The implementation of a free foreign exchange system in
Indonesia has accelerated the expansion and integration of the
Indonesian financial market into the world's financial markets.
As a result, the growth in rupiah transactions between banks
and foreign citizens and foreign legal entities has led to
instability in domestic monetary conditions, putting pressure
on the rupiah exchange rate. This has recently been exacerbated
by state oil firm Pertamina buying large amounts of dollars to
counteract increasing oil prices.
Bank Indonesia, the banking regulatory body, has taken
measures to stabilize the currency in the foreign exchange
market. They are set out in Bank Indonesia Regulation
(Peraturan Bank Indonesia) 7/14/PBI/2005, dated June 14 2005.
The Regulation, which improves on the previous regulation, sets
out necessary prohibitions and restrictions in conducting
foreign exchange transactions with foreign counterparts.
The limit on transaction amounts for commercial banks
engaging in derivative transactions with foreign counterparts
has been lowered from $3 million to $1 million. This limit will
cover all types of transactions involving foreign exchange
selling and purchasing against rupiah, whereas previously
derivative transactions involving foreign exchange purchasing
were not limited. However, the restrictions imposed on
derivative transactions will not apply if the transactions are
conducted for hedging purposes within the framework of an
investment in Indonesia that will last for at least three
months. The previous regulation did not provide any minimum
The Regulation requires foreign currency lending or domestic
currency lending to foreign counterparts to be conducted in the
form of a syndicated loan that engages a prime bank (that is,
commercial banks with a certain investment rating from a
renowned ratings agency) as lead bank and for the purpose of
project financing in the real estate sector in the territory of
the Republic of Indonesia.
The Regulation fines violations with a flat rate of 10% of
the amount of the violating transaction. By implementing the
flat rate, Bank Indonesia has stipulated more stringent
sanctions than under the previous regulation, which provided a
fluctuating rate equal to the amount of the violating
transactions. These financial penalties, however, should not be
more than Rp27 billion ($2.7 million).
Considering the increasing amount of financial transactions
based on Sharia principles, the Regulation has clearly
stated that all its prohibitions and restrictions will also
apply to similar transactions conducted based on
Sharia principles. This was missing from the previous
The Regulation came into force on July 14 2005.
Bank Indonesia hopes that the Regulation will reduce foreign
exchange movement that is not related to a genuine underlying
purpose. It is possible that the Regulation will be lifted when
Bank Indonesia deems the rupiah exchange rate stable.