Vincent Fabian Thomas, Jakarta – Indonesia has responded cautiously to the idea of creating an Asian Monetary Fund as a way to reduce the region's reliance on the United States dollar.
Recent talks between China and Malaysia have revived the decades-old proposal for such an institution, which would perform functions similar to the International Monetary Fund, but with a focus on the Asian region.
Coordinating Economic Minister Airlangga Hartarto told The Jakarta Post on Thursday that, in general, the idea was good for the region, but realizing it would require commitments from countries that may be hard to come by.
"First, there have to be countries committed to funding it. So, we can't just talk about [forming] the institution directly," Airlangga said during an interview in his office.
"Even the existing institution, the IMF, has many challenges," he added.
US dollars have become a tool for Western countries to attempt to cripple Russia's economy as part of sanctions imposed on the country following its invasion of Ukraine.
Countries that rely heavily on US dollars in their foreign trade have also suffered under the currency's volatility, as the dollar tends to appreciate during times of global economic uncertainty, which makes the purchase of foreign goods priced in US dollars more costly in local currency terms, leading to what economists refer to as imported inflation.
Airlangga suggested that the region focus rather on concrete policies, arguing that most Asian countries were unlikely to be able to reduce their reliance on the US dollar anytime soon.
One aspect to work on instead was local currency settlement (LCS), Airlangga suggested.
An LCS mechanism established by two countries' central banks allows them to settle transactions for trade or investment through the use of their respective currencies instead of US dollars.
Airlangga said the government had found that many Chinese companies investing in Indonesia were still opting to use US dollars despite Indonesia and China having established an LCS mechanism.
"It turns out that the LCS with China was not used by these companies," Airlangga said. "Even China still holds a large number of US dollars in its reserves," he added separately.
Airlangga went on to say that the government was keener on inking LCS agreements with more countries, as well as expanding the use of Quick Response (QR) codes to facilitate cross-border payments.
The government also encouraged ASEAN countries to create a regional central food bank, especially for rice, which was needed by most ASEAN member states, he said.
Furthermore, the minister expressed hope for more ASEAN countries to become involved in producing agreements and intensifying regional cooperation.
Currently, the region's five largest economies are the driving force behind ASEAN integration, while initiatives rarely involve all member states together.
"If we want to form [an Asian Monetary Fund], 10 ASEAN countries must commit as well," he said.
Domestically, Airlangga said, the country had taken measures to secure the supply of US dollars by ensuring that exporters deposit more of their export receipts with domestic banks instead of stashing the funds away overseas.
Bank Indonesia has pushed domestic banks to offer higher interest rates so as to match yields offered by foreign banks in the region, while the government is set to issue a regulation on the matter that is to include incentives in the form of lower withholding tax for export receipts stored inland.
Two economics professors expressed support for an Asian Monetary Fund in an article penned for the Asian Development Bank Institute back in 2019.
Suk Hyun and James F. Paradise, both from South Korea's Yonsei University, said such an institution was needed as the region required more effective financial crisis prevention and response mechanisms.
They argued there were lessons to be learned from Europe, including the need for strong economic surveillance and organizational arrangements facilitating macroeconomic adjustment, recapitalization of stressed institutions and a reduction in dependence on the US dollar for trade and finance.