Redenomination of the rupiah?

Today, one U.S. dollar can be exchanged for more than Rp 9,100. This means the Indonesian rupiah has a quadruple-digit exchange rate to the U.S. dollar.

Exploring exchange rates from 244 countries around the world, I surprisingly found that the rupiah today is the third-lowest-priced currency in term of its exchange rate to the U.S. dollar, after Mozambique (23,100 metical/US$) and Vietnam (16,000 dong), and followed by Sao Tome & Principe (9,000 dobra), Ghana (8,200 chedi) and Iran (8,200 rial).

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 Bank Indonesia (BI) first introduced the Rp 10,000 notes in 1964. The gross national income per capita, which amounted to only $1.50 at that time, is now approaching the $2,000 level and Indonesia has become the world's 16th-largest economy in term of PPP valuation of GDP.

In line with Indonesian economic growth that required currency in bigger denominations, BI issued Rp 20,000 notes in 1992, Rp 50,000 notes in 1993, and Rp 100,000 notes in 1999. But in real value, the Rp 100,000 notes do not match major high-priced notes such as the $100 bill, which is equivalent to about Rp 910,000.

It is believed that the need for bigger rupiah denominations in Indonesia is still growing. Should BI then issue bigger notes, such as Rp 500,000 or Rp 1,000,000? Or is it about time to consider redenomination of the 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, 10,000, 100,000, 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 onward, 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 in a nation's currency. In the case of Indonesia, redenomination would reduce the demand and use of the U.S. dollar and potentially strengthen the rupiah. Second, if managed well, and in consonance with other measures, redenomination would assist in taming inflation.

Let's now look at some recent experiences from other countries with regard to redenomination. Turkey, for example, redenominated its currency in 2005 by stripping six zeros from the "old" lira, so that the "new" lira exchange rate today equals 1.25 "new" lira to the dollar. Before redenomination it was 1,250,000 lira to the dollar. The Turkish economy now enjoys a once-soaring inflation in single digits and stable economic growth rates.

In 2006 Zimbabwe redenominated its currency by transforming 1,000 Zimbabwean dollars to one unit of a revalued Zimbabwean dollar. In the same year, Azerbaijan redenominated its currency by transforming 5,000 units of manat into one unit of the new manat and Romania redenominated its currency by transforming 10,000 units of the leu into one unit of the new leu.

In 2007, Sudan redenominated its currency by transforming 100 units of the Sudanese dinar into one unit of the 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. BI as the Indonesian monetary authority needs to consider the advantages and disadvantages, from both the short and long-term perspectives, of implementing redenomination of the rupiah.

The writer is an economist at the statistics department of the IMF in Washington, D.C., and can be reached at [email protected]. This article reflects the personal views of the writer.

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