ANALYSIS OF THE INFLUENCE OF EXTERNAL FACTORS ON LOCAL

GOVERNMENT FINANCIAL PERFORMANCE WITH A PANEL REGRESSION

ANALYSIS APPROACH

Local governments have an important role in economic development and community

welfare. However, the financial performance of local governments is often affected by external
factors over which they cannot fully control. Therefore, this study aims to analyze the influence
of external factors, such as national economic growth, general allocation funds, and inflation,
on the financial performance of local governments in Indonesia. The literature review will
include the concept of local government financial performance, external factors that influence
it, as well as the use of panel regression analysis as an appropriate analysis method to examine
the influence of these external factors. The data will be analyzed using panel regression
techniques to test the relationship between the dependent variable (local government financial
performance) and the independent variable (external factors). The results of the analysis will
be interpreted to identify the significant influence of external factors on the financial
performance of local governments.
One of the significant external factors is the condition of the national economy.
Fluctuations in national economic growth can have a direct impact on local government
revenues through taxes and financial transfers from the central government. In addition, fiscal
policies implemented by the central government, including the allocation of general allocation
funds (DAU), can also affect the availability and use of financial resources by local
governments. In addition, other external factors such as inflation rates, interest rates, and
geopolitical factors can also affect the financial performance of local governments indirectly.
For example, high inflation rates can increase local government operating costs and reduce
people's purchasing power, while changes in interest rates can affect local government
borrowing costs.
Over the past few years, Indonesia and the world as a whole have also been faced with
an unprecedented external challenge, namely the COVID-19 pandemic. The pandemic has
caused massive disruptions in various sectors of the economy, including the local government
sector. Local governments are faced with additional pressures in their financial management,
including increasing spending on crisis relief and facing declining revenues due to declining
economic activity. In this context, in-depth research on the influence of external factors on the
financial performance of local governments becomes very important.

Understanding the dynamics of the relationship between certain external factors and local
government financial performance can provide valuable insights for policymakers in designing
financial management strategies that are responsive and adaptive to changes in the external
environment. This study will use a panel regression analysis approach to analyze the influence
of certain external factors, such as national economic growth, general allocation funds, inflation
rates, and other factors, on the financial performance of local governments in Indonesia.
These factors can be overcome by increasing efficiency in tax collection, diversifying
sources of income, and strengthening cooperation between regions to maximize local economic
potential. Decreases or changes in DAU allocations can be addressed by strengthening their
financial capacity through income diversification, more efficient budget management, and
increased cross-sector cooperation. To overcome this, local governments need to control costs,
improve efficiency in resource use, and strengthen monitoring of inflation. By identifying
external and internal factors that affect the financial performance of local governments and
implementing appropriate strategies to overcome them, it is hoped that local governments can
improve their financial sustainability and provide better public services to the community.
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