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L/C Required for Exports of Key Commodities

A new regulation set to take effect in April will require exporters of the country’s key commodities to use letters of credit (L/C) in their overseas shipments, a move that will help generate a reliable record of export earnings.

The rule, issued by the Trade Ministry last week, is set to affect four primary commodities: coal; palm oil and palm-kernel oil; oil and gas; and minerals, including tin. On average these items accounted for 41 percent of overall exports in the five years from 2009 to 2013 with an average of US$71.04 billion a year, according to the ministry’s statistics.

“By demanding the application of L/C in exports, we want to increase export earnings and at the same time get accurate records, particularly from sales of natural resources,” Trade Minister Rachmat Gobel said in a press conference on Wednesday evening. 

Based on the rule, the prices in the L/C should reflect actual transaction value. It also stipulates that without the letters, overseas delivery cannot be executed.

The measure comes at a time when Indonesia, one of the world’s main suppliers of commodities such as palm oil and coal, struggles to maintain its export performance amid continuing weak demand caused by global economic slowdown.

The government aims to reach a 25.67 percent growth in non-oil and gas exports to $192.9 billion this year from $153.5 billion estimated for the past year.

The policy demanding L/C in international trade activities was implemented in 2009 to raise foreign exchange (forex) reserves, but was lifted a year later.

It also resonates with the ongoing situation in which the local currency faces greater pressure as the US dollar strengthens and in that context, bigger forex earnings are perceived as necessary to support the weak rupiah.

The Finance Ministry’s customs and excise revenue and regulations director Susiwijono Moegiarso said that the mandatory use of L/C issued by local banks would complement the central bank’s step to better manage the flow of foreign currencies.

Since 2011, Bank Indonesia (BI) has demanded that Indonesian exporters report and keep their dollar-based export revenues in local banks within 90 days of receiving payment to help support the Indonesian currency.

Nevertheless, a significant number of exporters have yet to comply, with BI’s latest data showing that at least 20 percent of the country’s proceeds from external trade were not reported and were kept in offshore banks.

Susiwijono said that the requirement to apply L/C in exportation would help push up the rate of compliance by exporters.

“The [exporters of] commodities subject to the L/C obligation are among those that have so far not fully complied with the prerequisite to report export revenues,” he said. 

A letter of credit is a document from a bank guaranteeing that a seller will receive payment in full as long as certain delivery conditions have been met.