Bank Indonesia is expected to keep its benchmark rate steady. (Antara Photo/Zabur Karuru)

Jakarta. Indonesia’s central bank has banned the use of foreign currencies for domestic transactions under regulations issued last week and effective July 1, aimed at controlling onshore demand for dollars and easing downward pressure on the rupiah.

The rupiah is the worst-performing currency in emerging Asia this year and has been trading around its weakest level since August 1998. It stood at 12,896 per dollar at 10:11 GMT on Thursday.

Foreign exchange reserves dropped almost $4 billion in March as Bank Indonesia defended the rupiah.

Eko Yulianto, acting director of money management at Bank Indonesia, said there was demand for at least $6 billion each month for domestic transactions, which the bank hopes to cut once the new regulations are in force.

“There are still a lot of transactions using foreign exchange and that has added to pressure on our exchange rate,” Yulianto told a briefing on Thursday, adding that companies in textiles, pharmaceuticals, chemicals and the oil and gas sector often used the dollar for domestic payments.

“We don’t want a dollarised economy so we need to uphold the sovereignty of the rupiah,” he said.

Indonesia has banned cash transactions in foreign currencies since 2011, with a maximum punishment of one year in prison and a 200 million rupiah ($15,500) fine for offenders.

From July 1, it will also ban non-cash transactions using foreign currency, with some exceptions such as for international trade and investment in strategic infrastructure projects.

The central bank can penalise offenders with a maximum fine of 1 billion rupiah or ban them from using payment clearing systems.

Under the new regulations, Bank Indonesia has also prohibited price quotations in foreign currencies.

Reuters