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Indonesia mulls incentives to keep US dollars in domestic market, Finance Minister says

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  Published in Business and Finance on Friday, September 19th 2025 at 11:44 GMT by Channel NewsAsia Singapore
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Indonesia Weighs Incentives to Keep U.S. Dollars In‑House, Finance Minister Says

Indonesia’s finance ministry has announced that it is actively exploring a range of policy tools to encourage domestic banks to hold U.S. dollars rather than allowing them to drift out into foreign markets. Speaking at a media briefing on June 27 2024, Finance Minister Sri Mulyani Indrawati said that the government’s objective is to “strengthen the domestic liquidity of U.S. dollar assets, thereby safeguarding the stability of the rupiah and reducing the risk of sudden capital outflows.” The minister’s comments come amid a global environment of tightening monetary policy, rising U.S. interest rates and a spike in domestic inflation, all of which have prompted many Indonesian financial institutions to reconsider the composition of their foreign‑exchange (FX) reserves.

Why the Dollar Drain Matters

Indonesia’s FX reserves are a key barometer of the country’s external solvency and are widely viewed as a buffer against sudden market shocks. According to Bank Indonesia (BI) figures, the country’s reserves stood at roughly US$280 billion at the end of May 2024, with about 54 % of those reserves denominated in U.S. dollars. The remainder is split between euros, Japanese yen, and a smaller basket of other currencies. While the dollar remains the most widely held currency, the finance ministry has signalled that a rapid exodus could erode the central bank’s ability to intervene in the foreign‑exchange market, weaken the rupiah and heighten inflationary pressures.

“Inflationary pressures are already being felt in the retail market,” Sri Mulyani said. “If a significant portion of the dollar reserves is sold off or moved abroad, we may see a depreciation of the rupiah that could worsen price pressures.” She added that the ministry is “not only protecting the domestic financial system but also helping to maintain investor confidence in the Indonesian market.”

Potential Incentives on the Table

The finance ministry is reportedly evaluating a set of measures that could make holding U.S. dollars in domestic banks more attractive:

While the ministry has not yet decided on any particular policy, the finance minister emphasized that the proposals would be “implemented in a way that maintains the market’s openness and protects the interests of depositors and investors.” She also hinted that the ministry would consult with Bank Indonesia and the Ministry of Trade to align the incentive framework with the broader macro‑prudential strategy.

Linking to Broader Policy Goals

The move is part of a broader suite of initiatives aimed at enhancing Indonesia’s resilience to external shocks. In January 2024, Bank Indonesia announced a temporary increase in the reserve requirement for foreign‑currency deposits from 3 % to 5 % for the next 12 months. The central bank has also been tightening its supervisory guidelines on FX risk exposure for banks, especially those with significant dollar portfolios.

The finance ministry’s focus on the dollar is also aligned with its currency‑stability policy, which has recently seen an emphasis on maintaining a competitive but stable exchange rate. “A stable rupiah is critical for keeping Indonesia’s economy competitive,” Sri Mulyani said. “By keeping the dollar within the domestic financial system, we are able to better manage external shocks and preserve the purchasing power of the Indonesian people.”

The minister also pointed out that any incentive package would be calibrated against the risk of distorting the market. “We do not want to create an environment where banks are incentivized to hold dollar balances solely for tax reasons,” she noted. “The incentives should be tied to real economic benefits and risk management.”

Reactions from the Financial Community

Bank Indonesia’s Deputy Governor, Dr. Budi, expressed support for the ministry’s initiative. “We recognize the need to keep a healthy amount of dollar liquidity in the domestic market,” he said in a statement. “However, any measures must be carefully designed so as not to impede the normal functioning of the FX market.”

Commercial banks, on the other hand, have expressed cautious optimism. “We would welcome incentives that help us manage currency risk more effectively,” said a spokesperson from Bank Central Asia. “But we will need to see concrete details on how these incentives will be implemented.”

Internationally, analysts note that Indonesia’s approach mirrors that of other emerging economies that have grappled with dollar outflows. “In countries like Brazil and Turkey, aggressive incentive packages have proven mixed results,” said Dr. Sofi, a macroeconomist at the Asian Development Bank. “The key will be balancing the need to retain currency liquidity with the risk of creating market distortions.”

Looking Ahead

Indonesia’s finance ministry plans to finalize the incentive framework in the coming months, with a pilot phase slated for early 2025. The government will also hold a series of consultations with the banking sector, the central bank, and foreign‑exchange market participants to fine‑tune the details. As the global monetary policy landscape continues to evolve, Indonesia’s approach to maintaining dollar liquidity will be closely watched by investors, policy makers and scholars alike.

In a world where capital can move in seconds, the Indonesian government’s decision to actively encourage the domestic retention of U.S. dollars underscores a growing recognition that liquidity management is as much about policy as it is about markets. Whether the proposed incentives achieve the intended outcome remains to be seen, but they mark a decisive step toward a more resilient financial system in Southeast Asia’s largest economy.