BI to Enforce No-Dollar Rule Despite Opposition

Bank Indonesia (BI) has decided to stand firm in enforcing the ban on US dollars for domestic transactions, arguing that it had given enough exemptions for some strategic industries that the economy would not be negatively affected by the rule.

BI spokesperson Peter Jacobs confirmed Tuesday that the requirement to use rupiah in all domestic transactions would go ahead on July 1 as planned, despite opposition from certain local businesspersons.

“Our position is that we will continue implementing this rule. Those opposing [the regulation] are yet to understand its details and, especially, its exemptions,” he wrote in a text message.

Beginning this Wednesday, BI will fully implement the central bank regulation (PBI) no. 7 that regulates the mandatory usage of rupiah for all transactions onshore, with the central bank banning all transactions conducted in foreign exchange currencies such as the US dollar.

The regulation is designed to rein in local demand for dollars and stabilize the rupiah, known as among Asia’s most volatile currencies.

The rupiah was traded at 13,395 per dollar on Tuesday, and data from Bloomberg showed that the currency led losses in Asia in 2015, falling 1.9 percent in the second quarter and at least 7 percent this year.

The central bank’s mandatory rupiah use was met by opposition from importers and even government officials who received complaints from state-owned firms. Some economic stakeholders fear a rise in costs, as they frequently use dollars in their transactions to safeguard their balance sheets against the rupiah’s depreciation.

The regulation, nevertheless, grants several exemptions for a number of transactions. The PBI said that non-rupiah currencies could still be used in international financial and commercial transactions, specified incomes and expenditures under the state budget, foreign currency savings and deposits in banks, as well as many other transactions allowed by the BI Law and the Investment Law.

In Indonesia, domestic transactions conducted in foreign exchange outside of the rupiah amount to US$11-12 billion a day, which “does not appear to be significantly large enough to have an impact on the day-to-day movement of the exchange rate”, Maybank analysts, led by Saktiandi Supaat, wrote in a research note analyzing the rule.

In the mining sector, business players have raised concerns that the Indonesian coal price would plunge further following the implementation of the government’s new regulation.

Indonesian Coal Mining Association chairman Pandu Sjahrir said that the necessity of using rupiah in coal purchasing or selling transactions would push traders to set a lower price than the benchmark in an attempt to compensate for fluctuations in the exchange rate.

Government to Sign Revised Mining Contracts This Month

The Energy and Mineral Resources Ministry will this month sign amended contracts of work with nine coal mining companies after it recently finished renegotiations with the miners.

The ministry’s director general for minerals and coal, Bambang Gatot Ariyono, said on Thursday that the formulation of financial obligations was signed by the Finance Ministry’s Fiscal Policy Office, the Energy and Mineral Resources Ministry and nine coal companies holding contracts of work.

“The signing means that the nine companies have agreed to the formulation of the coal mining contract. Therefore, we plan to sign the amendments to their contracts of work probably after Lebaran,” Bambang said.

The renegotiation of contracts of work has been lengthy, particularly because of contentious issues related to financial obligations. Among terms regulated in the financial obligation formulation are requirements that coal mining companies pay royalties in advance and that an export tax may be imposed in the future. The two issues contributed to a standoff in the re-negotiations with coal mining firms, which saw the requirements as disadvantage to them.

“The nine companies hold the second generation of coal contracts of work that abide by the prevailing regulation. It means that whatever regulation applies, they have to follow,” Bambang said, referring to the nine companies’ willingness to adopt the new requirements.

The nine companies are Indominco Mandiri, Antang Gunung Meratus, Bahari Cakrawala Sebuku, Borneo Indo Bara, Gunung Bayan Pratama Coal, Jorong Barutama Greston, Kartika Selabumi Mining, Mandiri Inti Pratama and Trubaindo Coal Mining.

The re-negotiation was part of the government’s move to renegotiate numerous contracts of work held by mineral and coal companies following the implementation of the 2009 Mining Law. 

The renegotiations aim to adjust several points in the contracts of work to provide greater benefits to the government from mining activities throughout the period of the contracts before they shift to mining permits.

The 2009 Mining Law aims to change the mining regime from “contract” to “permit”, which will give the state a superior position.

Renegotiations should have been completed one year after the law was passed. However, the target was frequently extended and has been missed because of the complexity of related issues.

Six main issues are on the table for renegotiation, namely adjustments to royalties, mining concession size, obligations for downstream activities, continuance of operation after contract expiry, divestment and the use of local goods and services.

Seventy-three coal contracts of work and 34 mineral contracts of work are to be renegotiated. Out of the total, only one contract has been amended and signed, which is the contract of work of nickel miner PT Vale Indonesia.

Energy and Mineral Resources Minister Sudirman Said said the ministry was committed to completing renegotiations with other coal mining firms.