New Indonesian Law on Currency May Require Review of All Foreign Currency Denominated Contracts

July 15, 2011

The Indonesian House of Representatives on 31 May 2011 passed Law No. 7 on Currency (the "Law"), which came into effect on 28 June 2011.  As well as establishing rules for the design, printing, circulation and withdrawal of coinage and banknotes, the Law contains two articles that are of particular interest to all entities that do business in Indonesia.  Unfortunately, the broad language of these articles and the lack of clarification from Indonesian authorities leaves the ultimate impact of the Law unclear.  This uncertainty will likely continue until regulations implementing the Law have been issued, which should take place within one year from the date of the Law’s enactment.

Article 21 (1) of the Law states that the Indonesian Rupiah must be used for payment and settlement of all commercial transactions and monetary obligations effected in Indonesia.  The Law provides for a maximum penalty for non-compliance of one year in prison and/or a fine of 200 million Rupiah (approximately US$23,450).  Exceptions are provided in Article 21 (2) for:

  • certain transactions in relation to the state budget;
  • grants received from or made overseas;
  • international commercial transactions;
  • bank deposits denominated in foreign currencies; and
  • international financing transactions.

Although some have suggested that Article 21 (1) requires that all onshore contracts must now be denominated in Rupiah or risk becoming unenforceable, most commentators think that commercial contracts may continue to be denominated in foreign currency; however, the Law requires that the payment or settlement of monetary obligations under such contracts be made in Rupiah.

Regarding the exceptions provided for in Article 21 (2), the scope of potential application is unclear.  Under the international financing exception a loan paid directly from a foreign branch of a foreign bank to an entity or individual within Indonesia would likely not fall under the ambit of the Law.  The same loan paid by an Indonesian branch of the same foreign bank, however, may fall within the scope of the Law.  Similarly, under the international commercial transactions exception a foreign entity booking sales through an Indonesian subsidiary may need to ensure that payment is effected in Rupiah, while a foreign entity entering into a similar transaction through its foreign operations would not.

Article 23 (2) of the Law raises further uncertainty, as it provides that refusal to accept the Rupiah as payment or settlement of a monetary obligation is a violation of the Law unless such payment or settlement of monetary obligation in a foreign currency has been agreed in writing by the parties.  Although on the face of it this Article seems to provide a means for parties to take a transaction outside the scope of the Law through the simple expedient of agreeing in writing to do so, such an interpretation should not be assumed absent further clarification from relevant government bodies.

The Law will apply retroactively to all transactions entered into prior to 28 June 2011 but where payment is settled after that date.  Consequently and given the current level of uncertainty, any foreign entity with operations in Indonesia should review all of its foreign currency contracts relating to transactions within Indonesia (including expatriate employment contracts) and at a minimum consider adding a provision establishing a method for fixing the exchange rate.  

Gibson, Dunn & Crutcher LLP  

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you work or any of the following lawyers in the firm’s Singapore office:

Emad Khalil (+65 6507 3682, [email protected])
Saptak Santra (+65 6507 3691, [email protected])
Chris Graham (+65 6507 3632, [email protected])

© 2011 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.