Freeing ASEAN from US dollar reliance

The rupiah should have a stronger value against the US dollar since Indonesia frequently records a surplus in its trade with the US, he added. (File Photo: Live Richer/Unsplash)

JAKARTA – The Association of Southeast Asian Nations (ASEAN), currently chaired by Indonesia, is stepping up efforts to intensify regional cooperation in promoting the use of local currencies in cross-border transactions.

At the 10th Meeting of ASEAN Finance Ministers and Central Bank Governors (AFMGM) in Jakarta from August 22 to 25, the Southeast Asian finance and central bank chiefs agreed to form a task force to promote local currency transactions (LCT) and adopt high-level principles in developing the ASEAN LCT Framework.

On the final day of the meeting, the central bank governors of Indonesia, Malaysia, and Thailand inked a memorandum of understanding (MOU) to strengthen LCT cooperation, with the objective of further promoting the use of local currencies in cross-border transactions by involving market players on a broader scope.

The MOU essentially constitutes a renewed and expanded version of the local currency settlement (LCS), on which an agreement was reached by Bank Indonesia (BI), Bank Negara Malaysia, and Bank of Thailand on December 23, 2016.

Under LCS, Indonesia, Malaysia, and Thailand will cooperate to use their currencies in bilateral trade activities as well as in direct investment.

BI Governor Perry Warjiyo said it is necessary to expand the economic activities covered by the agreement.

The change of the word “settlement” in LCS to “transaction” in LCT signifies that the agreement now also covers other economic and financial activities, in addition to trade and direct investment, he said.

The expanded agreement also aims to enable access to cross-border payments for completing transactions in local currencies more efficiently, which, in turn, could help the countries break free from their reliance on the United States (US) dollar in cross-border transactions.

So far, in addition to the three pioneer countries, three partner countries of ASEAN — China, Japan, and South Korea — have joined the LCT cooperation.

China and Japan have been actively implementing it, whereas South Korea is currently in the exploratory phase.

Implementation of LCT cooperation has proven instrumental in reducing the countries’ dependence on the US dollar in bilateral transactions.

BI data showed that as of July 2023, the value of transactions in local currencies reached a figure equivalent to USD3.7 billion, an improvement over the total transaction value of USD4.1 billion in 2022.

Destry Damayanti, Senior Deputy Governor of BI, said Indonesia’s local currency transactions with Malaysia have, so far, been the most productive since they have involved a very wide range of business actors.

Some parties have expressed optimism regarding LCT cooperation bolstering the independence of the participating countries in terms of currency.

Director of the Center of Economics and Law Studies (CELIOS), Bhima Yudhistira, said Indonesia will be able to maintain the valuation of the rupiah, its national currency, at Rp15 thousand per US dollar for a considerable period if the country manages to use its currency in 40 percent of its total economic and financial activities with other ASEAN countries.

He pointed out that to optimize the agreement, all participating countries will need to ensure that they are ready and capable of supporting the use of local currencies while paying close attention to non-dollar foreign exchange markets.

Said Abdullah, chairperson of the Budget Committee of the House of Representatives (DPR), shared a similar view, saying that monetary instability in the US has often led to the rupiah’s depreciation.

The rupiah should have a stronger value against the US dollar since Indonesia frequently records a surplus in its trade with the US, he added.

The promotion of the use of local currencies in economic and financial activities in Southeast Asia will be particularly beneficial for economies of developing countries in the region, said Eko Listyanto, deputy director of the Institute for Development of Economics and Finance (Indef).

Meanwhile, Indonesian Finance Minister Sri Mulyani Indrawati described the initiative to promote the use of local currencies in the region as a pertinent policy for countries to survive the uncertainties in the current global economic climate.

LCT cooperation, she said, can connect services among ASEAN countries and bolster the economic and financial resilience of the region.

At a press conference on the results of the 42nd ASEAN Summit in Labuan Bajo, East Nusa Tenggara in May of this year, Indonesian President Joko Widodo said efforts aimed at intensifying the implementation of LCT align with ASEAN’s resolve to make Southeast Asia a resilient and independent region.

Among the results of the summit was the ASEAN Leaders’ Declaration on Advancing Regional Payment Connectivity Promoting Local Currency Transactions.

Indonesia is seeking to optimize the momentum of its 2023 ASEAN chairmanship to continue encouraging the integration of ASEAN countries in the economic sector, including pushing for the expansion and implementation of LCT cooperation.

It is expected that promoting the use of local currencies in regional transactions will help ASEAN countries become economically independent amid global challenges. (Anadolu)