Indonesia’s Move Towards De-dollarization Through Local Currency Settlement

BRICS Alliance Considers New Payment System, Signs of Weakening US Dollar Power? (Olga DeLawrence - Unsplash)

Indonesia has been discussing the issue of de-dollarization, but it turns out that since 2017, the country has been working with trading and investment partners to carry out the ‘dollar dump’ initiative. At the end of 2017, Indonesia signed an agreement with Malaysia and Thailand to settle bilateral trade transactions using local currency.

This is known as Local Currency Settlement (LCS), which involves the settlement of bilateral transactions between two countries in their respective currencies, where transaction settlements are made within the jurisdiction of each country. This includes financial activities and transactions such as opening baht Thailand and Malaysian ringgit currency accounts.

The agreement also provides direct quotes for baht and ringgit against the rupiah, as well as trade financing in baht and ringgit, with the provisions taking effect on January 2, 2018.

“The implementation of LCS cooperation has been carried out since 2018 with Malaysia and Thailand. In 2021, its implementation expanded to four countries with the addition of Japan and China,” explained Deputy Governor of Bank Indonesia (BI) Dody Budi Waluyo, on Tuesday (April 18, 2023).

As it is known, the LCS cooperation has also been implemented with Japan in August 2020, and on September 6, 2021, the LCS cooperation with China also took effect.

Seven banks were initially appointed as ACCD (Appointed Cross Currency Dealer Banks) partners, including Bank Mandiri, Bank Rakyat Indonesia, and Bangkok Bank PCL.

The agreement was made to reduce exposure to the dollar and promote local currencies. By reducing the reliance on the dollar, Indonesia’s exposure to external shocks can be mitigated.

The strengthening of the dollar due to external shocks often causes Indonesia’s financial market to collapse, even though the domestic economy is doing well.

To further reduce Indonesia’s dependence on the dollar, the country should continue to promote the use of local currencies in trade and investment transactions, while at the same time building a strong and stable financial system that can withstand external shocks.

In addition, Indonesia should also work closely with its trading and investment partners to develop innovative financial products and services that can further promote the use of local currencies and reduce reliance on the dollar or de-dollarization.