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ASEAN local currency guideline in works
ASEAN is looking to expand the use of local currencies to settle trade and direct investment between member countries in a bid to stabilize the region’s financial market
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span>ASEAN is looking to expand the use of local currencies to settle trade and direct investment between member countries in a bid to stabilize the region’s financial market.
Bank Indonesia (BI) is drafting a local currency settlement framework guideline that will enable the use of local currencies to settle trade and direct investments between ASEAN member countries.
BI international department deputy director Haris Munandar said the central bank was giving suggestions on the drafting of the ASEAN local currency settlement (LCS) framework guideline.
“We want to expand the use of local currency in bilateral trade and direct investments to more countries in the region,” he said during a press briefing in Jakarta on Tuesday.
Only Indonesia, Malaysia, Thailand and most recently the Philippines have committed to promoting the use of local currencies in bilateral trade under the LCS.
BI international department director Wahyu Purnomo said Indonesia had implemented the framework with Malaysia and Thailand in 2017 and the three countries recently agreed to implement the framework with the Philippines during the ASEAN Finance Minister and Central Bank Governors Meeting in Chiang Rai, Thailand, last week.
He said the framework between the four countries was only applicable to bilateral trade. However, he added the LCS framework would also be applicable to direct investments between the four countries.
Given that Indonesia, Malaysia, Thailand and the Philippines had implemented the framework, Haris said, BI would model the ASEAN LCS framework guideline on the four countries’ existing framework and would be open to suggestions from other countries as well.
He said the guideline would contain the steps countries needed to take to enable the use of local currency in bilateral settlements, such as establishing memorandum of understandings and cross-currency quotations.
He continued that the guideline would also help the countries choose which private banks could carry out the transaction.
He expected the draft to be finished by the end of this year, after which it would be discussed among the 10 ASEAN central bank governors during the next Finance Minister and Central Bank Governors Meeting in Vietnam in 2020.
Wahyu expressed hope that when the use of local currencies would become significant, it would make the region more stable, especially during events of massive capital outflows that often disrupted trade transactions in the region.
He said, however, that the guideline merely presented an alternative to other member countries in settling their trade transactions.
“We’re not aiming to replace the use of US dollars in trade in the region with this framework, but only present an alternative,” he said, noting that there were many traders in the region that still needed to use the greenback.
Bank Central Asia economist David Sumual said local currency transactions with Malaysia and Thailand were still insignificant.
“The amount of local currency settlements is still in the millions [of dollars equivalent], far below our total trade that hit almost US$300 billion in February,” he said.
BI data showed that local currency settlement between Indonesia and Thailand was the equivalent of $50 million, while transactions between Indonesia and Malaysia was the equivalent of $130 million in 2018. As of the first quarter, transactions between Indonesia and Thailand stood at an equivalent of $10 million, while transactions between Indonesia and Malaysia stood at an equivalent of $50 million.
David said this was not only caused by the fact that many traders still needed to use the US dollar but simply because they did not know that they could use local currencies to settle transactions with other countries.
Indonesia Employers Association (Apindo) deputy chairwoman Shinta Kamdani agreed with David, saying that many exporters and importers were unaware that they could use the rupiah, Malaysian ringgit or Thai baht in their transactions.
That said, she suggested the government do more to raise awareness and help make the rupiah more stable.
David added that other countries’ government, banks and the central banks had to educate traders to promote the existing local currency settlement framework between Indonesia, Malaysia, Thailand and the Philippines, so that it could have a significant impact once the guideline had been implemented.
