Background

Pursuant to the Indonesian Currency Law No. 7 of 2011, which sought to encourage the use of Indonesian Rupiah (IDR) for domestic Indonesian transactions, the Bank of Indonesia passed, on 31 March 2015, Regulation 17 which will ban the use of foreign currencies in such transactions.

According to the Bank of Indonesia’s director of money management, the Regulation is part of an effort to avoid a “dollarized economy” and uphold the “sovereignty of the rupiah”.

Scope of Regulation 17/2015

Regulation 17/2015 will require the use of IDR for domestic Indonesian transactions. The Regulation will apply to both cash and non-cash transactions, and will also prevent affected sellers from quoting their prices in a foreign currency.

There are, however, several exceptions to Regulation 17/2015, including:

  1. State budget transactions, i.e. foreign debt payments, payments of a domestic debt in a foreign currency, shopping goods from abroad, capital expenditure from abroad, and state revenues from the sale of state bonds denominated in foreign currencies.
  2. Grants given by, or to, a party domiciled abroad.
  3. International trade transactions, defined as the import/export of goods or service trade activities which involve either a cross-border supply or consumption abroad.
  4. Bank deposits denominated in foreign currencies.
  5. International financing transactions where one party (either financier or recipient) is domiciled abroad.
  6. Bank activities in foreign currencies conducted in accordance with the prevailing law, i.e. export credit, inter-bank money market, bonds, sub-debt and other securities denominated in foreign currencies.
  7. Government bonds and securities denominated in foreign currencies.
  8. Infrastructure projects that have been approved by the Bank of Indonesia.

Regulation 17/2015 contains a further exception from the mandatory use of IDR for the settlement of obligations where a foreign currency has been agreed in writing.

Of the above listed exceptions, 5 and 6 are the most significant. Most international transactions will likely not be affected by Regulation 17/2015, to the extent they are made in the framework of international trade and financing. In this sense, cross-border investments, loans, structured finance transactions and other similar transactions may continue to be performed in foreign currencies.

Compliance and sanctions

Regulation 17/2015 is due to take effect on 1 July 2015. Non-cash transactions using foreign currencies that were entered into before 1 July 2015 will remain in force until the written agreement expires.

The Bank of Indonesia is charged with ensuring compliance with Regulation 17/2015 and may request reports, information or any data it requires to do so. Breach of the provisions of the Regulation may result in criminal sanctions under Article 33 of Law No. 7 of 2011. Where the transaction is not a cash transaction, a penalty may be charged against transacting parties in breach of the Regulation representing 1% of the value of the transaction (with a maximum limit of one billion IDR).

How HFW can help?

HFW is a market leader advising on the international sale of soft commodities, oil and gas, coal and steel, and non-ferrous and precious metals. With a strong Indonesian capability, HFW is well positioned to provide high level direction on the above regulations and issues connected to them.

In the first instance, potentially affected companies are encouraged to consult the relevant government agency and obtain clarification on how these regulations might apply to them directly.