Bank Indonesia and Bank of Korea agreed to implement the use of local currency in financial and economic transactions or Local Currency Transactions (LCT) starting next year.
This LCT transaction agreement will reduce dependence on the use of US dollars in financial and economic transactions between the two countries.
Perry Warjiyo, Bank Indonesia Governor explained that this agreement was an initiative by the two central banks to encourage the use of local currency.
Through this implementation, trade between countries can use direct exchange rate quotations provided by Appointed Cross Currency Dealer (ACCD) banks, thus providing options for the business world in carrying out trade transactions and increasing transaction efficiency.
“Wide use of local currency will strengthen macroeconomic stability. This collaboration will strengthen bilateral financial cooperation between Korea and Indonesia,” said Perry, on December 10, 2023.
As a first step in implementing LCT, BI and BOK agreed to develop an LCT framework in an Operational Guidelines.
This initiative is also a follow-up to the signing of a MoU on cooperation on the use of local currency between the two central banks which was agreed in May 2023.
According to Perry, the LCT framework will facilitate the settlement of cross-border payment transactions in the trade area and is expected to minimize exchange rate risk exposure and costs for business actors and other users.
Banks in Indonesia and Korea can quote exchange rates directly so that exchange rate risks and costs arising from these transactions can be reduced, as well as increasing efficiency which is expected to encourage trade transactions between Indonesia and Korea. This can also deepen financial markets in local currencies in both countries.
Rhee Chang-yong, Governor of the Bank of Korea, said that Indonesia plays an important role in the global supply chain for advanced sectors such as batteries and electric vehicles. Korean business interest in Indonesia also continues to show an increase.
He also hopes that the implementation of LCT will have a positive impact on economic development through increasing bilateral trade and the use of the local currencies of the two countries.
“Based on Indonesia’s successful experience in implementing the LCT framework with a number of countries in recent years, it is hoped that the LCT framework between Korea and Indonesia will also be successfully formed and implemented,” he said.
The two central banks are also committed to implementing the LCT cooperation framework in order to strengthen cross-border trade, increase regional financial market stability, and deepen local currency markets in the two countries.
This initiative is also in line with financial integration efforts of a number of countries in the region to facilitate wider use of local currencies.
