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New Indonesian currency law - Client update

 

05 July 2011

The Indonesian Currency Law (Currency Law) entered into force on 28 June 2011, requiring the use of Indonesian Rupiah (IDR) for domestic Indonesian financial transactions.  

The Currency Law will require careful examination of all transactions conducted within Indonesia in currencies other than IDR and, where the Currency Law's exemptions do not apply, adjustments must be made to any written agreements governing those transactions and payment must be effected in IDR.

Background

Regulation of the printing and circulation and the criminalisation of counterfeiting of IDR had been governed by a number of disparate regulations and laws which are now consolidated into and replaced by the Currency Law new legislation. Additionally, the Currency Law creates a new crime of using currencies other than IDR within Indonesia, subject to certain exceptions.

Key Provisions

Use of Indonesian Rupiah

Of most important impact is the Currency Law's requirement that IDR be used for all transactions conducted within Indonesia, with immediate effect. This will cover the payment and settlement of all domestic commercial transactions and obligations but excludes:

  1. Transactions related to the state budget;
  2. Grants given by or to a foreign state;
  3. International commercial transactions;
  4. Bank deposits denominated in foreign currencies; and
  5. International finance transactions.

Violation of this provision of the Currency Law may attract imprisonment of up to 1 year and a fine of up to IDR200,000,000 for both payer and payee.

Exemptions 3 and 5 above are of the greatest interest:

International commercial transactions

Any payment made by or to a counterpart overseas for goods or services with an overseas component will be exempt from the requirement that it be made in IDR. However, the international element will be key to qualify for this exemption. For example, a transaction between an Indonesian company and the Indonesian branch of an international company may not necessarily be exempt, particularly where the goods or services to which it relates are provided entirely within Indonesia. Accordingly, a determination of whether a particular transaction is indeed of an "international commercial" nature must be made on a case-by-case basis.

International finance transactions

Lending from a foreign lender into Indonesia, or to an overseas borrower by an Indonesian lender will clearly be exempt from the IDR requirement, as will trading in foreign currency within Indonesia. Similarly, the Currency Law should not impact the ability of Indonesian companies to issue or trade in financial instruments denominated in currencies other than the IDR overseas. However, while it could be argued that such instruments constitute part of the "international finance" system, we do not expect that wholly-domestic trading in such instruments issued by Indonesian companies will be possible under the Currency Law.

As with other new laws in Indonesia, how these provisions will be implemented in practice remain to be seen. The policies of Bank Indonesia and the Ministry of Finance will impact the implementation of the Currency Law.

Implications

  • The Currency Law regulates the settlement of monetary obligations rather than the currency in which goods or services are marketed. Accordingly, currencies other than IDR may continue to be used in all commercial transactions but, for those transactions regulated by the Currency Law, payment must be effected in IDR and a mechanism for calculating the exchange rate for those transactions must be agreed.
  • The Currency Law will not be limited to new transactions but will also affect obligations entered into before, but settled after, its entry into force. Accordingly Parties to such prior agreements should agree a mechanism for calculating the IDR equivalent sums to be paid going forward. In the absence of such agreement, we would expect the spot rate which applies on the day of settlement to be used.

Other Provisions

The Currency Law also regulates the printing and circulation of IDR banknotes and sets out the penalties for currency-related crimes such as counterfeiting. Many of these provisions are drawn from previous legislation which the Currency Law consolidates and replaces. However, a provision that banknotes will now bear the signature of the Minister of Finance (alongside the signature of the Governor of Bank Indonesia) has caused some concerns about Bank Indonesia's independence. These concerns have been heightened by the new requirements, pursuant to the Currency Law, that Bank Indonesia consult, and report to, Parliament. However, the Government has insisted that the change to the appearance of banknotes merely reflects the Government's support for, and confidence in, the currency and that the consultation/reporting requirements do not impact on Bank Indonesia's independence of action.

Implementation

It is still not clear how the implementation of - and adherence to - the Currency Law will be monitored. Similarly, the scope of the exemptions to the Currency Law is unclear. For example, the Currency Law criminalises the

refusal to accept payment in IDR but provides that such refusal, if pursuant to a written agreement, is acceptable (though it appears the payer may still be liable to criminal penalties). At its widest interpretation, this exemption would vitiate much of the rest of the Currency Law's operation and so a narrower interpretation appears to be the legislators' intention. Accordingly, the application of the Currency Law to the full range of commercial transactions will only be properly understood once implementing regulations are issued (expected within a year) and a pattern of working practice established..

 

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