Indonesia and China are closer to reducing their reliance on the US dollar as they plan to start using their own currencies for bilateral trade and investment within weeks.
The switch to local currency settlement (LCS) is expected to take place in the third quarter of this year.
Bank Indonesia (BI) financial market development head Donny Hutabarat said the move was part of Indonesia’s effort to diversify currencies used in trade and investment with bilateral partners. So far, Indonesia has agreed on LCS with Malaysia, Thailand and Japan.
“So, we do not depend 100 percent on the US dollar anymore,” Donny told reporters during an online media briefing on June 25.
“[LCS with China] will be implemented around July or [later in] the third quarter,” Donny said.
China is Indonesia’s biggest trade partner. According to Statistics Indonesia, China accounts for more than 32 percent of Indonesia’s imports and over 22 percent of exports.
BI and People’s Bank of China (PBoC) began discussing the plan on September 30, when BI governor Perry Warjiyo and his PBoC counterpart Yi Gang signed an agreement on LCS for bilateral trade and investment.
The US dollar has been used as the main medium for international trade ever since the establishment of the Bretton Woods system in 1944, which aimed to provide stability and efficiency in foreign trade and prevent competitive currency devaluation.
However, in recent years, more countries have begun to use their own currencies instead of the US dollar for cross-border trade and investment in a trend that has become known as dedollarisation.
China, Russia and the EU have been prime movers in the effort to steer away from the US dollar. By doing so, countries are gradually chipping away at the US currency’s global supremacy.
Centre of Reform on Economics researcher Yusuf Rendy Manilet said LCS would help maintain the rupiah’s stability. He said the US dollar had been widely used as an international standard, but it had one key drawback, namely being very volatile.
“With LCS, I think, the government will provide more stability to the rupiah exchange rate, particularly from its trading channel,” Yusuf told The Jakarta Post on June 28.
Yusuf said ditching the dollar in bilateral trade would simplify settlement, but he also noted drawbacks of LCS. He said some industries, such as mineral and coal mining, tended to benefit from the depreciation of the rupiah, as that increased their revenue. With LCS, the chances of such benefits would be much smaller, because the exchange rate gap in Indonesia-China trade would not be as significant.
Indonesia has already moved to LCS for bilateral trade with other countries of the region, including Malaysia, Thailand and the Philippines.
THE JAKARTA POST/ASIA NEWS NETWORK
