Bank Indonesia Detects Lower Foreign Currency Demand
Although causing waves of both criticism and support, Indonesia's central bank implemented BI Regulation No. 17/3/PBI/2015 regarding the Mandatory Use of the Rupiah in Indonesia on 1 July 2015 thus restricting the use of foreign currencies in transactions conducted within Indonesia in an effort to deepen the domestic rupiah market and stabilize the rupiah. After nearly seven months in effect the new regulation seems to have worked and lessened domestic demand for the US dollar according to a Bank Indonesia official.
Juda Agung, Executive Director of Economic and Monetary Policy at Indonesia's central bank (Bank Indonesia), stated that before the implementation of this regulation in July 2015 domestic purchases of foreign currencies reached USD $7 billion per month. Currently, however, the central bank only detects foreign exchange demand at USD $3 billion per month, down 60 percent. Agung added that after the implementation of the ninth economic stimulus package domestic demand for foreign currencies should decline further. One of the points in this package is the revision of Transportation Ministry Regulation No.3/2014 on the Use of Foreign Currencies for Transportation Payments. By revising this regulation the Indonesian government makes the use of the rupiah mandatory for payments related to transportation activities. Currently there are still many logistics and trade activities in which foreign currencies are used.
David Samuel, economist at Bank Central Asia (BCA), said the lower demand for foreign currencies is caused by two factors. Firstly, due to BI Regulation No. 17/3/PBI/2015. Secondly, due to the slowing economy. As Indonesia's economy has been in slowdown-mode since 2011 economic activity has been slowing accordingly. For example, imports into Indonesia during 2015 fell 19.9 percent (y/y), while the country's exports declined 14.6 percent (y/y).
Economist Lana Soelistianingsih added that over the past two years more and more Indonesian companies have been engaging in foreign exchange hedging programs to reduce the risk of rupiah depreciation. According to Soelistianingsih, hedging contributed to rupiah stability.