Freeing Asean from US dollar reliance

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, Southeast Asian finance ministries and central bank governors agreed to form a task force to promote local currency transactions (LCT) and adopt high-level principles in developing the Asean LCT Framework, said Antara news agency.

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 Dec 23, 2016.

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

Governor of BI, Perry Warjiyo, however, said that 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 explained.

Furthermore, the expanded agreement 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.

The implementation of LCT cooperation has proven instrumental in reducing the countries' dependence on the US dollar in bilateral transactions. Based on data provided by BI, as of July 2023, the value of transactions in local currencies reached a figure equivalent to US$3.7 billion, an improvement over the total transaction value of US$4.1 billion in 2022.

Destry Damayanti, Senior Deputy Governor of BI, said that 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. The promotion of LCT is expected to help the countries end their reliance on the US dollar in cross-border transactions.

According to the director of the Center of Economics and Law Studies (CELIOS), Bhima Yudhistira, 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 per cent of its total economic and financial activities with other Asean countries.

Even so, he pointed out, in order to optimise 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, Abdullah added.

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

Meanwhile, Indonesian Minister of Finance, 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, held in Labuan Bajo, East Nusa Tenggara, in May of this year, President Joko Widodo said that 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 optimise 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. - BERNAMA