The Local Currency Settlement

Being an independent country and free from dependence on other countries is one of the goals of each country to show its existence in international society especially for developing country. Because an independent country with minimal dependence, can be ascertained to become an attraction or soft power for the country to be accepted in international society in the framework of lateral cooperation as a sovereign country. One of the factors that “forces” a country to dependency is the hegemony of foreign currencies which in this case is the United States dollar.

The hegemony of the dollar against the whole world currency is not without reason after America became the winner of the second world war automatically the currency that survived at that time was only US dollars. The impact of the damage caused by world war 2 forced the war-losing countries to receive dollar loan assistance to rebuild their country, and since then on many countries in the world made the dollar a financial reference and dominated the foreign exchange rates that dominated the world economy.

This still has an impact until now, where the whole world currency refers to the dollar. Moreover, plus a trade war between the dollar and yuan which has an impact on the weakening of foreign exchange rates including the rupiah. This triggered developing countries especially in Southeast Asia by developing a long-term strategy to overcome the effects of the trade war.

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After long and careful planning, several ASEAN countries namely Indonesia, Malaysia, and Thailand implemented a local currency settlement (LCS) so that transactions between countries involved in the LCS agreement could be carried out in local currency, which in turn reduced the use of the US Dollar.

Veerathai Santiprabhob, Governor of the Bank of Thailand, Agus D.W. Martowardojo, Governor of Bank Indonesia and Muhammad bin Ibrahim, Governor of Bank Negara Malaysia

In theory, the Local Currency Settlement (LCS) is a bilateral cooperation agreement between Indonesia, Malaysia, and Thailand to increase the use of local currency, namely rupiah, ringgit and baht in payment transactions for goods and services between Indonesia, Malaysia, and Thailand. In LCS the settlement of trade transactions between two countries is carried out in the currency of each country where the transaction settlement is carried out in the jurisdiction of their respective countries.

Example: settlement of Indonesian and Malaysian trade transactions can be done in rupiah, but the settlement of rupiah transactions is still carried out in Indonesia. Conversely, if the Indonesian and Malaysian trade transactions are carried out in ringgit currency, then the settlement of the transaction is carried out in Malaysia.

Banking in Indonesia welcomes the cooperation of Bank Indonesia (BI) with the central banks of Thailand and Malaysia related to the use of local currencies in trade transactions or local currency settlement (LCS). Domestic banks assess that cooperation makes transaction costs between countries more efficient and cheaper. The reason is that local banks can directly buy the currency of the destination country without the need to buy dollars first.

Achmad Baiquni, Managing Director of PT Bank Negara Indonesia (Persero) Tbk (BNI), said that the first step to be taken was BRI to open account accounts in Thailand and Malaysia. This is to facilitate transactions in both countries so that the funds spent are more economical because they can follow the exchange rates of local currencies.

Reference:
cnbcindonesia.com
beritasatu.com

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