Friday, March 29, 2024 | 06:41 WIB

INDONESIA STRENGTHENS DOMESTIC ECONOMY – Gov’t demands Co’s repatriation of Foreign Proceeds

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The Rupiah has fluctuated against the US dollar every month over the last five years, but in general it has been on a depreciating trajectory. It even hit a low of Rp16,000 per US dollar in 2020. This weakening is influenced by various factors, including the aggressive rate hike by the Fed and central banks of other developed countries. High interest rates in developed countries make investing in developing countries less attractive, resulting in capital fight/outflows, including from Indonesia. In addition, high inflation in Indonesia has contributed to the recent weakening of the Rupiah. One way to maintain exchange rate stability is through Bank Indonesia’s intervention in the forex market, by selling off reserves of foreign currency. Therefore, having ample foreign exchange reserves is crucial to defend the national currency from losing more of its value. 

This is even more crucial as Indonesia’s foreign trade has increased in recent years. In the period 2020- 22, Indonesia posted 30 consecutive months of trade surpluses. This should beef up the country’s foreign exchange reserves, as the inflow of dollars has been rising. 

Trade Surplus Trend 

Indonesia has found itself in an advantageous position in recent months. As a producer of oil and gas as well as non-oil and gas commodities, Indonesia has benefited from rising commodity prices post Covid-19 pandemic. Prices for Indonesia’s main export commodities have soared. These include petroleum, coal and palm oil which shot up by 62.67 percent, 152.28 percent and 49.45 percent YoY, respectively in June 2022. (FIGURE 4) 

It can be seen from the chart above that while the value of Indonesia’s exports has fluctuated, it surged quite significantly between 2020 and 2022. In August 2022, it even generated US$27,862.09 million, up 30 percent YoY. While Indonesia’s current exports are driven by the non-oil and gas sector which earned the country US$26,175.55 million, the performance of the oil and gas sector has also improved. In August 2022, it hit US$1,686.54 million, up by 61 percent YoY. (FIGURE 5) 

Strong exports have helped inflate Indonesia’s trade surplus over the past three years, outpacing a trade balance in the previous years, one which even recorded a deficit. Of course, this is good for the economy, because the trade surplus would provide a boost to Indonesia’s GDP. 

In theory, it should also boost the country’s foreign exchange reserves. However, this is not the case. Indonesia’s forex reserves have not increased significantly, despite the country’s strong export performance. This is mainly due to the absence of a specific policy that regulates foreign exchange from export proceeds to be repatriated and deposited onshore. This is what prompted the government to revise and expand the scope of the export proceeds policy. 

Export Proceeds Repatriation Policy 

The export proceeds repatriation policy was enacted in 2019 as part of the government’s efforts to bolster the country’s foreign exchange reserves. Prior to this, BI only monitored and recorded transactions in foreign currency without the need for natural resource exporters to place their earnings in domestic banks for a stipulated period. This policy is certainly detrimental to the country when exports are booming. This is a missed opportunity. As a result, the country’s foreign exchange reserves have not increased significantly, even tending to dwindle on an annualized basis. 

This contradicts studies by Dananjaya, Jayawarsa and Purnami, which show that an increase in exports will lead to a significant increase in foreign exchange reserves. However, because there is no obligation to repatriate export proceeds, this has failed to materialize and, as a result, the Rupiah exchange rate movement has often been volatile against a stronger US dollar, thus not always accurately reflect its fundamental value. (FIGURE 6) 

Globally, an export proceeds repatriation policy is certainly nothing new; it has been implemented in other countries. Thailand, for example, requires export proceeds from certain industries to be retained in the country for at least a year. Turkey and India also apply similar obligations. The positive results can be seen from Thailand’s foreign exchange reserves (US$201.9 billion) which are almost double that of Indonesia’s US$130.2 billion. (FIGURE 7) 

In a word, the obligation to park export earnings domestically is not a new policy. It should also not be opposed, because it can greatly benefit the country, boosting its foreign exchange reserves in line with export performance. 

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