While a new export regulation will help cover local firms from risk of payment default, several business associations say it may spook potential overseas buyers of the country’s key commodities.
Trade Minister Mari Elka Pangestu said Friday a new ministerial decree, issued Monday, would require the use of letter of credits (L/Cs) for export transactions for raw mining and plantation commodities.
“The regulation is designed to improve discipline in trade, to support natural resource conservation programs and to smooth the inflow of foreign exchange,” Mari said.
“The L/C requirement will cover natural resource products that have not been processed. This includes coffee, cacao, crude palm oil [CPO], natural rubber and mining products such as tin billet.”
The policy will cover all raw mining commodities.
An L/C is a contract usually issued by a bank that, in most cases, binds a beneficiary to make the payment stipulated in the letter.
Indonesia, rich in metals and agricultural produce, is heavily dependent on exports of commodities, and is among the world’s biggest producer of CPO, rubber, cacao, coffee and tin.
Mari said the regulation, which also involved other ministries and was finalized by the Coordinating Ministry for the Economy, would not come into effect for another two months so as to provide some time for exporters to adjust.
She also said the regulation was supported by a trade financing insurance scheme provided by the government, and would serve as an additional guarantee for exporters trying to penetrate new markets or dealing with new foreign buyers.
“The global financial crisis enhances the risk of payment failures [in global trade]. We can reduce this risk by improving our [trade] insurance system,” she said.
The government is drawing up a trade financing insurance scheme for newly established export financing agency LPEI to execute.
However, several business groupings have opposed the policy, saying it would discourage foreign buyers by burdening them with extra costs and efforts.
The critics have said the policy would hamper their efforts to woo new buyers in nontraditional importing countries as it generally takes time to build trust before a corresponding bank in the buyers’ country agreed to affiliate with Indonesian banks in providing the L/Cs.
Indonesian Coffee Exporter Association secretary-general Rachim Kartabrata said most coffee exporters preferred cash rather than L/Cs to settle with foreign buyers.
“This regulation will force our foreign buyers to redirect their orders to Vietnam - our main rival - for practical reasons unless that country applies a similar policy,” he said.