Wed, 01 Jul 2015

Australians holidaying in Indonesia could find themselves short of money from today after the country’s central bank pushed through new legislation prohibiting foreign currencies from being used in domestic transactions.

The new rule, which takes effect today, has been introduced as Jakarta tries to get a grip on the falling rupiah, a historically volatile currency that has been on a downward slide over the last four years.

Trust in the rupiah has been fragile ever since the Asian financial crisis in the late 1990s, when its value went into free fall and Indonesia went under an International Monetary Fund rehabilitation program. The rupiah has become one of Asia’s worst-performing currencies this year, depreciating around 7 per cent against the US dollar.

Bank Indonesia says the prohibition against foreign currency in domestic transactions is intended to reduce reliance on the US dollar and other foreign currencies and mitigate against capital outflows.

According to Bank Indonesia, transactions within the country in currencies other than rupiah amount to $US73 billion a year. From today, prices for all goods and services will need to be quoted in rupiah only, a measure that will affect prices for hotels, and restaurants used by tourists as well as local services, such as legal advice, insurance and accounting.

As is often the case with Indonesian regulations, the law empowering the ban was passed several years ago but implementation has only been announced over the past three months.

The shift comes at a time when President Joko Widodo’s government is struggling to draw investment to help fund infrastructure projects that are badly needed in this Southeast Asian nation of 250 million people. Economic growth has hit a six-year low and confidence in the current government’s ability to manage economic policy has slumped.

“You can only implement this policy when the exit rate risk is relatively small,” said Muhamad Chatib Basri, a former finance minister and chairman of the Mandiri Institute, a research think tank affiliated with state-owned Bank Mandiri.

Peter Jacobs, a spokesman for the central bank, said Bank Indonesia would consider allowing companies more time to put the rule into effect on a project-by-project basis. “If there are corporations that have concerns about transactions about any problems related to this, they can write us a letter and we’ll see the possibility to give them a delay,” he said.

Affected businesses say they are trying to minimise the impact of the regulation by building in market-based adjustments to help offset the rupiah’s volatility. Some property companies are considering a US dollar-linked rupiah rate that changes with each billing cycle.

Other companies are expected to increase their prices in rupiah to account for the risk of depreciation.