Problems relating to Trade and Investment on Indonesia

12. Exchange controls
Issue	Issue details	Requests	Reference

(1) Application of the Real Demand Principle on Foreign Exchange Transactions in Rupiah	- Member firm's subsidiary incorporated in Indonesia is unable to deal in foreign exchange in Rupiah with another member firm incorporated in Singapore operating financing business in the same group, because GOI applies the principle of real demand as regards Rupiah related foreign exchange transactions.	- It is requested that GOI liberalises foreign exchange transactions.	- BI Foreign Exchange System
	(Action) - On 12 January 2001, GOI introduced regulation to restrict fund transfer between Rupiah bank accounts, prohibiting, in principle, the transfer of Rupiah between the non-residents, and restricting such transfer between residents and non-residents only relative to transactions contributory to the Indonesian economy. - Since July 2005, GOI has required submission of the underlying declarations, contracts, etc. for remittance in Rupiah to non-resident bank accounts - BI promulgated on 12 November 2008 Regulation No.10/28/PBI/2008 on "The Purchase Of Foreign Currency Against Rupiah Through Banks", that requires to the domestic non-bank legal entity and Foreign Funded Enterprises (FFEs) submission of evidence that shows underlying transactions, in the case where purchase of foreign currency is involved in the amount exceeding US$100,000. Valid underlying transaction documents include payment for the cost of import, accounts payable and other business activities. Commercial banks are required to collect and maintain adequately the record of the underlying transactions backed by evidence. Any banks not observing the requirements under this Regulation is subject to administrative penalty or fine in the amount not more than 10 million Rupiah (US$899). - On 28 June 2011, "Law No. 7/2011 on Currencies" was promulgated and enforced. Article 21 of the Law provides that the Rupiah must be used for all transactions in Indonesia, including without limitation, special transactions related to the national coffer for revenue/expenditure, external and internal free assistance, international commercial transactions, foreign fund deposit in banks, all settlement of accounts, excluding international settlement transactions, monetary debt settlement and all other financial transactions. - "A.P. (DIR Series) Circular No.124 of 10 May 2012" compels conversion into Rupiah of 50% of the amount of foreign currency revenue received by exporters, etc. at Exchange Earner's Foreign Currency (EEFC) Account. - When a foreign funded enterprise (FFE) purchases Rupiah in the amount corresponding to more than USD100,000 per month through a domestic Indonesian bank, the Central Bank compels FFE's submission to the Indonesian Bank of documents that certify the needs for purchase of foreign currency. (Indonesia Regulation No.10/28/PBI/2008 on "Purchase of Foreign Currency vs. Indonesian Rupiah through Banks") - On 31 March 2015, bank Indonesia promulgated Regulation No. 17/3/PBI/2015 on the mandatory use of the rupiah (IDR)on all transactions in the territory of the republic of Indonesia. Enforcement date is from 1 March on transactions in cash, and for all transactions other than in cash, from 1 July 2015.However, as exceptions, this regulation does not apply to "receipt or payment between the states of free assistance fund, foreign currency transactions, foreign currency deposit, foreign currency transactions at banks, infra-projects (transportation, road, irrigation, water, public hygiene, information/ communication, electric power, petroleum, oil/gas, etc." at banks.

(2) Restricted Offshore Borrowing

- On 3 October 2011, BI promulgated "New Regulation on Export Proceeds and Offshore Borrowing Fund". While the new Regulation enables "exporter's net settlement of account with importers during 2012, from 2013 only gross settlement is permitted". A member firm now only exercises net settlement of account with its financial enterprise of the same group in Singapore for cost of trade, expenses and foreign exchange settlement. However, if in gross settlement, operational complications will result, as gross settlement must be made on transaction-by-transaction basis.

- It is requested that BI liberalises the foreign exchange transactions (by repealing the new Regulation).

- BI Foreign Exchange System

(3) Instability of Foreign Exchange Rate	- The loss or profit from foreign exchange fluctuations heavily impacts especially the foreign investment report.	- It is requested that GOI holds down radical fluctuations in foreign exchange transactions.	- Reference: Malaysian Regulation on their Foreign Exchange
	(Action) - In August 2013, the Central Bank of Indonesia released its emergency economic measures, including improvement in balance of trade, promotion of investment and expansion of export industries, raise in key interest rate, improvement in financial liquidity moreover, exchange intervention, as well.
	(Improvement) - On 12 December 2013, the 3rd Bilateral Swap Arrangement (BSA) was ratified. It has almost doubled the cap from 12 billion to 22.76 billion. In addition, financial institutions operating in Indonesia signed fund supply agreement that enables Rupiah procurement on security of Japanese Government Bond.

(4) Rapid Exchange Fluctuations

- A member firm in direct trade with its local subsidiary (MFS) gains some exchange profit from the lower yen that enables MFS's resale at a special price level. Nevertheless, the bulk of MFS sales are made with thin profit so that should the transactions continue at higher yen, MFS will easily turn into deficits.

- It is requested that GOI endeavours to keep the exchange fluctuations within a few percents in 6-months.

(5) Exchange Fluctuations suppress Rupiah, push up Bank Interest	- Weaker rupiah, and rising consumer price index resemble closely the high growth era of Japan, approaching the pre-bubble circumstances. High rupiah interest rates bring about a heavier burden of interest on the bank borrowing. MFS seeks exchange risk hedge (avoidance of risk) upon the external borrowings.	- It is requested that GOI takes a quid pro quo approach, adjusting to the changing circumstances.
	(Action) - On 17 March 20015, Bank of Indonesia promulgated new Regulation No. 17/3/PBI/2015 on the Mandatory Use of the Rupiah in the Territory of the Unitary State of the Republic of Indonesia. It is aimed at combating Rupiah depreciation by a partial exemption. Enforcement is due from 31 March 2015 on Cash Transactions and from 1 July 2015 on Non-Cash Transactions.

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