New regulation on domestic IDR transactions raises concerns

Regulation BI 17/2015 was issued as part of BI's efforts to clarify and implement Law No. 7 of 2011 on Currency, which requires the use of the IDR for domestic financial transactions.

"We believe the new regulation is also part of the Indonesian government's measures to promote the development of the FX market. Another reason may be to create more IDR demand, while controlling volatility in the currency", says Standard Chartered.

The expected increase in US interest rates and broad USD appreciation have weakened the USD-IDR rate significantly. The Indonesian government hasresponded with several measures to re-evaluate the IDR's attractiveness against the USD. It mandated in January this year that all export transactions of Indonesian minerals, oil and gas, and palm oil be backed by letters of credit and proceeds collected through Indonesian banks.

The new regulation reads as follows: 'Utilisation of [the] Rupiah for every transaction in the Republic of Indonesia is required in order to achieve the stability of the Rupiah exchange rate.'

Standard Chartered notes a 'transaction' includes 

• (1) every transaction for the purpose of payment 
  
  
• (2) a settlement of other obligations that must be met with money
  
  
• (3) other financial transactions. 

The regulation specifies only a few exemptions, one of which is international trade transactions. This implies that exports of coal, minerals, and oil and gas are not affected, as they fall under 'international trade', adds Standard Chartered.