Redenomination of the Rupiah ?

Today, one US dollar can be exchanged with more than Rp9,100. This means that Rupiah has a quadruple-digit of exchange rate to the US dollar.

Having little exploration of exchange rates from 244 countries in the world, I surprisingly found that Rupiah today is the third lowest-priced currency in term of its exchange rate to the US dollar, after Mozambique (23,100 Metical / USD) and Vietnam (16,000 Dong / USD), and followed by Sao Tome & Principe (9,000 Dobra / USD), Ghana (8,200 Chedi / USD), and Iran (8,200 Rial / USD).

The exchange rate represents the strength and weakness of the currency and it is also closely connected to the status of a nation in the international community. A nation is supposed to possess its own currency pursuant to its economic and political standing, as it is sometimes a matter of national pride.

Some 35 years have passed since BI first introduced the Rp10,000 notes in 1964. The gross national income per capita, which amounted to only USD1.5 at that time, is now approaching the USD2,000 level and Indonesia has become the world's 16th largest economy in term of PPP valuation of GDP.

In line with Indonesia economic growth that required currency in bigger denominations, BI issued Rp20,000 notes in 1992, Rp50,000 notes in 1993, and Rp100,000 notes in 1999. But in real value, the Rp100,000 notes do not match major high-priced notes such as the USD100, which is equivalent to about Rp910,000.

It is believed that the need for bigger Rupiah denomination in Indonesia is still growing in particular for transactions in big value. Should BI then issued bigger notes, for example Rp500,000 or Rp1,000,000? or is it about time to consider redenomination of Rupiah?.

What is redenomination? Redenomination is the process where a “new” unit of currency replaces the “old” unit with a certain ratio. This means that the currency changes from the "old" currency to a "new" one, which are often worth 1000, 10000, 100000, or 1 million units of the old currency.

At some point, usually after at least one year, the old currency ceases to be legal tender. From that point onwards, it is in theory possible to drop the "new" prefix from the new currency.

In addition to reducing transactions costs, there are two major advantages of redenomination. First, it helps in restoring credibility and confidence to a nation's currency. In the case of Indonesia, redenomination will reduce the demand and use of US dollar in the economy and potentially strengthen the Rupiah. Second, if managed well, and in consonance with other measures, redenomination will assist in taming inflation.

Let’s now look at some recent experiences from other countries with regard to the redenomination of currency. Turkey, for example, redenominated its currency in 2005 by stripping “six zeroes” from the “old” Lira, so that the “new” Lira exchange rate today equal to 1.25 “new” Lira / USD. Before redenomination it was 1,250,000 “old” Lira / USD. Turkish economy now enjoys a positive outcome ― putting soaring inflation under control in single digit and maintaining stable economic growth rates.

In 2006 Zimbabwe redenominated its currency by transforming 1,000 of old Zimbabwean dollar to one unit of “revalued” Zimbabwean dollar. In the same year, Azerbaijan redenominated its currency by transforming 5,000 units of “old” manat (AZM) into one unit of “new” manat (AZN) and Romania redenominated its currency by transforming 10,000 units of “old” Leu into one unit of new “Leu”.

In 2007, Sudan redenominated its currency by transforming 100 units of Sudanese “dinar” into one unit of Sudanese “pound”.

Without doubt, there will be considerable social and economic costs if redenomination is implemented in Indonesia, but currency transformation has become crucial given the enhanced status of Indonesia in the international community and changed economic situation. Bank Indonesia as the Indonesian monetary authority needs to consider the advantages and disadvantages, from both the short and long-term perspectives, of implementing redenomination of Rupiah.