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Indonesia de-dollarization move, economist weighs its plus and minus

Tempo - April 19, 2023

Amelia Rahima Sari, Antara, Jakarta – The Center of Economic and Law Studies (Celios) expert on economy Bhima Yudhistira in a statement on Wednesday revealed the benefits and disadvantages of Indonesia's step to move away from the United States dollar, also known as the de-dollarization.

The upside of de-dollarization

"The plus side of de-dollarization is that it enables Indonesia's trade partners to use local currencies and improve the stability of the Rupiah exchange rate," Bhima wrote to Tempo on April 19.

So far, a myriad of factors in terms of the rise and fall of the US dollar has been difficult to control by monetary authorities. A rupiah weakening would always accompany a rise in the US central bank interest rate, which happens continuously.

"But once there is a reduction in the portion of the US dollar to the total international transactions, even though it is still small, it has contributed to the maintenance of the rupiah exchange rate," said Bhima.

In addition, another positive aspect of de-dollarization is closer trade relations with partner countries, mainly at the ASEAN level. When the US domestic economy was shaken, Bhima said, the diversion of export interest to ASEAN countries and other alternative countries made export performance slightly maintained as the United States economy is slightly shaken.

Another positive aspect of de-dollarization is efficiency in trade, according to Bhima, exporters and importers benefit when using local currencies without the need to first exchange to the US dollar.

"Actually, it had been quite troublesome, there are palm oil exporters selling to Malaysia receiving ringgit, then converted to US dollars, and from dollars to rupiah. Why not directly convert ringgit to rupiah?" Bhima said.

With Indonesia's local currency transaction or LCT cooperation with Malaysia, Indonesian exporters no longer need to convert local currencies to US dollars in bilateral trades.

The downsides

"The weakness in this system is the difficulty of using local currency to pay ships operating in cross-border trade routes," the Celios Director said.

Bhima assessed that foreign ships want to receive US dollars and not be paid with rupiah quotations. This can be cumbersome as 90 percent of ships for imports and exports are vessels from foreign countries.

"Another problem arises when international cooperation, for example in grants, loans remains predominantly in US dollars. So the return of principal installments and interest payments also continues to suck up US dollars," said Bhima.

Bhima pointed out the lack of domination in transactions using local currency settlement with Thailand only amounts to 4 percent of total exports. This is similar to other countries.

"If the portion can increase to 30 percent of total exports, it can be an effective rupiah stabilization policy," said Bhima.

Finally, he assessed that Indonesia must begin to be involved in the BRIC discussion (forum of Brazil, Russia, India, China, and South Africa) despite Indonesia not being included in the group. The discussion is related to joint currency cooperation. "Every de-dollarization effort must be supported," he said.

Indonesia has established LCT cooperation with Thailand, Malaysia, Japan, and China. Even though in China the trend of transactions with local currency has slowed somewhat due to the increase in Covid-19 cases, the trend in the remaining three countries can be observed to strengthen, especially in Japan.

Amidst the constant attempt towards de-dollarization, Bank Indonesia recorded the realization of LCT reaching US$957 million or around Rp14.2 trillion as of February 2023.

Source: https://en.tempo.co/read/1716814/indonesia-de-dollarization-move-economist-weighs-its-plus-and-minu