Currency Diversification Strengthens Economic Stability

Jakarta, 16 February 2022 – The Covid-19 pandemic has impacted the financial markets, trade and investment. Indonesia has prepared itself, however, through a series of significant and fundamental measures to address financial market volatility in terms of managing market sentiment and anticipating the policy response instituted in advanced economies (AEs). Indonesia is actively involved in several bilateral initiatives for currency diversification, including use of Local Currency Settlement (LCS) to bolster economic stability. That was the main takeaway delivered by the Minister of Finance, Sri Mulyani Indrawati, at the Leader’s Insight session, entitled Strategic Policy Framework to Enhance Use of Local Currency Settlement for Trade and Investment in Asia (16/02). The session is part of the third day of side events of the 2nd Finance and Central Bank Deputies Meeting (FCBD) and 1st Finance Ministers and Central Bank Governors Meeting (FMCBG) of Indonesia’s G20 Presidency, held 14-19th February 2022 in Jakarta. The Finance Minister also took the opportunity to express her utmost appreciation for Bank Indonesia’s tireless efforts to promote LCS since 2018.

Furthermore, the Bank Indonesia Governor, Perry Warjiyo, stressed the importance of currency diversification to facilitate global investment and world trade among developing economies, thus driving economic growth and reducing vulnerabilities, including the potential systemic impact of global shocks. As a form of currency diversification, local currency settlement (LCS) can dampen exchange rate volatility and reinforce economic stability. In 2022, LCS transactions are targeted to increase after experiencing significant growth in 2021, with plans for further expansion into other countries.

Echoing those sentiments, the Governor of the People’s Bank of China (PBC), Yi Gang, confirmed PBC support for currency diversification. Yi Gang expressed confidence that LCS schemes can unlock trade and investment. Therefore, PBC support has been realised through implementation of a bilateral LCS scheme between China and Indonesia, which has strengthened the economies of both countries, while accelerating the economic recovery in Asia. At the high-level discussion, the Chief Representative of the Bank for International Settlements (BIS) for Asia and the Pacific, Siddharth Tiwari, added the current need to enhance the attractiveness of local currency markets through financial market deepening using local currencies, including the SUN market, repo market and derivatives market to hedge against currency risk. The BIS Chief Representative also urged central banks to engage with investors to increase participation in corporate bonds denominated in local currencies, such as the BIS Asian Bond Fund.

The second session of the day, a discussion forum amongst economic players, including Senior Indonesian Economist, Chatib Basri, President Director of Bank Mandiri, Darmawan Junaidi, President Director of Bank Central Asia (BCA), Jahja Setiaatmadja, and Chairman of the Indonesian Employers Association (Apindo), Hariyadi B Sukamdani, focused on the role of Appointed Cross Currency Dealers (ACCD) to facilitate LCS transactions for exporters-importers as well as investors (foreign direct investment). ACCD bank support through incentive schemes can optimise LCS use and provide employers and investors with a choice of currencies for business transaction settlement to mitigate risk during the imminent exit policy period.

These activities are intended to support the national economic recovery by fostering trade and investment through LCS promotion in the Asian region, considering Asia’s growing presence in global economic activity. Consistent with the vision and agenda of Indonesia’s G20 Presidency in 2022, Bank Indonesia constantly strives to increase collaboration with other emerging markets and developing economies (EMDEs) as well as advanced economies to increase the contribution to national, regional and global financial system stability.

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