UAE, Indonesia Forge Trade Link with Local Currency Pact

The United Arab Emirates and Indonesia are set to streamline trade between their nations after their central banks signed a Memorandum of Understanding (MoU) on May 10, 2024. This agreement paves the way for increased use of their respective local currencies, the Emirati Dirham (AED) and the Indonesian Rupiah (IDR), in bilateral transactions.

The MoU, signed by Khaled Mohamed Balama, Governor of the Central Bank of the UAE (CBUAE), and Perry Warjiyo, Governor of Bank Indonesia (BI), establishes a framework to facilitate cross-border transactions in local currencies. This move is expected to benefit businesses in both countries by reducing transaction costs and mitigating risks associated with foreign exchange fluctuations.

Currently, most international trade is settled in U. S. dollars (USD), which exposes businesses to exchange rate volatility. By enabling transactions in AED and IDR, the agreement aims to provide a more stable and cost-effective alternative for UAE and Indonesian companies.

The agreement between the CBUAE and BI is not the first of its kind for either institution. In July 2023, the CBUAE signed similar MoUs with the Reserve Bank of India (RBI) to promote local currency trade and link payment systems. This suggests a growing trend among central banks to bypass the USD-centric global trade system and explore alternative settlement mechanisms.

Analysts believe that the UAE-Indonesia MoU could significantly boost trade volumes between the two countries. The UAE has emerged as a major trading hub in the Middle East, while Indonesia boasts a large and growing domestic market. Streamlining trade finance through local currency transactions could incentivize businesses on both sides to explore new opportunities.

Beyond facilitating bilateral trade, the agreement also holds potential for strengthening financial ties between the UAE and Indonesia. Increased use of AED and IDR in regional transactions could foster the development of their respective financial markets and promote greater financial integration.

The MoU comes at a time when both the UAE and Indonesia are seeking to diversify their trade partnerships. The UAE, a major oil producer, is looking to expand its economic footprint beyond hydrocarbons. Meanwhile, Indonesia, Southeast Asia's largest economy, is keen to attract foreign investment and boost its export sector.

The agreement between the CBUAE and BI is a significant step towards fostering closer economic ties between the UAE and Indonesia. By promoting the use of local currencies, the MoU has the potential to streamline trade finance, reduce transaction costs, and unlock new business opportunities for companies in both nations.

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