Letters of Credit Required for Indonesia Commodities Exporters

Posted by Reading Time: 4 minutes

By Charles Small

indo flagA Rule from Indonesia’s Trade Ministry requires commodity exporters to use letters of credit (L/C) in overseas shipments from April 1, 2015. The new rule will effect coal, oil and gas, palm and palm-kernel oil, and minerals including tin. According to the Ministry, these commodities together accounted for over 41 percent of Indonesia’s exports from 2009 to 2013, averaging $US71 billion per year.

A letter of credit is a bank-issued document guaranteeing that payment will be received by a seller so long as delivery conditions have been met. A 2009 policy requiring L/C for international trade activities was lifted in 2010.

Trade Minister Rachmat Gobel said on January 14, 2015 that the letters of credit are intended to help gather accurate records on the sale of Indonesia’s natural resources and overall foreign exchange. Without the L/C, the transaction would not be permitted to be executed. The L/C issuer would be a local bank and prices in the letters of credit would be the actual transaction value.

Finance Ministry Customs and Excise Revenue and Regulations Director Susiwijono Moegiarso has said the mandatory use of L/C by local banks will support Bank Indonesia (BI) in managing the flow of foreign currencies. Since 2011, in an effort to support the rupiah, BI has required that Indonesian exporters keep dollar-based revenue in onshore banks for 90 days after receiving payment and report such transactions. BI’s latest data has shown that at least 20 percent of Indonesia’s exporters have not complied with this requirement, a situation Susiwijono expects to be addressed by the latest regulation.

Related-Reading-Icon-Asean LinkRELATED: Indonesia-Malaysia Financial Agreement a Model for Bilateralism

Issuance of a letter of credit may effect import and export procedures in Indonesia, including compliance requirements in product certification, labeling, and packaging. With the exception of certain bulk items, letters of credit numbers, and relevant invoice dates must be indicated when labeling products. The use of a letter of credit payment also effects the number of documents required to submit during commercial invoicing procedures.

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