ArrowArtboardCreated with Sketch.Title ChevronCrossEye IconIcon FacebookIcon LinkedinShapeCreated with Sketch.Icon Mail ContactPath LayerIcon MailMenu BurgerPositive ArrowIcon PrintIcon SearchSite TitleTitle ChevronIcon Twitter
Economy

Indonesian bureaucrats moot a currency redenomination

President and others are wary of a move that sparked chaos in 1965

Most Indonesians tend to ignore the last three zeros on the country's bank notes. (Photo by Nozomu Ogawa)

JAKARTA It is perhaps little surprise that Indonesian bank notes come in far higher denominations than those of most other major currencies. A Starbucks latte, after all, costs 33,000 rupiah ($2.47), while a Toyota Avanza starts at around 189 million rupiah. The nation's budget for fiscal 2017 is 2,070 trillion rupiah.

Denominations have risen rapidly over the years in response to inflation and a plunge in the value of the currency during the Asian financial crisis. The result is bank notes with face values in the thousands, tens of thousands and even hundreds of thousands.

Now, however, the country's Finance Ministry and central bank want to take a step in the opposite direction by redenominating the currency. Officials at the ministry and Bank Indonesia have called for the introduction of a new rupiah that is 1,000 times the value of the current one -- in effect lopping three zeros off of price tags -- but not everyone is on board with the idea.

People close to Indonesian President Joko Widodo and government officials as a whole have been, at best, lukewarm toward the plan, arguing that it would bring unnecessary confusion to the country's economy.

To make their case, critics point to Indonesia's disastrous redenomination in 1965, which not only threw the economy into chaos but ended up bringing down the administration as well.

MIND-BOGGLING BILLS The huge numbers on the face of Indonesian bank notes often result in mistakes and questionable bills. Surprised at a bill of 92 million rupiah for six-months of language lessons, one housewife said she got in touch with the school and was told the correct amount was actually 9.2 million rupiah.

In 2010, the then-governor of the central bank declared the start of feasibility studies looking at redenomination.

This July, Finance Minister Sri Mulyani Indrawati told parliament she was considering adding the redenomination of the rupiah to a set of bills for priority examination over the next fiscal year.

Lawmakers, however, seem to have the opposite view to Sri Mulyani, an economist who is not a member of parliament. Widodo plans to seek re-election in 2019, and his supporters are worried about the immense political risks involved in tinkering with the currency.

"Redenomination at this time is impossible," said one member of the administration.

As the process entails changing only the face value of bank notes and coins, the value of the currency neither rises nor falls against other currencies, nor does the value of assets change.

PAST EXAMPLE On Dec. 13, 1965, the administration of President Sukarno announced its decision to redenominate the rupiah. The announcement came as Sukarno was losing his grip on power. At the same time, Suharto was gaining influence. As head of army strategic command, he had quelled a coup in September that year and would later become president.

Large numbers of people linked to communism were killed for alleged involvement in the attempted coup, and the whole episode sparked social chaos.

The Indonesian economy, too, was thrown into turmoil and the value of the rupiah plunged. Fighting inflation was imperative as prices soared at a rate of 600% during the year.

Redenomination was seen as a quick remedy, just as it had been when Germany brought hyperinflation under control after World War I. For Sukarno, however, it proved catastrophic.

"Markets in Jakarta were thrown into bewilderment and became almost panic-stricken," The Nikkei reported on Dec. 15.

Over the next 10 days, the paper reported that prices were rising 10% to 30% in Jakarta, and that army vans were driving around with megaphones calling for people to remain composed and stressing that old bank notes remained valid.

Redenomination merely fueled inflation as stores took to price gouging and stockpiling merchandise. The government threatened merchants accused of such practices with harsh punishments, including the death penalty.

But the price hikes were not simply a case of profiteering. Store owners were forced to raise prices because the government had introduced a "revolution donation" program with the purpose of collecting 10% of the face value of the new rupiah when converted.

The ensuing chaos resulted in the collapse of the Sukarno regime.

Today, however, bureaucrats and senior central bank officials stress that the stability of Indonesia's macroeconomy would insulate the country from a similar reaction.

Gross domestic product has been growing steadily at a rate of about 5%, while inflation, around 4%, is within the central bank's target.

PRESTIGE MOVE Another reason advocates want to redenominate the rupiah is to make the currency appear stronger and signal the country's arrival as a major economic power.

Under the plan being put together, the new rupiah would be introduced over six years. This appears extremely cautious compared with Turkey's redenomination in 2005, when the old lira remained legal tender for one year.

Such an approach is clearly aimed at avoiding a repeat of the 1965 debacle. For a similar reason, the plan also calls for old bank notes to be exchanged free of charge.

But while paying for groceries in hundreds of thousands may seem inconvenient, redenomination is far from an urgent matter for most citizens. People are accustomed to removing the last three zeros from bank notes and prices in their minds -- and in some cases from the actual price tag. That 33,000 rupiah latte at Starbucks, for example, is listed as costing 33.

Get unique insights on Asia, the most dynamic market in the world.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Get Unlimited access

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world
.

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends January 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to the Nikkei Asian Review has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media