JAKARTA - Draft legislation to
redenominate Indonesia's currency is expected to
gain momentum this year as lawmakers and monetary
authorities push to drop the last three zeros from
the nominal value of the rupiah. While the paper
change will be largely cosmetic, analysts are
divided on whether a redenomination could spark
inflation and sow confusion among the public.
The rupiah currently trades at 9,200 to
the US dollar and is the second-lowest priced
currency in the world, trailing only the
Vietnamese dong. The rupiah collapsed amid the
1997-1998 Asian financial crisis and despite
economic and financial recovery still trades at a
fraction of its pre-crisis value.
Finance
Minister Agus Martowardojo said last month that the
government was prepared
to submit the draft law to the House of
Representatives (DPR) for approval. The central
bank, Bank Indonesia, has backed the move for
various reasons, including the need to simplify
accounting standards for transactions that now
often exceed trillions of rupiah to the national
pride that will be supposedly restored through a
lower nominal currency value.
If the bill
is passed, as is expected, Bank Indonesia has said
it will need one to two years to introduce the
concept to the public and explain how to adapt
accounting and information systems. During the
proposed transition period, prices of goods would
be labelled with both the old and new rupiah
rates. Old notes would later be recalled and
replaced by new notes where one rupiah would be
equivalent to 1,000 of the old bills, according to
the proposed plan.
Certain financial
analysts wonder if redenomination could be used to
mask a devaluation of the currency to improve
export competitiveness. If so, the policy
motivation isn't abundantly apparent: Indonesian
gross domestic product (GDP) grew by 6.5% last
year, up from 6.1% in 2010. That represented the
fastest growth clip seen since 1996, the year
before the Asian financial crisis hit and
bankrupted the national coffers. GDP growth is
projected to hit 6.3% this year.
In
December, Fitch Ratings was the first of the three
major credit agencies to raise Indonesia's
sovereign rating from junk status to BBB minus,
based on the country's steady economic growth, low
debt and strong macroeconomic position. The
upgrade represented the first time Indonesia has
achieved investment grade status since the economy
collapsed during the 1997-98 financial crisis.
Moody's followed suit this week, raising
Indonesia's rating from debt to investment grade.
The credit rating agency said Indonesia's cyclical
resilience to large external shocks pointed to
sustainably high trend growth over the medium
term.
"A more favorable assessment of
Indonesia's economic strength is underpinned by
gains in investment spending, improved prospects
for infrastructure development following key
policy reforms, and a well-managed financial
system," Moody's said in a public statement.
Fundamental strengths The rupiah
was relatively stable against the US dollar during
last year, a troubling economic and financial
period around the world, with the local unit
trading between 8,500-9,000 to the greenback.
That stability would seem to indicate that
the proposed redenomination plan is not being
driven by urgent economic problems, as has been
the case in the past. Inflation was a manageable
3.79% in December, marking a 20-month low,
although there are indications that exports are
slowing amid economic turbulence in Europe and the
United States and slowing growth in China.
Bank Indonesia deputy governor Budi
Rochadi has acknowledged that a redenomination of
the rupiah would be "disastrous" if the transition
was attempted during a period of high inflation.
He has said that three requirements must be met to
redenominate successfully, namely a stable
economic environment, low inflation and a
government guarantee of price stability. He has
said that all three conditions are currently and
securely in place.
Mika Martumpal, a
currency analyst at Commonwealth Bank based in
Jakarta, believes that the redenomination plan
carries few economic risks.
"It's not an
overnight change. Bank Indonesia has planned to
have a transition period that may run for years in
which both currencies - existing rupiah and new
rupiah - are accepted as legal tender.
Consequently, the public will have time to accept
the new currency," he said.
Martumpal
notes that Turkey dropped five zeroes from the
lira and had two currencies in circulation for
four years before dropping the word "new" from the
replacement currency in 2009. Turkey has often
been cited as a success in using redenomination to
fight inflation and simplify economic transactions
that were previously denominated in terms of
billions, trillions and even quadrillions,
Martumpal notes.
The key to avoiding a
sudden currency devaluation during redenomination
is public education, according to Johannes
Ginting, a market analyst at Monex Investindo
Futures. "Preparing the public to accept the new
rupiah will take time. During the transition
period, prices of goods have to be clearly marked
with two currencies to ensure that psychologically
people will understand that the value of their
money has not dropped," he said.
Traumatic past Managing those
perceptions, however, may be easier said than
done. An older generation of Indonesians remembers
having the value of their savings drastically
reduced through currency redenomination schemes
implemented in 1950, 1956 and 1966. The first, in
1950, saw then finance minister Syarifuddin
Prawiranegara order the public to literally tear
in half all of the notes they held denominated
over five rupiah.
The left portion of a
torn bill was valid as legal tender but worth only
half the pre-torn bill's original amount. The
right portion of the torn unit was no longer valid
but could be exchanged for government bonds -
valued far less than the money's original face
value.
The policy aimed to reduce public
purchasing power, counter hyperinflation and pay
off then-spiraling national debt. While the
policy's success in dampening inflation was
temporary, the move managed to drastically reduce
the quantity of money in circulation and replaced
the bills issued by the colonial Dutch
administration. In 1959, Indonesia again
sought to reduce the amount of money in
circulation and contain hyperinflation. A
presidential decree acted to drop one zero off all
500 and 1,000 rupiah notes, an unexpected move
announced on the radio that effectively reduced
the value of the currency by 90% overnight. Those
ham-fisted interventions collapsed the value of
the rupiah, which fell from 45 to the US dollar in
1955 to 35,000 by 1965.
An even more
radical change took place in 1965 to curb
inflation that then ran as high as 650% Then
president and independence hero Sukarno, whose
central bank over-printed bank notes to finance
political prestige projects, ordered the public to
exchange their old 1,000 rupiah notes for new one
rupiah notes. The move drove prices even higher as
Indonesians ditched cash for gold, goods and other
assets.
Indonesia is now in better
technocratic hands, but policymakers still feel
obliged to play down that economic history. The
proposed redenomination plan, Bank Indonesia
officials have emphasized, is wholly different
from the schemes of the past. Central bank
governor Darmin Nasution has repeatedly said that
the purchasing power of the rupiah will remain the
same, despite dropping three zeroes from its
nominal value.
Still some local analysts
and business leaders suspect a hidden agenda and
have referred to lingering "trauma" among older
Indonesians when discussing the potential
downsides of the redenomination plan.
"This has been done back in the president
Sukarno era," said Sofyan Wanandi, general
chairman of the Indonesian Business Association
(Apindo), in a recent interview. "However it was
not fruitful. Instead society endured trauma."
Megawati Wijaya is a
Singapore-based journalist. She may be contacted
at megawati.wijaya@gmail.com.
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