange rate stability is a key pillar of macroeconomic resilience in emerging economies, particularly those with growing dependence on imported energy. Despite extensive research on the relationship between energy and exchange rates, previous studies have predominantly emphasized oil price shocks while paying limited attention to the structural vulnerability arising from energy import dependence. This paper fills these gaps by analyzing the EIDR effect on the rupiah exchange rate in Indonesia during 1996–2023, with economic growth, trade openness, as well as foreign direct investment (FDI) included in the model. The data were annual, collected from the World Development Indicators (World Bank), and analyzed using Ordinary Least Squares (OLS) by means of a series of classical diagnostic tests. The findings demonstrate that exchange rate dynamics in Indonesia are predominantly influenced by domestic economic fundamentals and the systemic reliance of the Indonesian economy on imported energy. Higher EIDR gives a positive and statistically significant influence on the Rupiah exchange rate, meaning stronger depreciation pressures will occur as foreign currency demand increases for energy imports, intermediate goods and capital goods. Conversely, the appreciation of exchange rates is primarily driven by economic growth and trade openness through better external balances that give rise to greater foreign currency receipts. We also find that FDI has no direct statistically significant impact, implying the importance of indirect effects through improved productive capacity and competitiveness in a long-memory context, as this type of capital flow is not necessarily an immediate foreign exchange inflow. These findings emphasize that attracting foreign investment is not sufficient to stabilize exchange rates. Policies should focus on lowering reliance on imported energy, speeding up the growth of industrial downstreams and high-value-added manufactured export ventures while enhancing domestic-industry-FDI linkages. This paper makes a contribution to the literature by introducing the Energy Import Dependency Ratio as a structural forms of external vulnerability that give more explanation of the dynamics of the exchange rate by using a conventional oil price channel appropriate for energy-importing emerging economies.
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