In a move seen as another blow to the use of US dollars in Asian-Middle East trade, the governors of the Central Bank of the United Arab Emirates and Bank Indonesia have established a framework promoting the use of local currencies for bilateral transactions.

The central banks signed a memorandum of understanding to promote the use of their national currencies by supporting the gradual implementation of the framework, which also aims to develop financial markets to support economic growth and financial stability.

Partnership between the UAE and Indonesia have witnessed robust growth particularly in non-oil trade, which doubled between 2017 and 2023 to reach more than 16 billion dirhams (US$4.3 billion).

The MoU defines a framework comprising various elements and measures to facilitate the settlement of cross-border trade transactions in the two national currencies (the UAE dirham and the Indonesian rupiah) as agreed between importers and exporters.

It also outlines the types of eligible transactions and allows for developing the conditions to support hedging and liquidity management activities in AED-IDR. This collaboration marks a key milestone in strengthening bilateral financial cooperation and will help businesses reduce transaction processing costs.

“We are pleased to embark on another cooperation to deepen financial integration and strengthen the economic relations of the United Arab Emirates with Indonesia,” Bank Indonesia governor BanPerry Warjiyo says. “Local currency transactions would further support financial stability and resilience, and deepen financial market to address heightened external vulnerabilities.”

A growing number of countries have been promoting the use of local currencies in cross-border payments and trade to reduce their reliance on the US dollar. In November 2023, for example, China and Saudi Arabia agreed to a local currency swap agreement worth 50 billion yuan (US$6.93 billion) as part of efforts to strengthen financial cooperation and expand the use of local currencies between the two countries. The deal is valid for at least three years and can be extended by mutual agreement.