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Time to take some zeroes off the rupiah

Publication Date : 18-01-2013


Are you a millionaire yet? If not, you might like to take a trip to Indonesia.

At an exchange rate of one Singapore dollar to around 7,860 Indonesia rupiah earlier this month, for example, it was possible to become an instant millionaire by visiting a money changer and exchanging less than S$130 (US$106).

Such high denominations have long been a source of amusement to foreigners. For accountants, however, it is a plain nuisance. Salaries are paid in millions of rupiah, while government and corporate budgets are regularly denominated in billions and even trillions.

Of all the countries in Asia, only the Vietnamese dong (currently going for around 16,960 dong to the Singdollar) has a lower price.

Dealing with all those zeroes can be annoying.

A recent Bloomberg article, for example, pointed out that the nation's total banking assets in October last year amounted to 4.029 quadrillion rupiah. That's 4,029,000,000,000,000 rupiah.

In 2010, Bank Indonesia, the central bank, announced plans to redenominate the currency, issuing new notes that would effectively drop three zeros so that 1,000 rupiah would be equal to one new rupiah.

A draft law to this effect was finalised last year, and the Finance Ministry hopes it will be included as one of the priority Bills in the 2013 legislative programme. If all goes according to plan, the new currency could begin circulating alongside the old as early as next year.

Economists The Straits Times spoke to welcomed the proposal. "I'm all for it," CIMB research head Erwan Teguh said in Jakarta, adding that many retail outlets were already removing three zeros for the sake of simplicity when displaying prices.

Not everyone is happy with the idea, however.

The rupiah has a troubled history, and Indonesians have been conditioned to treat any official meddling with considerable suspicion. Reflecting this, Deposit Insurance Institute chief executive Mirza Adityaswara last month urged the government to focus on ensuring monetary stability before implementing the plan.

The rupiah fell 6.6 per cent against the US dollar last year, and now stands at its weakest point since September 2009. The economy as a whole, however, is very stable. Inflation is well under control, and fiscal policy remains prudent.

Even so, economic planners have to contend with the fact that many older Indonesians regard redenomination as synonymous with sanering, a word of Dutch origin that refers to an attempt to defeat inflation by slashing the nominal value of notes in circulation.

Together with devaluation, sanering has been implemented several times since independence in an attempt to overcome economic difficulties.

It is hard to imagine now, but in 1949, it was possible to buy one US dollar for just 3.8 rupiah. To do the same today, you need about 9,660 rupiah.

An overvalued exchange rate and high inflation in the years following independence led to a series of devaluations.

The first took place in 1959. It was accompanied by a sanering exercise, in which 1,000-rupiah notes were revalued at 100 rupiah.

In 1966, hyperinflation - of over 600 per cent per annum - led to yet another devaluation. It also involved sanering. In late 1965, a "new rupiah" was brought in, at 1,000 to one against the old currency.

A subsequent economic stabilisation programme during the early years of the Suharto regime was very successful. But it was not until the mid-1970s that the country's convoluted system of multiple exchange rates was abandoned. A mild devaluation in August 1971 then put the exchange rate to the US dollar at 415.

Other devaluations and depreciations followed, but the catastrophic collapse of the value of the rupiah during the Asian Financial Crisis of 1997 and early 1998 was far more serious. Faced with enormous financial market pressures, Bank Indonesia was unable to prevent the rupiah losing over 80 per cent of its value in just a few months.

Since 1999, the Indonesian currency has been far more stable. Even so, the rupiah has yet to shake off its reputation as one of the riskiest liquid assets in Asia.

Despite short-term concerns over the declining exchange rate, now seems as good a time as any to carry out a redenomination exercise.

Now that Indonesia has a stable economy, no one can reasonably suggest that redenomination is the action of a government desperate to get its house in order.

Learning from the experience of countries such as Turkey, a transition period of about three years is envisaged, during which both the old and the new currency will circulate.

Most important, however, will be the planned consultations with the public before officials press ahead. Without public trust, the exercise could see jittery citizens dumping the rupiah and creating exactly the sort of situation they fear most.


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