Pacific Money

Indonesia Revives Rupiah Redenomination Plan

Southeast Asia’s largest state may redenominate its currency for the second time in three years.

Indonesia Revives Rupiah Redenomination Plan
Credit: Flickr/ Jason Paris

Bank Indonesia, Indonesia’s central bank, is reviving a plan to redenominate the rupiah, for the second time in three years. This announcement came on Monday, as Bank Indonesia issued new notes. The rupiah is one of the highest denominated notes in Asia.

Quelling fears of currency devaluations, Mirza Adityaswara, Bank Indonesia’s senior deputy governor, was quick to stress that “redenomination is a matter of simplification.” Under this proposed policy, the bank will cut three zeroes off the face value of rupiah notes, in an attempt to simplify the currency system. For example, RS 25 000 would be shortened to RS 25.

Theoretically, these new currency units should not reduce purchasing power or cause any currency volatility and will have a minimal impact on prices. A redenomination in currency would be followed by an adjustment in prices for goods and services in line with the elimination of zeroes off rupiah banknotes. Before the idea of redenomination was even floated around, some coffee shops and restaurants had reportedly begun dropping the zeroes on their menus.

If and when implemented, redenomination would serve to overhaul and even strengthen Indonesia’s existing financial infrastructure. Currently, because of the size of the rupiah, stores must have cash registers that can deal with at least nine digits. Banks have to accommodate transactions up to the trillions. The sheer number of digits in each transaction increases the possibility of errors and the need for regulation. On the macro level, experts hope that redenomination may raise investor confidence in the general investment climate of Indonesia and improve capital inflow.

Nevertheless, it remains unclear the extent to which the Indonesian government will prioritize this project. On Monday, President Joko Widodo had said that the bill should be included in the 2017 National Legislation Program (Prolegnas) as a priority item. While this indicates the government’s priorities, it is not a guarantee for implementation. Typically, only a fraction of the bills in Prolegnas are passed. However, Indonesian Finance Minister Sri Mulyani Indrawati reportedly said that the redenomination proposal is not on the list of current legislative priorities for 2017.

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If passed, there will be a six-year transition period in place to phase out old bills.