Indonesia and South Korea Forge Pact to Move Away from Dollar Dependency, Advocate for Local Currencies

ASEAN Members Agree to Reduce Use of US Dollar (photo: lucas Favre - Unsplash)

Bank Indonesia (BI) and the Bank of Korea (BOK) have recently come to an agreement, setting the stage for a shift away from the dollar in favor of promoting local currencies for financial transactions. This initiative, known as Local Currency Transaction (LCT), aims for full implementation by 2024. Korea now joins the ranks of several countries, including Thailand, Singapore, and Malaysia, in embracing this approach.

In a statement during the High Level Meeting BI-BOK, BI Governor Perry Warjiyo expressed enthusiasm about this collaborative effort. He stated, “We proudly announce a joint initiative between the two central banks to promote the use of local currencies through the LCT framework, expected to be implemented by 2024.”

This decision follows the signing of a Memorandum of Understanding (MoU) in May 2023, outlining the cooperation between the two central banks on the use of local currencies. To kickstart this transition, BI and BOK have agreed to develop a comprehensive framework for Local Currency Transactions through Operational Guidelines.

The potential benefits of this initiative are considerable. By moving towards local currencies, international trade transactions can use direct exchange rate quotations provided by banks designated as Appointed Cross Currency Dealers (ACCD). This approach is designed to reduce exchange rate risks and transaction costs, fostering increased efficiency and facilitating smoother trade between Indonesia and Korea.

Governor Perry Warjiyo highlighted that BI’s ongoing implementation of Local Currency Transactions via Quick Response Code Indonesia Standard (QRIS) continues to grow. As of October 2023, QRIS transactions have reached IDR 24.97 trillion, involving 43.44 million users.

The strategic move away from the dollar aligns with BI’s commitment to advancing financial and economic processes. In addition to supporting Indonesia’s trade relations with Korea, the initiative also reflects a broader global trend toward embracing local currencies for cross-border transactions.

Meanwhile, Bank of Korea Governor, Mr. RHEE, emphasized Indonesia’s vital role in the global supply chain, particularly in advanced sectors such as batteries and electric vehicles. He stated, “Indonesia, with its large territory and population, plays a crucial role in the global supply chain for advanced sectors such as batteries and electric vehicles.”

In conclusion, the success of Local Currency Transactions between Indonesia and several nations serves as a testament to its effectiveness. The hope is that the newly established LCT framework between Korea and Indonesia will also achieve success and contribute positively to economic development.