Time for Indonesia to Reduce Dependence on the US Dollar

Jakarta (ANTARA) - Every time the US dollar strengthens, the same anxieties resurface in Indonesia. The rupiah exchange rate weakens, import costs rise, inflationary pressures intensify, and the business community begins to recalculating the various risks they must face.

This phenomenon is not new. Throughout various episodes of global economic volatility—ranging from the 1998 Asian crisis, the 2013 Taper Tantrum, the COVID-19 pandemic, to the current global economic uncertainty—the rupiah has almost always been under pressure. These conditions indicate that the Indonesian economy remains highly sensitive to US dollar movements.

From a fundamental perspective, however, Indonesia is currently far stronger than it was two decades ago. Indonesia’s foreign exchange reserves remain in the range of US$145-150 billion, equivalent to more than six months of imports, well above the international adequacy standard of approximately three months of imports.

Nevertheless, the fact that almost every strengthening of the dollar is followed by a weakening of the rupiah suggests that the problem is not solely about foreign exchange reserves or central bank intervention. There is a structural dependency that leaves the national economy too vulnerable to changes in US monetary policy direction and global financial market dynamics.

Dollar Dominance

The dominance of the dollar in the world economy is a long-standing legacy of the international financial system following World War II. To this day, the dollar remains the primary currency in international trade, cross-border financial transactions, global financing, and the foreign exchange reserves of various nations.

Indeed, various studies show that the majority of international trade transactions still use the dollar as the currency for invoicing and payment. One study noted that approximately 98 per cent of Indonesia’s exports are still invoiced using the US dollar.

This dominance creates what is often referred to as ‘dollar dependency’. When the dollar strengthens, almost all developing nations face pressure. However, the impact is far greater for countries whose trade, financing, and investments are heavily dependent on the dollar. In this context, the dollar functions not only as a medium of exchange but also as a determining factor for trade costs, debt costs, and international capital flows.

Consequently, every interest rate decision made by the US central bank often has a greater impact on developing nations than decisions made by the governments of those developing countries themselves. This situation is what is driving more countries to seek ways to reduce their excessive dependence on the dollar.