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Jakarta Post

New banknotes launched, redenomination will go on

  • Satria Sambijantoro

    The Jakarta Post

Jakarta   /   Tue, August 19, 2014   /  10:32 am

Bank Indonesia (BI) says that it will go ahead with a redenomination plan that will slash three zeroes off the local currency, despite recently issuing new versions of rupiah banknotes.

The House of Representatives, the government and the central bank are still discussing how to proceed with the Redenomination Bill without reducing the value of the local currency, BI Governor Agus Martowardojo said on Monday.

'€œThe discussion is still ongoing and if approved [by lawmakers], there will be a transitional period of at least six years,'€ he said in his keynote speech during the official release of the new Rp 100,000 banknote in BI'€™s headquarters.

Agus assured the public that a redenomination of currency would be different from the historically unpopular sanering (currency remediation), an economic policy normally implemented in a period of hyperinflation when a cut in currency value would also curb the people'€™s purchasing power.

However, unlike sanering, a redenomination in currency would also be followed by an adjustment in prices for goods and services in line with the elimination of the zeroes off the rupiah banknotes, he explained.

'€œWe have seen the example of Turkey that has implemented a successful example of a redenomination policy and now has a stronger sovereign currency,'€ the BI governor said.

The decision to go ahead with the redenomination plan was revived in the middle of the launch of the new Rp 100,000 banknote, which has added printing that says, '€œNegara Kesatuan Republik Indonesia'€ (The Unitary State of the Republic of Indonesia).

The banknote will also be the first rupiah denomination to bear the signature of a government representative, in this case the finance minister. Previously, only BI top officials could have their signatures printed on the rupiah.

The Rp 100,000 banknote is among the currencies with the most zeroes in the region.

This is because in terms of nominal value, the Indonesian currency is one of the world'€™s weakest currencies, with a US dollar being equal to 11,681 rupiah, according to the Jakarta Interbank Spot Dollar Rate (JISDOR) published on Monday.

In Southeast Asia the other currency beside the rupiah that hovers at the five-digit level against the dollar is the Vietnamese dong, which was traded at 21,200 against the greenback at the end of last week, according to the Bloomberg rating agency.

Government officials have previously stated that the redenomination plan might be dropped because of the uncertain global environment, which has exerted heavy pressure on the rupiah.

At times when a redenomination plan is implemented during a period of unstable exchange rates, or when the policy is not being communicated successfully, it could trigger heavy inflation as people lose their faith in the currency and opt to hoard assets, buying goods and services in massive amounts.

The rupiah was Asia'€™s worst performing currency in 2013, having depreciated by more than 26 percent against the US dollar throughout last year.

Indonesia suffered from the volatility in the global financial market as the rupiah breached its psychological threshold three times (10,000, 11,000 and 12,000 per dollar) within a year because of pressures caused by capital outflows.

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