Indonesia has cut taxes for exporters who converted their earnings to rupiah in a new regulation issued this week aimed at boosting foreign exchange supply. Since last year, natural resource exporters from Indonesia must retain for at least three months in the domestic financial system 30% of their proceeds.

Authorities have been encouraging exporters to convert these proceeds into rupiah and keep them longer in the domestic banking system to bolster domestic U.S. dollar supply amid tight global liquidity. Some exporters, however, have opted not to convert due to exchange rate volatility.

In the new regulation seen by Reuters, exporters will be taxed a maximum 5% for interest gained from their deposits if converted into rupiah, down from 7.5% previously.

The government has also widened the choice of instruments in which exporters can put their earnings and receive the tax breaks to include instruments issued by Bank Indonesia and promissory notes issued by Indonesia's Eximbank.

"This will surely increase exporters' interest to keep their earnings in domestic accounts," Filianingsih Hendarta, Bank Indonesia's (BI) deputy governor, told reporters on Wednesday.

Under existing rules, exporters can pass on their funds at local banks on to the central bank and receive favourable rates from BI.

Currently, about $1.8 billion to $1.9 billion of such funds are kept at BI, the central bank said. (Reporting by Stanley Widianto and Stefanno Sulaiman; Editing by Gayatri Suroyo and Bernadette Baum)