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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.