Jakarta. Bank Indonesia, the country’s central bank, is optimistic that the value of trade and investment transactions settled in local currency will increase by 10% this year, adding a layer of protection against future global shocks.
Bank Indonesia Governor Perry Warjiyo said on Wednesday that the value of local currency settlement transactions had increased over the past two years. Settlements reached $2.53 billion last year, more than double the $797 million in 2020.
“This year we are aiming for an increase of at least 10%,” Perry said at the Indonesian G20 Presidency side event on Wednesday.
Central bank data showed that international trade accounted for more than 35% of local currency settlements last year, followed by remittances (14%) and direct investment (1%). The remaining 50% was made up of interbank transactions.
Two countries with a local currency settlement agreement can settle cross-border transactions using their respective currency in their respective jurisdiction. For example, a transaction between parties in Indonesia and Japan using Japanese yen can be settled in Japan. If the transaction uses rupiah, it will be settled in Indonesia.
Perry said local currency settlement could reduce dependence on the dollar, especially for international business transactions. He said the use of the dollar in trade could make regional economic risks more vulnerable to global shocks. As a result, this will threaten the stability of the macroeconomic and financial system.
“Using local currency to facilitate trade and investment will support economic stability to support economic growth,” Perry said.
Indonesia has entered into bilateral local currency settlement agreements with Malaysia, Thailand, China and Japan since 2018 and plans to invite more countries to sign similar agreements.
“We are growing by spreading information about this local currency settlement facility to countries that already have an agreement with us. In addition, we will even expand to other countries,” Perry said.
Bank Indonesia was also developing the National Non-Deliverable Forward (DNDF), a local currency hedging instrument, to further protect local currency transactions.