The impact of de-dollarization on Indonesia
In general, there are several benefits that de-dollarization can have for Indonesia:
1. Increasing the number of trade partners
Indonesia’s acute dependence on the US dollar has an unfavorable impact on the economy. From a trade perspective, converting from Rupiah to US dollars to trading partners’ national currency often makes trading less efficient, because it will depend on the availability of US currency. In addition, certain countries tend to devalue their currencies in order to boost exports. In certain circumstances, as in the devaluation of Thai Baht in 1997, this can spark a monetary crisis.
De-dollarization will encourage diversification of trade relations, because a country can trade with others without having to use US dollars. Both sides can enjoy the direct benefits of trade. So far, trade tends to favor countries with strong currencies, particularly the US, as part of the measure to secure foreign exchange reserves, while other currencies are considered less attractive.
2. Promote a stronger monetary sector
Dollarization leads to a fragile monetary sector, especially for countries that do not have hard currencies. Obviously, the value of a country’s currency is heavily influenced by the US dollar. The central bank is obliged to maintain the value of the currency, so that it does not have a negative impact on the national economy. For countries that have limited foreign exchange reserves, their monetary sector will remain vulnerable, as they will struggle to defend their currencies and maintain exchange rate stability. This in turn will lead to imported inflation, further depressing the economy. De-dollarization is believed to be able to create a more robust monetary sector because a country’s currency does not have to be pegged to the US dollar.
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3. Create a solider fiscal footing
In state expenditures, one of the top expenditures is on debt interest payments. In Indonesia, this accounts for around 20 percent of government spending. However, this figure can soar if the Rupiah depreciates. If debts are not denominated in US dollars, this risk can be mitigated.
For Indonesia, de-dollarization issue is very important and more attention should be given to it, because of the country’s huge dependence on US dollars, which in reality is detrimental to the national economy, because it limits trading opportunities as well as monetary and fiscal space. (Abdul Manap Pulungan)