One important aspect of the currency bill that is being debated by the House of Representatives is redenomination.

The issue, raised by Bank Indonesia last year, has drawn controversy, although the spirit of the policy is to increase national “pride” in our currency, the rupiah.

The rupiah is one of the “cheapest” currencies in the world, with denominations reaching 100,000, second only to Vietnam’s dong, which has a 500,000 note. We would see if the advantage of this complex policy is justified.

Redenomination is a policy to change the denomination of a currency at particular ratio (Dogarawa, 2007). In most cases, redenomination is conducted only by eliminating a number of zeros in the old denomination. This change does not alter purchasing power; it is purely a matter of rescaling.

In a disclosed plan, Bank Indonesia (BI) will replace the current Rupiah with a new currency at a ratio of 1 to 1,000.

A cellular phone voucher which now costs Rp 100,000, for example, would be valued at Rp 100.
This process, of course, needs a transition period, in which all goods in the economy will have two prices: one for old rupiah and one for new rupiah.

The concept is really simple and many countries have adopted it. Since 1960, there have been 70 redenomination episodes (Moseley, 2005), including Turkey (2005), Romania (2005), Zimbabwe (three times between 2006 and 2008) and Brazil (1994).

Redenomination is usually conducted for two reasons: First, if an economy experiences high inflation and second in the case of a currency union. In most cases redenomination follows high and chronic inflation.

Turkey, for example, experienced almost 100 percent annual inflation in the 1990s before opting for redenomination. The accumulation of such a high inflation rate caused regular prices to reach astronomical levels. It was not surprising that when redenomination took place in Turkey, six zeros were removed from the currency.

Indonesia had a similar experience in 1965. After years of macroeconomic mismanagement, inflation reached 1,136 percent. Redenomination was performed, and the new Rp 1 replaced Rp 1,000 of the old currency.  

The most important benefit of redenomination is restoring the credibility of policy makers. Through the policy, authorities send a signal that past macroeconomic management was wrong: That there were past mistakes but from now on the macroeconomic management will be more prudent.

Another advantage of (successful) redenomination is convenience. Most humans cannot deal in calculations that involve too many digits. We can imagine the hard time that a cashier or bank teller would have while handling currencies whose denominations reached billions (nine zeros). Even electronic systems could experience errors or crash if forced to handle transactions with too many digits.

It should be noted, however, that redenomination is a mere signaling instrument. It could succeed or fail to achieve its original goal. If a regime has entirely lost public confidence, a series of redenominations would not have any impact.

The Zimbabwe Central Bank performed redenominations four times (4th Zimbawe dollar) between 2002 and 2008, but annual inflation remained out of control. The bank gave up and since April 2009, Zimbabwe has adopted the South African rand and US dollar as a means of exchange.

The implementation of redenomination could impose a significant cost on a state. The principal cost is the adjustment cost.

BI has planned for 2013-2018 to be a transition period when both the old and new rupiah will be
applicable. In this period, every business player should display price tags using both the new and old currencies.

With millions different kinds of goods and services available, the cost of this adjustment will be high. In addition, enterprises should accommodate financial reporting / accounting in both currencies.

Another problem may arise due to coordination failures. It is possible that after the redenomination the new price of certain goods is not the same as it used to be.

This condition would most likely arise when market competition is not perfect because of the presence of monopolistic and oligopolistic practices. There would be a particular group of society that loses because of the redenomination.

While it must be admitted that the current ratio is not ideal, it is not psychologically disturbing either.

Inflation is well managed and has hovered below two digits for the past five years. It could be said that the government has succeeded in creating an image and reputation of prudent macroeconomic management.

No complaints have been heard of the number of digits in the currency, either. Therefore we need to question if this policy is necessary to improve the national image.

While it is not wrong to improve this image, all necessary costs of policy implementation should be calculated beforehand. Policy makers need also to answer if redenomination is a feasible means to reaching a better currency standing.

The most important benefit of redenomination is restoring the credibility of policy makers.


The writer is the head of the Center for Business and Economics Studies, Ma Chung
University, Malang.

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