It is very important to make the link between the real economy and the financial sector. This is because the financial sector plays an intermediary role for the economy. Policies on export earnings retention have often been used by developing countries, notably those which depend largely on natural resource exports, to increase the link between exports and the depth of the financial sector, and to help maintain exchange rate stability through the conversion of export earnings into local currencies.

The commodity boom increased Indonesia’s international trade surplus to US$54.46 billion in 2022 from $35.42 billion in 2021, but the positive trade balance seemed unable to contribute significantly to Bank Indonesia’s (BI’s) foreign reserves, as exporters hesitates to bring home their export earnings due to a lack of incentives and domestic investment instruments, as well as the low interest rates for foreign exchange deposits.

In the short term, this could pose a risk to exchange rate stability, which is being hit by the issues of inflation and global monetary policy tightening. BI has increased its policy rate by 225 basis points between August 2022 and January 2023, to 5.75 percent at present, to curb capital outflows.

Currently there are two kinds of policies on incentives for and the retention of foreign exchange earnings from the exports of natural resource commodities, as stipulated in Government Regulation No.1/2009. The regulation requires companies to bring their export earnings from natural resource commodities back into the domestic financial system by placing their earnings at a special natural resource-based export earnings account at banks that conduct business in foreign currencies, and no later than the end of the third month after submitting their export customs declaration.

Companies are entitled to use the retained export earnings to pay export duties and other related levies, loans, imports, dividends of exporters, as stipulated in Article 8 of Investment Law No. 25/2007.

As regards incentives for retaining export earnings in the domestic financial system, BI exempts retained export earnings deposited at commercial banks from the compulsory minimum reserve ratio, to enable domestic banks to provide attractive interest rates to exporters. The Finance Ministry also exempts foreign exchange deposits at domestic banks from interest revenues to attract exporters to put their export earnings into the domestic financial system.

However, these incentives still do not seem very attractive to many exporters, due to the lack of investment instruments for foreign exchange funds and the low interest rates for foreign exchange deposits at domestic banks. The central bank recently said that exporters often preferred to pay administrative penalties for not complying with Government Regulation No. 1/2009.

The government might strengthen its policies on incentives and disincentives to force exporters to repatriate their foreign exchange earnings. Exporters also should be given a wider variety of investment instruments where they can put their foreign exchange earnings, and banks need to raise the interest rates for foreign exchange deposits.

The government may also extend the minimum time period of only three months at present for the mandatory retention of foreign exchange earnings at domestic banks. Other countries that also mandate export earnings retention have set a minimum period of around two years.

Moreover, some countries impose mandatory retention at domestic banks for export earnings from not only goods and merchandise, as Indonesia, Malaysia and Nepal do, but also services, such as Bangladesh, India, Pakistan and Thailand. In addition, many countries also impose conversion obligations at varying levels, depending on exchange rate stability.

Policies on Foreign Exchange Export Proceeds (DHE) that are not based on market mechanisms may run afoul of several international standards for free foreign exchange such as the International Monetary Fund’s Article VII, but it must be underlined that developing countries with weaker currencies need stronger enforcement of the mandatory retention of export earnings at domestic banks to increase economic resilience and the depth of their financial sector.

However, it should be underlined that the implementation of this mandatory policy should give adequate leeway to exporters. This is because the current global financial turmoil requires the public, including businesses, to be prepared for uncertainty in the exchange rate.

 

-- The writer is a financial sector analyst at the Finance Ministry. The views expressed are her own.