Indonesia and South Korea Strengthen Trade with Local Currency Transaction Framework for Rupiah and Won

• Bank Indonesia (BI) and South Korea have advanced their economic relationship through a newly established local currency transaction framework.
• The aim of this framework is to facilitate direct trade between the two nations, utilizing their local currencies, the Indonesian rupiah and the South Korean won, thereby streamlining transactions.
• Erwin Haryono, head of BI’s department of communication, highlighted that this initiative represents a significant milestone in Indonesia and South Korea’s financial cooperation.

This article explores the recent agreement between Bank Indonesia and South Korea, focusing on its implications for bilateral trade and economic relations.

New Local Currency Transaction Framework Set for Implementation

The agreement between Bank Indonesia and South Korea’s financial authorities heralds a significant shift in how trade transactions will occur between the two countries. Scheduled to take effect on September 30, 2024, this framework is positioned to eliminate reliance on third-party currencies, particularly the U.S. dollar. This move is expected to mitigate exchange rate volatility, thus enhancing trade efficiency and reducing costs associated with currency conversion.

Key Features of the Local Currency Transaction Agreement

The initiative, first proposed in a memorandum of understanding in May 2023, reflects a strategic partnership aimed at fostering deeper economic ties. As part of this framework, a selection of appointed cross-currency dealer (ACCD) banks from both Indonesia and South Korea will facilitate transactions in their respective currencies. This arrangement is not merely a step towards increased financial autonomy but also a dynamic response to the evolving needs of the global trade environment, which increasingly favors localized solutions.

Participating Banks and Their Roles

Bank Mandiri, Bank Negara Indonesia (BNI), and several other local financial institutions in Indonesia have been designated as ACCD banks. Their counterparts in South Korea include prominent institutions like Woori Bank and Shinhan Bank. These banks will play a crucial role in executing transactions within the framework, allowing for a seamless exchange of the rupiah and won, which is pivotal for enhancing trade volume. This structure is designed to not only streamline the payment process but also strengthen the commitment between the two nations in terms of financial cooperation.

Broader Implications for Bilateral Trade

The establishment of the LCT framework is expected to resonate beyond mere convenience; it has the potential to significantly stimulate bilateral trade. By reducing the transactional costs and risks associated with currency fluctuations, businesses operating in both Indonesia and South Korea can expect to see a greater propensity for trade. The adjustment in trade dynamics will likely attract foreign investments into both markets, creating further opportunities for economic growth. Additionally, this initiative serves as a model for other nations looking to implement similar strategies to enhance economic ties.

Conclusion

The collaboration signaled by the agreement between Bank Indonesia and South Korean financial authorities marks a pivotal development in enhancing bilateral relations. By enabling local currency transactions, both countries are poised to experience a boost in trade, increase economic cooperation, and navigate the complexities of global finance with greater independence. As the implementation date approaches, stakeholders across various sectors will be closely monitoring the tangible outcomes of this agreement.