LCS Benefits for Businesspeople

ALIF ICHWAN

Loading and unloading activities at the container port, Jakarta International Container Terminal, Tanjung Priok, Jakarta, Friday (4/10/2019).

The benefits of Bank Indonesia’s innovative move several years ago has now been felt. The local currency settlement (LCS) policy has brought convenience to businesspeople.

During the enforcement of the policy to use local currencies from 2018 to 2021, international trade and investment transactions in Indonesia that no longer used the US dollar generated Rp 36 trillion, or equivalent to around US$ 2.53 billion. The transactions were made as part of Indonesia’s trade and investments with the four countries that had agreed to implement the LCS, which are China, Japan, Malaysia and Thailand. Dependence on the US dollar is expected to decline further, so as to maintain the stability of the rupiah exchange rate (Kompas, 17/2/2022).

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Through the cooperation under the LCS policy, businesspeople from Indonesia and its partner countries can use their respective local currencies in trade and investment transactions. Before this cooperation existed, all transactions used the US dollar. The LCS is a form of cooperation initiated by Bank Indonesia (BI) with the central banks of China, Japan, Malaysia and Thailand.

Changes frequently occurred, so business decisions were even more difficult to make.

We still remember that during the monetary crisis of 1998 and several years afterwards, the increase in the exchange rate of the US dollar against the rupiah caused a headache for businesspeople. They had to monitor the movement of the currency at all times. Changes frequently occurred, so business decisions were even more difficult to make.

The existence of the LCS policy certainly does not automatically put an end to uncertainty. Nevertheless, transactions with business partners in the four countries have become easier and more convenient. Businesspeople no longer need to change their money into US dollars, and can instead directly use the local currency. Their dependence on the US dollar could be gradually reduced.

KOMPAS/M CLARA WRESTI

A container ship is docked at Tanjung Perak Port, Surabaya, East Java.

Businesspeople certainly feel it has been more efficient in conducting transactions and has definitely saved transaction costs. More importantly, business calculations and investment decisions can be made faster. Business activities in the partner countries have indeed become more enthusiastic. Trade and investment values are definitely rising. External risks to businesses can also be mitigated or lessened.

More than that, the most important effect of the LCS cooperation is that it has been able to suppress the volatility of the market exchange rate. Demand for the US dollar could be reduced, so the market is not easily shaken by the large sums demanded. The LCS policy has also had an impact on economic stability over the short term as well as the long term.

We hope that Bank Indonesia can continue to carry out measures to maintain exchange rate stability. The central bank also needs to follow up with policy innovations to decrease external pressures. Businesspeople who feel that the policy has made it convenient to do business will of course respond by developing even more substantial trade and investment.

(This article was translated by Aris Prawira)