Asean leaders declared at this week’s summit in Labuan Bajo, East Nusa Tenggara, that member countries should use their own currencies more often in intraregional trade, as the bloc aims to insulate the region from external volatility.

Asean is seeking to improve its regional payment connectivity through initiatives such as the recently launched Indonesia-Malaysia quick response (QR) standard, which allows citizens of both countries to use QR codes and their local currencies to make payments in the other.

The bloc is also encouraging the settlement of regional accounts in local currencies rather than with the US dollar, the go-to currency for international trade.

“This is in line with the purpose of Asean centrality, so that Asean can be much stronger and self-reliant,” President Joko “Jokowi” Widodo said of the currency policy recommendation in remarks on Thursday.

Among Asean countries, Indonesia, Thailand, Malaysia and the Philippines have been developing their capacity for local currency settlement since 2017.

Recently, the region has established the similar framework with China, Japan and South Korea.

Asean leaders have also agreed to explore the development of a unified Asean local currency transaction framework that would help countries in the region transition away from established trade currencies like the US dollar.

Read also: QRIS expands to Malaysia in push for cross-border payments

A number of countries have become wary of their reliance on the US dollar amid global inflation, volatility and a series of recent bank failures in the country.

In the past few years, many currencies have lost value against the greenback, making purchases from overseas more costly and contributing to domestic price rises in some countries.

Center of Economic and Law Studies (CELIOS) executive director Bhima Yudhistira told The Jakarta Post that the recent Asean move might be interpreted as de-dollarization.

Bhima said such a move was “an inevitability” given Asean countries’ urgent need to improve economic efficiency amid heightened geopolitical uncertainty.

While the move might be seen as an effort to distance the bloc from the US, Bhima believed the two would remain strategic partners given Asean’s growing importance on the global stage.

Read also: Less dependent on the dollar

Haryo Kuncoro, a professor of economics at Jakarta State University’s School of Economics, told the Post on Thursday that local currency settlement sought to minimize reliance on the US dollar but not to do away with it entirely.

“When dollars are scarce or expensive, LCS becomes a solution that will allow transactions to proceed,” Haryo said.

He said he expected dollars to remain in use by Asean countries, especially given that it was not mandatory for regional businesses to settle in local currencies.

“There is no obligation for exporters or importers to use [local currencies], no punishment either for those who choose not to use them,” Haryo said.

Publicly listed lender Bank Permata chief economist Josua Pardede concurred, saying Asean countries were seeking stability in their own currencies, which played an important role in their economies.

Josua said developing countries, like most Asean member states, felt the need to limit their dependence on the US dollar in response to the volatility it experienced from 2020 to 2022 as a result of the pandemic and geopolitical issues.

“With this agreement, the price of export and import goods in Asean will become more stable so players do not have to weigh exchange rate fluctuations too much,” Josua told the Post on Thursday.

Challenges

CELIOS’s Bhima said Asean member states would have to follow the declaration with more concrete action for any real changes to occur, especially as the declaration was non-binding.

“It is problematic that it is non-binding, but I hope it will bring working groups to life, especially sectoral cooperation, for example between Bank Indonesia [BI] and the central banks of Asean countries,” said Bhima.

“That would be far more concrete,” he added.

Bhima noted that he did not expect the implementation of Asean’s currency policies to be smooth, as not all member states were equally prepared to settle accounts in local currencies.

Asean countries like Indonesia, Malaysia, Singapore, Thailand, Vietnam and the Philippines were relatively better prepared for local currency settlement, but Timor-Leste, which was preparing to join the bloc, and Myanmar which was embroiled in civil strife, were still a long way away.