To reduce the impact of the dollar, businesses are advised to use local currency

KOMPAS/PRIYOMBODO

The atmosphere at the PT Valuta Artha Mas foreign currency exchange in Jakarta on Tuesday (16/4/2024). The exchange rate of the rupiah dropped to a level of Rp 16,200 per US dollar after the 2024 Eid holiday.

JAKARTA, KOMPAS — Anticipating the weakening rupiah exchange rate, the business world is advised to use transaction settlement facilities using local currency or local currency settlement/LCT with certain country trading partners that have collaborated with Indonesia.

Under the LCT scheme, Indonesian entrepreneurs can use the rupiah currency for their exports and imports, thereby reducing their dependence on the US dollar currency, making the process more efficient, and avoiding exchange rate losses. The hope is that this will make the rupiah exchange rate more stable.

"This step is to reduce dependence on hard currencies, especially the US dollar, considering that the economic scale and trade volume continues to increase, as well as to increase the stability of the rupiah exchange rate," said Minister of Industry Agus Gumiwang Kartasasmita, Thursday (18/ 4/2024). Agus also appealed to the business world to increase the use of local currency under the LCT scheme for bilateral transactions carried out with partner countries.

Also read: Rupiah Reaches IDR 16,240, Two Monetary Policy Options Open

Citing the Jakarta Interbank Spot Dollar Rate (JISDOR), the exchange rate of the rupiah on Thursday's (18/4/2024) trade closed at the level of Rp 16,177, strengthening compared to Wednesday which was at the level of Rp 16,240.

Senior Deputy Governor of Bank Indonesia (BI), Destry Damayanti, stated that she agrees with the call from the Minister of Industry. This is also in line with BI's policy in maintaining the stability of the rupiah exchange rate.

Through the LCT scheme, explained Destry, Indonesia can diversify the use of currencies or encourage the use of local currencies in trading activities with partner countries. The LCT scheme can reduce dependence on certain currencies, especially the US dollar. Therefore, there is a positive impact in reducing the volatility of the rupiah exchange rate.

It is not unlikely that the industry will have to make adjustments and decrease production performance, evaluate sales plans, expand the market, and adjust market prices.

"The development is positive and grows significantly. Together with related ministries/institutions, associations, and banks, we continue to promote socialization and education to business actors to more optimally utilize LCT schemes in trading activities and other economic activities with partner countries," said Destry.

This LCT scheme is an initiative by Bank Indonesia together with other central banks in seven countries to agree on settling transactions using local currency. Since 2018 until now, BI has agreed to collaborate with Malaysia, Thailand, Japan, China, Singapore, South Korea, and India.

DOKUMENTASI BANK INDONESIA

Officials from Bank Indonesia and the Reserve Bank of India have signed a memorandum of understanding for the use of their respective local currencies in transactions in Mumbai on Thursday (7/3/2024).

Through this collaboration, both exporters and importers, both from Indonesia and its partners, can use their respective currencies when engaging in bilateral transactions. For example, in trade with India, Indonesian entrepreneurs can use the rupiah, while Indian entrepreneurs can use the rupee. The same goes for transactions with six other countries. This replaces the use of the US dollar, which was previously used in these bilateral economic activities.

At the end of 2023, the LCT scheme has generated transactions equivalent to 6.3 billion US dollars, a 53 percent increase compared to 2022 which amounted to 4.1 billion US dollars.

Also read: Rupiah Reaches IDR 16,240, Two Monetary Policy Options Open

Still small scale

The Chairman of the Indonesian Entrepreneurs Association (Apindo), Shinta W Kamdani, believes that there is currently no magical cure that can immediately create exchange rate stability or suppress the appreciation of the US dollar.

Various monetary instruments, such as currency swaps and LCTs, still operate on a small scale. "The effect of the exchange rate stabilization efforts created is still limited so it needs to be supported by other intervention instruments," said Shina, Thursday.

Shinta said that what the business world can do to anticipate depreciation of the rupiah is simply to make adjustments to business performance, especially those made from imported raw materials. Industry players will try their best to create affordable production costs and market prices to create optimal business performance.

"It is not impossible that the industry will also make adjustments/reduce production performance, evaluate sales plans, expand markets, and adjust market prices," said Shinta.

KOMPAS/PRIYOMBODO

Queue of visitors at the PT Valuta Artha Mas foreign exchange exchange place in Jakarta, Tuesday (16/4/2024).

As is known, the strengthening of the US dollar which has caused the rupiah to weaken recently has the potential to increase industrial production costs. This is because domestic manufacturing industrial raw materials still have to be imported.

Data from the Central Statistics Agency (BPS) shows that in January-February 2024, the total imports of raw materials or auxiliaries reached 72.47 percent of the total imports amounting to 36.93 billion US dollars.

Also read: Challenges of Dedollarization in the Industrial World

The high import of raw materials by the manufacturing industry still persists due to the weakness of the upstream and downstream industries in the country. Additionally, there are still many types of raw materials that cannot be produced domestically.