On May 31, 2011, the House of Representatives passed a new bill on currency, which will come into effect upon signature by the President or automatic enactment at the latest by June 30, 2011 (“
Currency Law”).
The Currency Law formalises the role of the Indonesian Rupiah as legal tender for monetary obligations in Indonesia and, in particular, mandates the use of Rupiah for settlement of payment obligations in Indonesia, and may have important implications for onshore contracts denominated in US Dollars.
In particular, Article 21 of the Currency Law requires the use of Rupiah for following transactions:
- all transactions for purposes of payment,
- settlement of other monetary obligations, and/or
- other monetary transactions,
which are conducted within the Republic of Indonesia.
Paragraph (2) of the same article provides that the following transactions are exempted from the requirement to use Rupiah currency:
- certain transactions in relation to the implementation of the State budget,
- receipt or extension of offshore grants,
- international commercial transactions,
- foreign currency deposits in banks, or
- international financing transactions.
While the language appears comprehensive, we do not believe the Currency Law is intended to prevent Indonesian counterparties from entering into onshore contracts with pricing denominated in other currencies. However, the Indonesian Rupiah is legal tender for the settlement of such obligations, and we would recommend that onshore contracts include a provision or mechanism for fixing the exchange rate in the event of settlement in Rupiah.
The potential application of the Currency Law is quite wide - for example, it would
prima facie cover a US Dollar loan booked by an onshore branch of an international bank or an equipment lease by an onshore subsidiary of an international contractor. International institutions with operations in Indonesia that transact in foreign currencies may wish to review their documentation for compliance with the Currency Law.
Implementing regulations for the Currency Law are expected to be issued within 1 year of the enactment date, which may provide further clarification on the practical implementations of the Currency Law.
O'Melveny & Myers LLP is not licensed to practice law in Indonesia, and this Client Alert should not be construed as providing advice concerning the laws of Indonesia or of any other country or jurisdiction. The foregoing should not be construed as an opinion on the laws of Indonesia. Readers should consult with Indonesian counsel for legal advice on the matters addressed herein.
Related Offices