Indonesia's central bank, Bank Indonesia, recently issued BI Regulation No. 17/3/PBI/2015 regarding the Mandatory Use of the Rupiah within the Republic of Indonesia, dated March 31, 2015 (BI Reg 17), which restricts the use of foreign currency in domestic transactions conducted within Indonesian territory. With the issuance of BI Reg 17, despite the fact that the Currency Law (Law No. 7 of 2011) is referenced in the regulation, BI is not positioning itself as issuing an implementing regulation of the Currency Law, but is positioning itself as the monetary and payment system authority based on Law No. 23 of 1999 regarding Bank Indonesia, as amended several times, lastly by Law No. 6 of 2009 (Bank Indonesia Law). Pursuant to the Bank Indonesia Law, to maintain the stability of the Rupiah's value, BI has the duty, among others, to stipulate and implement monetary policy and regulate and ensure the smooth continuity of the payment system. In the framework of conducting such duties, BI has the authority to stipulate the use of payment tools through BI regulations. On that basis, BI issued BI Reg 17 to regulate the obligation to use Rupiah in transactions within the territory of the Republic of Indonesia. The stated purpose for this obligation is to maintain the Rupiah exchange rate stability. However, the new regulation has raised a number of issues as to how it will be implemented, whether and how BI can or will enforce it and whether BI Reg 17 is, in fact, a proper implementation of the Currency Law since an argument can be made that BI Reg 17 imposes restrictions on the use of Rupiah in domestic transactions that are not contained in the Currency Law. The main highlight of BI Reg 17 is that it does in fact provide more detailed requirements on the use of Rupiah, particularly for transactions within Indonesia. According to a BI official, the requirements under BI Reg 17 are not meant to contradict those in the Currency Law or Law No. 3 of 2011 regarding Fund Transfers (March 23, 2011) (the Fund Transfer Law), but rather to provide more specific requirements on the mandatory use of the Rupiah. The following is a brief summary on the mandatory use of Rupiah under BI Reg 17: 1.√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç Transactions that require the use of Rupiah: Article 2(2) of BI Reg 17 requires the use of Rupiah in cash and non-cash transactions in Indonesia. This is virtually the same requirement as under Article 21(1) of the Currency Law. Specifically, BI Reg 17 stipulates the mandatory use of Rupiah for: (i)√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç transactions in Indonesia that are for the purpose of payment (ii) √Ç √Ç √Ç √Ç √Ç √Ç transactions in Indonesia that are for the settlement of other obligations that must be fulfilled with money and (ii) √Ç √Ç √Ç √Ç √Ç √Ç other financial transactions in Indonesia. 2.√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç Transactions that are exempted from the mandatory use of Rupiah: Those transactions that are exempted from the mandatory use of Rupiah under Article 4 of BI Reg 17 are the same as those transactions under Article 21(2) of the Currency Law. However, BI Reg 17 provides further details on such transactions, as follows: (i)√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç certain transactions related to the implementation of the state budget as further detailed in Article 6 of BI Reg 17 (ii)√Ç √Ç √Ç √Ç √Ç √Ç √Ç acceptance or provision of grants from or to overseas. Article 7 of BI Reg 17 further provides that the exemption on the mandatory use of Rupiah only applies if either the receiver or provider of the grant is domiciled overseas (iii)√Ç √Ç √Ç √Ç √Ç √Ç international trade transactions. BI Reg 17 further provides the details on these transactions in Article 8, as follows:
- transactions for the export and import of goods and
- cross-border service trade activities, such as cross-border supply and consumption abroad. Cross-border supply is defined as service activity provided from Indonesia to another country, such as through online shopping or a call center. Consumption abroad is a service activity from overseas to serve consumers from Indonesia, such as Indonesian students overseas and Indonesian patients in overseas hospitals.
(iv)√Ç √Ç √Ç √Ç √Ç √Ç foreign exchange savings at banks and (v)√Ç √Ç √Ç √Ç √Ç √Ç √Ç international financing transactions. Article 9 of BI Reg 17 further provides that one of the provider or the receiver of the financing must be domiciled overseas to qualify for the exemption. In addition to the above transactions, Article 5 of BI Reg 17 further provides additional transactions that are also exempted, as follows: (i)√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç business activities in foreign exchange conducted by banks pursuant to the law that regulates banking and sharia banking (ii)√Ç √Ç √Ç √Ç √Ç √Ç √Ç foreign exchange transactions involving commercial paper issued by the Government in primary markets or secondary markets pursuant to the law regulating state debentures and state sharia commercial paper and (iii)√Ç √Ç √Ç √Ç √Ç √Ç other foreign exchange transactions conducted based on, among others, the Bank Indonesia Law, the Capital Investment Law, and the Indonesian Export Financing Institutions Law. 3.√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç Mandatory use of Rupiah for cash and non-cash transactions: Article 3 of BI Reg 17 provides that the mandatory use of Rupiah applies to both cash and non-cash transactions. Non-cash transactions are transactions that use non-cash tools (check, giro order, credit card, debit card, ATM card and electronic money) and non-cash mechanisms (fund transfer).This is inconsistent with the purpose of the Currency Law, which is to require the use of Rupiah only for cash transactions. In addition, BI Reg 17 also is inconsistent with the Fund Transfer Law, which allows fund transfers in Rupiah or foreign currencies within Indonesia. Article 16 of BI Reg 17 provides that if businesses have trouble implementing the mandatory use of Rupiah for non-cash transactions, BI may issue exemptions for the businesses. The elucidation of Article 16 states that in issuing such exemptions, BI will consider the readiness of the business actor, the continuity of the business activity, investment activity and/or national economic development. Therefore, for non-cash transactions, we note that business actors may attempt to obtain an exemption from BI if they feel they can satisfy the conditions set forth in Article 16. 