Indonesia’s Ministry of Trade Requires Letter-of-Credit Settlement for Exports of Key Commodities
According to a January 16 report by The Jakarta Post, Indonesia’s Ministry of Trade has just issued a regulation requiring that exports of coal, palm oil, oil and gas, and mineral products be conducted exclusively via letters of credit; otherwise, such exports will be prohibited. The regulation is scheduled to take effect in April. These four product categories accounted for 41% of Indonesia’s total export value from 2009 to 2013, averaging approximately US$71.04 billion per year. Under the new rule, the value of letters of credit will reflect the actual transaction prices for these exports.
At present, Indonesia, as a major global exporter of commodities such as palm oil and coal, is facing sluggish external demand due to the global economic downturn, making the export outlook decidedly pessimistic. The Indonesian government aims to increase non-oil and gas exports in 2015 from last year’s US$153.5 billion to US$192.9 billion. In addition, the rupiah has been steadily depreciating against the U.S. dollar; boosting foreign-exchange earnings could help stem further depreciation of the rupiah. In fact, as early as 2009, the Indonesian government mandated the use of letters of credit in international trade to bolster foreign-exchange reserves, but the policy was discontinued after just one year.
Officials at Indonesia’s Ministry of Finance stated that the mandatory use of letters of credit can be coordinated with relevant central bank policies to better manage foreign-exchange flows. In 2011, the Bank of Indonesia required exporters to deposit U.S. dollar proceeds in local Indonesian banks within 90 days of receipt, in order to support the rupiah exchange rate; however, according to central-bank statistics, at least 20% of foreign-exchange earnings were not reported to the central bank and were instead held in overseas banks. The implementation of the letter-of-credit policy is expected to encourage exporters to comply with the central bank’s regulations.
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