Indonesia: Reintroducing letters of credit

Oene Marseille	Emir Nurmansyah

Indonesia's Ministry of Trade has issued a regulation requiring the use of a letter of credit (LC) for the export of certain commodities. Under the new regulation, payments for export of crude palm oil, coals, oil and gas, and certain minerals including steel, gold, and nickel are to be done by way of an LC. Payments from export of manufactured goods are exempted from the regulation.

The regulation also mandates that the payment price stated in the LC should not be lower than the world market price of the exported goods. Further, the paying bank in this process is required to be a qualified domestic bank (Bank Devisa di dalam negeri). LC payment performed by a foreign branch of an Indonesian-headquartered bank is disallowed.

The requirement that an LC is used for the payment of commodities export is not new. Back in 2009, the Ministry of Trade issued a similar regulation. However, this requirement was revoked in 2010 in the face of strong opposition from exporters. The exporters complained of the domestic bank's general lack of preparedness to handle LC payments and that the mandate had led to extended payment lead-times at those banks.

This time, the banks have expressed readiness to handle the uptick in LC demand when the regulation becomes effective.

Finally, in order to allay concerns that the regulation would disrupt the free movement of capital, Agus Martowardojo, the governor of the Bank of Indonesia, affirmed Indonesia's commitment to free capital movement as stated in its law. Martowardojo further stated that nothing in the new regulation requires immediate conversion of payment into Indonesian rupiah, and exporters are not restricted in any way with regard to the use of the LC payment.

The regulation is effective as of April 1 2015.

Oene Marseille and Emir Nurmansyah

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