Indonesia has launched a national “de-dollarisation” task force to facilitate cross-border local currency transactions with regional partners as the push to reduce US dollar dependence in south-east Asia gathers pace. More than 80% of exports in the region are invoiced in dollars, according to the Asian Development Bank.
Experts say the national task force will pursue policy adjustments to financial market and trade rules as Jakarta aims to incentivise banks and other institutions to deepen their engagement with regional currencies.
“Through the task force, the government will look at the [policy] bells and whistles it needs to fine-tune. This [covers] financial markets, trade and customs; there are many things to synchronise,” says Erwandi Hendarta, senior partner and the head of finance and projects practice group at HHP Law Firm, member firm of Baker McKenzie in Indonesia.
Tools available to regulators include lowering bank reserve requirements on holdings of regional currencies and accelerating import procedures for certain businesses, though concrete changes have yet to be announced. Bank Indonesia, the country’s central bank, did not respond to a request for comment.
The task force — launched on September 5 — includes at least six ministries, the central bank, and key financial regulators, underscoring its political power. It follows the August endorsement of a region-wide local currency transaction framework by Asean finance ministers and central bank governors.
“The Indonesian government is trying to foster local currency use [with regional partners]. Having a [national] task force is an excellent idea to facilitate policy co-ordination locally and internationally,” says Mr Hendarta.
South-east Asia, the fastest-growing region globally economically, has been hit by a stronger US dollar since the Federal Reserve began hiking interest rates in early 2022. This has galvanised efforts to promote local currency use across the region.
“A broader local currency transaction framework could help Asean nations mitigate foreign currency risks, as the strength of the dollar in recent years has been reflected in weak local currencies,” says Dedi Dinarto, lead Indonesia analyst at public policy advisory firm Global Counsel.
“The Fed’s potential interest rate hike in September would also mean that the US dollar is expected to remain strong, and this could be detrimental for most south-east Asian countries, which are net importers of food and energy,” says Mr Dinarto.
Across the region
Some Asean member states, including Indonesia, are already progressing with local currency use for a broader range of transactions. In August, the central banks of Thailand, Malaysia and Indonesia signed a memorandum of understanding to expand an existing local currency agreement for trade and investment to cover financial asset transactions.
The growing success of cross-border QR code payment linkages has accompanied this. Today, consumers in Indonesia, Thailand, Singapore and Malaysia can conduct payments in their local currencies through QR code wallets across all four countries. Exchange rates are determined directly between participating countries’ central banks.
“The development of cross-border QR code payment linkages benefits significantly from domestic efforts to introduce national QR code payment linkages within each member economy. Once domestic payment systems achieve a high level of interoperability, establishing cross-border connections becomes much more efficient,” says Li Lian Ong, senior advisor to the director, macro-financial research group at AMRO.
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But Indonesia’s local currency task force is grappling with the more complex challenge of high-value, business-to-business transactions. Serious obstacles in this domain must be addressed, not least Indonesian and other Asean banks’ obligation to expand their local currency trading and settlement infrastructure. Demand for regional currency pairs from customers across the region also needs a lift.
According to Ms Ong, this is creating a “chicken and egg” situation: “Banks require scale if any investment they make in infrastructure and human resources for local currency transactions is to be financially viable. Demand for local currency transactions would depend on the market they are operating in and the counterpart economies. So far, volumes need to be larger to incentivise banks to make such investments.”
Yet the launch of Indonesia’s national local currency task force and similar initiatives occurring at the Asean level underscores the push to overcome these challenges. In the coming weeks and months, a period of regulatory synchronisation and renewal beckons for Indonesia and its Asean peers in pursuit of this objective.
