To maintain rupiah resilience, Bank Indonesia will expand LCS transaction cooperation

Bisnis.comJAKARTA Bank Indonesia (BI) is committed to expanding cooperative business in local currency or in local currency (LCS). This move was taken by BI to maintain exchange rate resilience amid increasing risk of rupiah erosion.

LCS is a settlement mechanism for bilateral transactions conducted in local currency. This cooperation also includes the handling of settlements, which are carried out in each jurisdiction.

BI Economic and Monetary Policy Department head Solikin M. Juhro said the central bank has discussed this cooperation with two countries, namely India and South Korea.

So far, the SCS has been agreed between Indonesia and Malaysia, Thailand, Japan and China. “We discussed with India and South Korea and [LCS] that will develop,” said Solikin on Wednesday (June 15).

BI believes that the use of local currency needs to be optimized to reduce dependence on the US dollar. Consistent with the many countries that have cooperated, Indonesia is believed to be able to withstand the pressure of US dollar volatility.

The risk of rupiah erosion is growing after the Fed’s policy of raising interest rates, which has the potential to trigger foreign capital outflows capital outflow from emerging markets, including Indonesia.

This condition then increases the risk of the Rupiah exchange rate weakening. Additionally, the Fed is reported to be tightening monetary policy more aggressively in line with the far out-of-control inflation rate.

“Of course [LCS] associated with increasing stability. We need to extend the implementation of the LCS to other central banks,” Solikin said.

So far, the LCS cooperation has proven to be quite effective. Bank Indonesia (BI) noted that the value of LCS transactions reached $2.53 billion last year, much higher than the previous year, which was only $797 million.

The development of LCS transactions was driven by the significant contribution of transactions between Indonesia and Japan, valued at the equivalent of US$95 million, and between Indonesia and China, which reached US$128 million last year.

This positive trend has increased optimism from the central bank, which plans to increase the value of LCS transactions by 10% this year.

On the previous occasion, Governor BI Perry Warjiyo said expansion is a priority LCS will be conducted with Asian countries before expanding beyond the region.

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