Jakarta, CNBC Indonesia – Indonesia’s dependence on the United States (US) dollar has faded after the implementation of the policy on the use of local currency in trade transactions or Local Currency Settlement (LCS).
Clear evidence of the loss of influence of the US dollar on Indonesia is clearly shown by two giant banks in the country, namely PT Bank Mandiri (Persero) Tbk. (BMRI) and PT Bank Central Asia Tbk. (BBCA).
President Director of Bank Mandiri Darmawan Junaidi said the LCS Arrangement policy was important to manage the stability of the rupiah exchange rate. The implementation of this policy with 4 partner countries so far, Darmawan said, really supports business actors to be able to enter the international market easily and quickly.
“So foreign trade with this LCS Arrangement, if supported by continuous communication between ACCD (Appointed Cross Currency Dealers) can also support approximately what other sectors we can develop to develop the business of Indonesian entrepreneurs with partners in 4 countries that already have LCS Arrangements,” said Darmawan in the G20 Finance Track Side Event entitled ‘Showcasing The Implementation of Local Currency Settlement Framework Between Indonesia and Partner Countries’, Wednesday (16/2/2022).
According to Darmawan, LCS has an impact on increasing the volume of trade and transactions made through banking. The proof is, throughout 2021 the increase in trading volume using the LCS payment method increased by 30% on an annual basis. Then, the volume of currency trading between Partner Banks (ACCD) that facilitates LCS grew by 171% on an annual basis.
Bank Mandiri believes that the increase in the value of transactions using the LCS method will continue in 2022. Darmawan said, LCS has a very important role in optimizing trade between Indonesia and the 4 countries that have implemented this policy, namely China, Japan, Malaysia and Thailand. In the future, he hopes that the central banks in these 4 countries, together with Bank Indonesia (BI), will continue to optimize the implementation of LCS policies and eliminate underlying transactions with certain values.
“We need to make the most of the G20 event in Indonesia by pushing as much as possible the showcase we have, the potential that we can offer globally. So maybe we can push how much data we have to show the G20 that Indonesia can supply a lot to the global market. Investment potential is also needed because for good economic growth we must invite a lot of investment into Indonesia,” he said.
On the same occasion, the President Director of BCA Jahja Setiaatmadja said that LCS reduced Indonesia’s dependence on the US dollar because this policy prevented business actors from converting rupiah into US dollars before transacting with their business partners in the destination country.
Jahja gave an example, before there was an LCS policy, Indonesian businessmen who transacted with their partners in Japan had to make a price list in USD. After that, the transaction must be carried out using the rupiah to USD conversion method, then the funds in USD are sent to the destination country, and when they arrive at the partner location, the money is converted back into the local currency.
“This means that there are two prices that must be borne by both parties. With straight forward, there is only one conversion. With this model, we can offer cashback transaction promotions, then we provide special exchange rates. This initiative is an innovation breakthrough that leads to effectiveness and efficiency. We must salute BI and our central bank colleagues in China, Japan, Malaysia and Thailand,” said Jahja.
This BCA boss said that now the value of Indonesia’s trade with 4 countries that have implemented LCS has reached 41% of the total trade. This figure is already quite large and can continue to be developed so that in the future more countries will join in implementing this policy.
“I think this is a good product, it’s just a matter of educating our customers to find out that this is very efficient and effective. They can get a special discount on the exchange rate, “swap” themselves and if it’s true that the USD interest rate will rise fast, in swapping with China it will be cheaper than swaps to US interest rates are definitely higher,” he said.
The implementation of the LCS cooperation is one of BI’s ongoing efforts to encourage a wider use of local currencies in the settlement of trade transactions and direct investment with various partner countries.
According to BI’s explanation, LCS is the settlement of bilateral transactions between two countries carried out in their respective currencies, where the transaction settlements are carried out in the jurisdictions of the respective countries.
The expansion of the use of LCS is expected to support the stability of the Rupiah through its impact on reducing dependence on certain currencies in the domestic foreign exchange market.
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