Coming to naught - someday
Rupiah redenomination more about emotion than economics
05 June 2017
By: Duncan Graham
Photo by Erlinawati Graham

It was clearly a bargain – and the alert shopper was shouldering her bag into the ready-to-buy position; an elegant batik blouse for Rp499 in Indonesia’s popular Matahari shop. The well-established outlet is known for discounting but this was too good to miss.

The target moment was brief. One step closer and another symbol became clear – the letter “k”, short for “kilo”.

The middle-class department store and other big retailers can use this pricing because the clientele is financially literate. Buyers understand that the basic monetary unit in Southeast Asia’s largest economy is not one rupiah – but a thousand rupiah and has been for many years.

So why not stop playing around and officially scissor the last three zeroes? It’s called redenomination and the term is as awkward to say as the currency is to handle. So Bank Indonesia and the government are yet again pushing the idea into the nation’s conversation as a way into its wallets.

With the exchange rate stubbornly stuck above Rp13,000 to the US dollar, a thousand rupiah equals between seven and eight US cents. That’s enough to buy one cigarette.

Rp1,000, 500, 200 and 100 coins are getting rare. The smaller ones are more likely to be pocketed in taped bundles to make Rp1,000.  

The largest note is Rp100,000 (US $7.50). Carrying rupiah is burdensome compared to the Malaysian ringgit (4.3 to one greenback) and the Singapore dollar (72 cents). Western holidaymakers in Bali filling their bags at ATMs dub the rupiah “funny money” and assume it means the economy is in strife.

It’s less amusing in Vietnam where carrying away 2.3 million dong after exchanging one Benjamin (US$100 note) needs a backpack.

“We’re not there yet, but the arguments for redenomination of the rupiah are compelling,” Professor Candra Fajri Ananda told Strategic Review.

“I think it would be good for the country and the economy. It will stimulate growth and lift our international status. But I also know it will take time and a massive public awareness campaign.

“Redenomination is hard to say and often confused with devaluation (imposing an exchange rate) which is entirely different. Indonesia is still a largely cash economy and most people don’t use banks.” Surveys show there are only 60 million accounts in Indonesia.

Ananda, 43, Dean of Economics and Business at Malang’s Brawijaya University, has been appointed to work with the House of Representatives' Commission 11. This handles finance, the National Development Planning Board, banks and other financial institutions. He takes up his three-year posting this month [June].

The need for redenomination is widely accepted by professionals in business.  Though the logic for change is clear, the execution could be catastrophic if mishandled.

India has given skittish politicians a sobering example of how good ideas crumble when governments meddle with money. Last year Prime Minister Narendra Modi ordered banks to exchange 500 (US$7.50) and 1,000-rupee notes (US$15) for new bills in a bid to stop hoarding and tax evasion.

The New York Times reported the decision threw “the economy into turmoil, with many millions of people forced to line up at banks to deposit or exchange their old bills”.

In two years Indonesia will elect its leader through popular vote. If he stands again, the last thing incumbent President Joko Widodo wants is a loss of confidence from electors who might think juggling the rupiah a trick to clip their salaries and savings.

President Joko has publicly endorsed the latest plan to delete zeroes and says he wants it to be a priority in this year’s Prolegnas (National Legislation Program).

However, should he win in 2019 he’s built in a personal escape hatch by suggesting a seven year education campaign.

This will take the nation up to 2024 – an election year when the impact of redenomination will be someone else’s hurdle. Indonesian presidents are restricted to two five-year terms.

US political scientist Professor Layna Mosley has studied redenomination and found “government concerns about credibility and the effect of currencies on national identity” are strong factors in deciding whether to cut the zeros. In brief, it’s politics and emotion rather than economics.

About 40 million (15 per cent) of the Indonesian population is considered poor by the World Bank. Numeracy levels are low. According to UNICEF “a significant number of children stop their education after completing primary school. One in ten children who should be in classes at junior secondary level are not enrolled.”

Distrust of authority is widespread, along with conspiracy theories. Persuading all citizens to understand and accept currency changes would require a massive investment in building community acceptance.

The present enthusiasm for change is an echo from past calls. In 2010, and again three years later Bank Indonesia, was assertive. So was Finance Minister Agus Marto Martowardojo. He was reported as saying:

“We have now achieved a good level of national economic development, but it is not yet supported by an efficient currency. The rupiah must now be redenominated as it has become inefficient.”

The inefficiency remains. Nothing happened because the economy was suddenly said to be unstable. Ananda claims that’s not an issue now as inflation (currently 4.17 per cent) has been steady for several years.

“Financial illiteracy is a problem though the situation is improving,” said Ananda. “As part of the change we’d need an authority where people could complain and get action if traders tried to exploit confusion.”

As no budget has been announced to run an awareness program, Indonesian shoppers will continue putting up with spending half a million rupiah for a batik blouse – though still a good buy at US$37.50. 

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