4.√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç Prohibition on refusing Rupiah: Article 10(1) of BI Reg 17 is in line with Article 23 of the Currency Law on prohibiting any parties from refusing to accept Rupiah as payment or settlement of obligations that must be fulfilled using Rupiah and/or for other financial transactions within Indonesia. 5.√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç Exceptions to the prohibition on refusing Rupiah: Article 10(2) of BI Reg 17, which is also in line with Article 23 of the Currency Law, provides two conditions that allow a party to refuse Rupiah, as follows: (i)√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç if there is any question as to the originality of the Rupiah received for cash transactions or (ii) √Ç √Ç √Ç √Ç √Ç √Ç payment or the settlement of obligations in foreign exchange has been agreed in writing. The Currency Law does not provide any further requirements on agreements to use foreign exchange, while Article 10(3) of BI Reg 17 provides that such agreements can only be reached for the following: (i)√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç transactions that are exempted under Articles 4 and 5 of BI Reg 17 (see point 2 above) or (ii)√Ç √Ç √Ç √Ç √Ç √Ç √Ç strategic infrastructure projects that obtain the approval of BI. Such projects are:
- infrastructure projects as intended under PBI No. 16/21/PBI/2014 dated December 29, 2014 regarding the Application of the Prudence Principle in Managing Non-bank Corporate Foreign Loans, in which its financing is from international creditor institution (bilateral or multilateral) or from syndicated loan in which more than 50% is contributed by international creditor institution, and the infrastructure is for:
- transportation (such as airport service, seaport service, railroad service)
- roads (such as toll roads and toll bridges)
- irrigation (such as raw water bearing channel)
- drinking water
- telecommunications and information
- oil and gas and
- infrastructure projects that are proven by a statement letter from the ministry or the authorized institution.
6.√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç Mandatory declaration of the price of goods and/or services in rupiah: BI Reg 17 requires that all business actors in Indonesia declare the price of their goods and services only in Rupiah. This is a new requirement that was not provided for in the Currency Law. 7.√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç Compliance report to BI and supervision by BI: Article 12 of BI Reg 17 provides that BI is authorized to request a report, information and/or data from any party related to the implementation of the mandatory use of Rupiah and the obligation to declare the price of goods and services in Rupiah. Under Article 13 of BI Reg 17, BI will supervise the implementation of BI Reg 17 through the following activities: (i)√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç requesting reports, information, data and/or supporting documents, with or without involving the relevant institution (ii)√Ç √Ç √Ç √Ç √Ç √Ç √Ç direct supervision of any party and/or (iii)√Ç √Ç √Ç √Ç √Ç √Ç the appointment of another party to conduct research on compliance with BI Reg 17 The above supervision by BI is primarily for non-cash transactions. Cash transactions will be supervised through cooperation with law enforcement agencies, as stipulated under Article 15 of BI Reg 17 that BI has the right to coordinate and cooperate with other parties. 8.√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç Sanctions: BI Reg 17 provides that the criminal sanctions under Article 33 of the Currency Law will apply for any violations of the mandatory use of Rupiah for cash transactions or the prohibition on refusing Rupiah. BI Reg 17 provides administrative sanctions for any violation of the mandatory use of Rupiah for non-cash transactions, including a fine of 1 percent of the transaction value, with a maximum fine of one billion rupiah. Violations of the obligation to declare the price of goods and services in Rupiah and the obligation to provide reports and/or data on the use of Rupiah will result in administrative sanctions in the form of written warnings. Article 19 of BI Reg 17 also provides that BI can recommend that the competent authorities take action in response to violations. 9.√Ç √Ç √Ç √Ç √Ç √Ç √Ç √Ç Effective dates: Based on BI Reg 17 and our confirmation with an official at BI, the mandatory use of Rupiah will take effect in two stages. The mandatory use of Rupiah for cash transactions took effect as of the issuance of BI Reg 17 on March 31, 2015. For non-cash transactions, the mandatory use of Rupiah takes effect on July 1, 2015. However, any agreements for non-cash transactions that require the use of foreign currency and that were executed before July 1, 2015, will remain applicable until the expiration of the agreement, which means that foreign currency can be used until the agreement expires. The exemption given to agreements executed before July 1, 2015, only applies to the agreements themselves and not to any amendment or extension entered into after July 1, 2015. In other words, if the agreement is amended or extended after July 1, 2015, the grandfathering protection will be lost. In conclusion, those transactions for which a written agreement can be entered into for the use of foreign currency are restricted to those transactions stipulated in BI Reg 17. This is a change from the Currency Law, which does not specify the types of transactions that can use such written agreement. Further, under BI Reg 17 the use of Rupiah is mandatory for both cash and non-cash transactions. This is a change from the intention of the Currency Law to require the use of Rupiah only for cash transactions, as previously confirmed by BI and the Minister of Finance. Further, we note that BI Reg 17 does not provide any prohibition to make agreements that set the Rupiah value for any transaction payment subject to exchange rate movements, which therefore can be an option for the Rupiah use requirement. Last, any agreements for cash transactions executed before the issuance BI Reg 17 must be amended to use Rupiah.