Jakarta. Bank Indonesia is encouraging businesses to make greater use of local currencies in cross-border transactions rather than relying heavily on the US dollar, as the central bank seeks to diversify foreign-exchange demand and support rupiah stability.

Erwin Gunawan Hutapea, Bank Indonesia's head of monetary management and securities assets, said Wednesday that Indonesia has expanded its Local Currency Transaction (LCT) framework with several trading partners, allowing businesses to settle eligible transactions directly in their respective currencies.

For transactions with China, for example, Indonesian businesses can use rupiah and yuan, while transactions with Malaysia can be settled in rupiah and ringgit. Similar arrangements allow rupiah and baht to be used in transactions with Thailand, Erwin said.

The framework provides an alternative to the traditional practice of using the US dollar as an intermediary currency.

An Indonesian company importing goods from China, for example, can settle an eligible transaction directly in rupiah and yuan rather than first obtaining US dollars to make the payment.

The wider use of local currencies could help diversify demand for foreign exchange in Indonesia's domestic market, Erwin said.

“So not all foreign-exchange demand is concentrated in US dollars,” he said at a press briefing in Jakarta.

His comments came as the rupiah again traded beyond Rp 18,000 against the US dollar, putting renewed attention on Bank Indonesia's efforts to stabilize the currency.

Reducing Reliance on the Dollar
Bank Indonesia has been expanding local-currency arrangements with trading partners as part of a broader effort to reduce reliance on the US dollar for bilateral transactions.

Under the LCT framework, businesses can use designated banks to facilitate direct exchange between the rupiah and partner-country currencies.

This can eliminate the need for two separate currency conversions.

For example, without direct local-currency settlement, an Indonesian importer purchasing goods from China may need to convert rupiah into US dollars before the payment is ultimately converted into yuan.

With direct rupiah-yuan transactions, the intermediate dollar conversion can be avoided.

Erwin said broader use of local currencies could improve the structure of foreign-exchange demand in the domestic market by reducing its concentration in dollars.

The policy is part of Bank Indonesia's wider strategy for maintaining rupiah stability, alongside intervention in the foreign-exchange market and other monetary and financial-market measures.

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