US$ 1 = IDR 14?

25
DR. Fuad Bawazier, MA
Economist and Former Finance Minister in Cabinet Development VII

IO – Perry Warjiyo, the Governor-elect of BI, seems set to continue the plan to redenominate the Rupiah, subject to Government approval. We can understand that, because lawmaking is the authority of the Government and DPR, not the authority of BI as a mere executor.

The idea of Rupiah redenomination has been launched for quite some time, but apparently the Ministry of Finance still has its doubts. On the other hand, the public has gotten used to practicing Rupiah redenomination in their daily lives, even before the Government and BI launched it.

Check the restaurants, cafes, shops, and even traditional markets: prices are shown with three zeroes deleted for reasons of economy and neatness, but customers are not surprised or confused. They understand perfectly that an item or service priced at Rp 100,000.00 will be tagged as “Rp 100K”, and even saying that it’s worth “100” is enough to make the customer understand that they must pay using an Rp 100,000.00 bank note. Various publications and reports that write in Rupiah in numbers, it is practically certain that the numbers will be simplified with the addition of the words “in thousands”, “in millions”, or “in billions”. Read the financial report of any company published in any local newspaper – the Rupiah numbers will be simplified. This tendency is most evident in the APBN (State Budget) reports issued by the Government, which is usually denominated in millions and billions of Rupiah.

In daily conversation, whether among the elites or the lowly, in both modern and traditional market, in the cities and in the village, you can be nearly certain that Rupiah simplification will occur. In an interview held by the Minister of Trade in traditional markets, smalltime merchants will say “20” to mean “Rp 20,000.00” or “150” to mean Rp 150,000.00, and the person they talk to would understand what – or more precisely, “how much” is actually meant, without any errors or misunderstandings. On the other hand, when the same amount is mentioned by a higher-level merchant, such as a motorcycle dealer, “20” is immediately understood to mean “Rp 20 million”, and when a car dealer says “150”, it is immediately understood to mean “Rp 150 million”.

This common and daily practice of shortening is used only when mentioning or writing about Rupiah. This abbreviation does not apply outside of prices or values in Rupiah.  Nobody will say “10” in the number of a house or letter to mean “10,000”. Or to cite another example, “Flight 2000” will never be shortened into “Flight 2”.

If the value of a country’s currency is so low that it is too far from the value of other countries’ currencies, there is an impression that there is something wrong with the economic management of that country. The low currency value also gives an impression that goods and services in that country are expensive, again strengthening the impression of “economic mess”. It would be hard to build trust in a low-value currency or a currency that frequently falls in value, especially if you want to build up cash reserves.

The current Rupiah value has been in effect since 1966, when the Government changed the denomination of Rp 1000.00 into Rp 1.00, which caused a bit of a panic among the public because citizens had to exchange existing currency for new notes. People queued up everywhere to exchange their money, panicking to spend their old money, while smart traders sold their wares at an extra profit because they were sure they could exchange their own proceeds for new currency.

Now, the 50+ year-old inflation has decimated the value of the Rupiah in such a way that all prices must be expressed in at least thousands of Rupiah. Therefore, it is time for the Government and BI to simplify the value of the Rupiah to follow the pattern or culture that has been applied smoothly among people so far.

BI usually issues and distributes new bills and coins to replace worn-out currency money within a 5-year frame. The new denomination of Rp 100.00 will replace Rp 100,000.00 and Rp 50.00 will take the place of Rp 50,000.00. The new money will be distributed alongside old money, so there should be no shock or panic, especially when the information has been disseminated accordingly beforehand. There is no need to act dramatically – it is not complicated. Within 5 years at most, the old money will be reabsorbed back to BI, leaving only the new money behind.

I expect people will quickly understand and get used to this within a year, if BI is able to provide new money to replace the old currency. The Rupiah exchange rate to the dollar would be USD 1 = Rp 14, which will make the Rupiah more dignified and prestigious. So why the confusion and doubt when redenomination is already on the table?