Bank Indonesia has once again underscored its strategic intent to broaden the scope and promote the adoption of local currencies, known as Local Currency Transactions (LCT), in international interactions. This latest move involves a concerted effort to reduce reliance on the US dollar by strengthening cooperative arrangements with China.
The intensified Local Currency Transaction framework with China, which entails a shift away from the US dollar, encompasses a wide spectrum of financial dealings, including trade transactions, investment endeavors, participation in financial markets, banking activities, and cross-border payment settlements.
Perry Warjiyo, the Governor of Bank Indonesia, has articulated the conviction that the LCT mechanism holds the potential to invigorate investment and trade cooperation between the two nations.
In his words, “Direct campaigns conducted within partner countries are instrumental in encouraging the widespread utilization of the Indonesia-China LCS, a system that has been operational since September 6, 2021.”
In addition to this collaboration with China, Indonesia has already executed agreements pertaining to the use of local currencies with several countries within the region. Notable among these are Malaysia, Thailand, and Japan. Furthermore, bilateral accords have been brokered with Singapore and South Korea, solidifying the foundations for implementing LCT cooperation with Indonesia.
Local Currency Transactions, often referred to as LCT, serve as a bilateral transactional conduit between parties and their international counterparts, with both sides engaging in financial dealings using their respective local currencies, namely the yuan and the rupiah.
Perry elaborates on this point, stating, “In essence, LCT transactions have the potential to mitigate the dependence on other foreign currencies.”
At present, the Indonesia-China LCT initiative encompasses the active involvement of 16 Indonesian banks and 8 Chinese banks. Perry underscored that the performance of the Indonesia-China LCT over the past biennium has manifested an encouraging trend, characterized by substantial growth in transaction volumes and an expanding user base.
To optimize and refine this monetary mechanism, during the LCT promotional activities in China, Perry has been instrumental in fostering a sense of commitment among leaders within the banking sector and various stakeholders to enhance the utilization of LCT in the foreseeable future.
In addition to these developments, Bank Indonesia and the People’s Bank of China (PBOC), China’s central bank, recently formalized a collaboration agreement in the arena of central banking. This accord, elucidated by Perry, encompasses a broad spectrum of policy dimensions, spanning monetary policy, macroprudential policy, financial stability, and payment systems.
The scope also extends to encompass digital innovations within payment service systems, the regulatory frameworks governing these innovations, and supervision protocols in the context of anti-money laundering and the fight against the financing of terrorism. Moreover, the agreement extends to include other areas of mutual interest and accord.
The forthcoming execution of this cooperative endeavor will be underpinned by a multifaceted approach. This entails sustained policy dialogues, technical cooperation, data and information exchange, as well as collaborative initiatives designed to foster innovation and deepen ties within the realms of central banking, financial stability, and cross-border economic cooperation.
