Is Indonesia Moving Away from Dependency on US Dollar?

Anisa Sopiah, reporting for CNBC Indonesia, has written an interesting article around Indonesia’s push in the last five years to implement more bilateral transactions in local currency settlement (LCS) currencies with its trade and investment partners and how this could be a signal that dependency on the US Dollar is being intentionally replaced.

The LCS is a settlement of bilateral transactions between two countries that are done in the currency of each country where the transaction settlement is being carried out and within the jurisdiction of the respective countries, which essentially makes it easier for people to be able to shop in the destination country using local currency

In 2018, Bank Indonesia (BI) initiated LCS cooperation with Malaysia and Thailand to encourage the use of local currency by business actors in completing bilateral trade transactions between the two countries, say CNBC Indonesia.

Two years later, in August 2020 a similar cooperation was implemented with Japan. “This collaboration is also carried out to encourage the use of local currencies (rupiah, ringgit, baht, yen) more broadly for the settlement of bilateral transactions between Indonesia and Malaysia, Thailand and Japan,” explained BI on its official website.

In September 2021, the LCS cooperation was also effectively implemented with China, which includes, among other things, the use of direct exchange rate quotations in transactions between the rupiah and yuan, as well as the relaxation of certain regulations to encourage the use of local currencies.

So far, BI believes the implementation of the LCS has provided many benefits for Indonesia and bilateral countries. From a cost standpoint, BI reports that through the LCS, transaction conversions are more efficient due to the availability of alternative financing for exports/ direct investment in local currencies. In addition, LCS also provides benefits with the availability of alternative hedging instruments in local currencies, and diversification of currency exposure used in transaction settlements.

BI said that the domination of the US dollar in the domestic financial market was one of the fundamental reasons for carrying out LCS cooperation between BI and other authorities, say CNBC Indonesia. The use of the US dollar as the settlement currency in Indonesia’s bilateral trade transactions with trading partner countries is still dominant however, with over 90-percent of export transactions and above 85-percent of import transactions.

CNBC Indonesia report that within Indonesia’s economic structure, the dominance of the US dollar as the settlement currency in Indonesia’s trade with various trading partners creates high economic dependence on the US dollar, which in turn can increase the risk of Indonesia’s external economic vulnerability to shocks stemming from global economic dynamics. As a result of high dependence on the US dollar, any news related to global economic vulnerabilities will prompt financial market players to react. This could have an impact on Indonesia’s macroeconomic stability, namely through the volatility of the rupiah exchange rate against the US dollar.

For business actors, the volatility of the rupiah exchange rate can affect business stability because obligations to pay foreign or trade debts become difficult to predict. Meanwhile, in a large-scale economy, exchange rate stability is an important measure to support sustainable business growth.

CNBC Indonesia report, that for the record, BI has changed the name of LCS to Local Currency Transaction (LCT). This is possible because BI will expand the function of the LCS, which does not only cover trade settlements, but also individual transaction payments.

According to BI, Indonesia’s LCT cooperation has been implemented with China, Japan, Malaysia and Thailand. Meanwhile, for Singapore, an MOU was signed on 29 August 2022 and is currently in the exploratory stage for implementation in 2023. Going forward, BI has planned LCT cooperation with Saudi Arabia and India.

Source: CNBC Indonesia

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