President Joko Widodo and VP Jusuf Kalla - Photo by President Office

JAKARTA (TheInsiderStories)— Indonesia may need stricter foreign exchange (FX) regime in order to help stabilize the Rupiah, Vice President Jusuf Kalla said on Thursday (02/08), citing the little amount of foreign currency earnings from exports repatriated back to the domestic financial market.

Kalla said Indonesia has a free FX regime policy since the 1980s that cause export proceeds do not last long in the domestic economy, which is one cause rupiah depreciation against U.S dollar. In addition, the country also loosened its foreign exchange policy in 1998 when the financial crisis hit.

He added only around 80 percent of foreign reserve exchange stay in the domestic economy. In his opinion, Indonesia needs better regulation on foreign exchange to stabilize Rupiah.

“So maybe a clear policy is needed, that all export [proceeds] must enter [domestic financial market],” he said in an economic discussion in Jakarta on Thursday (02/08).

Kalla gave an example of controlled foreign exchange policy in Thailand that obliges export proceeds stay in the national economy for at least six months. The policy makes the foreign exchange supply in Thailand’s domestic market more stable.

Meanwhile, Coordinating Minister for Economics Affairs Darmin Nasution said the export earnings that not return to the domestic market can be considered as leakage in the economy.

According to him, the law that allows exporters to put money in overseas become the main cause of this export proceeds leakage. During his tenure as Bank Indonesia’s governor, Darmin said, a lot of effort had been done to keep export proceeds in the domestic economy, which resulted in an increase of export proceeds repatriation to as high as 85 percent.

He said export proceeds leakage will reduce foreign exchange reserves and reduce the ability to boost liquidity. A large foreign currency in the financial system will safeguard the rupiah exchange rate.

According to Nasution, around 15 percent out of 80 percent of the export proceeds that stay in the domestic financial market usually converts to rupiah, while another 70 percent keep in bank savings, giro, deposit in U.S dollar currency.

He added export proceeds that stay in bankings are not as profitable as the banks refrain to use these funds for loans because it can be withdrawn anytime. The banks usually put this funds in foreign bankings with 0.6-0.8 percent interest rate such as in Frankfurt, Hong Kong, and Singapore.

This was part of the government’s effort to stabilize the rupiah. Earlier, President Joko Widodo announced a plan to reduce imports from infrastructure projects.