Depth Review of the Implementation of Currency Redenomination in Indonesia

                Depth Review of the Implementation of Currency Redenomination in Indonesia 

The Ministry of Finance and Bank Indonesia (BI) have once again put forward plans for redenomination, also known as simplification of the rupiah (rupiah redenomination 2020). Within the framework of the national legislative program for the years 2020-2024, Finance Minister Sri Mulyani presented a proposal that captured the attention of many: a redenomination bill. Since the announcement, discussions about the possible implementation of redenomination have engaged various sectors. However, amid the diverse perspectives that have emerged, it is important for us to delve into what redenomination actually entails, its underlying objectives, and the potential impacts it may have on our country's economy. 

According to the Big Indonesian Dictionary (KBBI), redenomination is defined as the simplification of the value of the rupiah currency without altering its exchange rate. In this context, redenomination aims to simplify the number of digits in rupiah denominations without reducing purchasing power, prices, or the value of the rupiah against goods and/or services. In other words, redenomination maintains the currency exchange rate but reduces the number of zero digits in its denominations. It is important to note that the redenomination process is not the same as a currency reset. Redenomination does not diminish the purchasing power of money, whereas a currency reset would devalue the purchasing power you possess. For example, Indonesia might undergo redenomination by removing three zero digits. Thus, Rp100,000 would become Rp100, Rp10,000 would become Rp10, and Rp1,000 would become Rp1. If currently Rp10,000 can be used to purchase bread, then after redenomination, Rp10 could also be used to buy bread. The purchasing power of the currency remains the same; only the number of zero digits is reduced. 

The objectives of redenomination depend on each country that undertakes it and are related to the accumulation of economic crises and past inflation. The rationale behind the proposal for the redenomination of the Rupiah currency is the high level of inflation, which causes the value of the currency against goods to decrease rapidly over time and the nominal value in the currency to increase. For example, Indonesia experienced very high inflation in 1966, where the inflation rate reached 1000%, and according to Hal Hill (2001), inflation at that time reached 1500%. This high inflation rate is reflected in the devaluation of the Rupiah currency (reset) from Rp. 1000 (one thousand Rupiah) to Rp. 1 (one Rupiah). Furthermore, the highest inflation rate in the world ever recorded occurred in Zimbabwe, with an inflation rate of 2,500,000 percent. 

With high inflation rates, a larger currency value will be needed in the future. Currently, the highest value of the Rupiah currency is Rp. 100,000. If inflation continues to be high, in 5 (five) or 10 (ten) years, Indonesia may need currency denominations above Rp. 100,000, such as Rp. 200,000 or Rp. 500,000, or even Rp. 1,000,000. If that happens, the value of money against goods will decrease. This means that to purchase certain types of goods, a very large amount of money will be required, which in turn will complicate financial accounting systems. We certainly realize that three zero digits are hardly ever used, right? Those three digits actually only prolong the process of writing numbers without providing any real contribution to value or better understanding. By removing these three zero digits, it will result in simpler and easier-to-understand financial accounting. This step also has the potential to prevent or at least minimize the possibility of writing errors that may occur. 

Enhancing Currency Credibility and Equality is an important aspect in the context of the global economy. Currently, we are aware that there is a significant difference in the exchange rate of the Indonesian Rupiah compared to the US Dollar. For example, $1 is equivalent to Rp14,000, while $1 is equivalent to 31.3 Thai Baht and 4.27 Malaysian Ringgit. Through the redenomination process, the impression will be created that the exchange rate of the Rupiah is equivalent to other foreign currencies. This has a positive impact from the perspective of international trade and market psychology. Let's look at Turkey as an example; before redenomination, $1 was equivalent to 1.8 million Lira. However, after redenomination, $1 is equal to 1.8 Lira, making the Lira on par with other currencies. Thus, redenomination can also enhance the credibility and competitiveness of a country's currency in international trade. 

Furthermore, it should be noted that the Rp100,000 denomination is the second largest denomination in the ASEAN region, where the largest denomination is 500,000 Vietnamese dong. However, in the context of Indonesia, Rp100,000 has limited purchasing power. Perhaps that amount of money is only enough for a few meals. To compare, let's look at the Singapore Dollar. A sum of 100,000 Singapore Dollars can be used for meals for an entire year. Thus, redenomination can have a significant impact in increasing the purchasing power of the domestic currency and aligning it with the exchange rate and purchasing power of other international currencies. 

The thought of redenominating the Rupiah needs to be deeply considered by Indonesia. Experiences from various countries that have successfully implemented redenomination of their currencies, such as Turkey, Poland, and Romania, show that this step was successful when the economic conditions were stable. On the other hand, countries like Brazil, Nigeria, Ghana, and Zimbabwe, which failed in implementing redenomination (Wulan TP, 2011), faced challenges because the action was taken during times of economic turmoil. Even Zimbabwe experienced inflation of up to 250 million percent. Therefore, if Indonesia intends to implement redenomination, then economic health must be well-maintained, economic growth must remain stable, and inflation rates must be controlled and low. 

The main requirements for implementing redenomination include economic stability, controlled inflation rates, and price stability assurance (Karnadi & Adijaya, 2017). Other opinions suggest that effective redenomination requires at least four main conditions, namely stable inflation below 5% for four consecutive years, foreign exchange reserves of USD 100-200 billion, alignment of perceptions between the government/parliament and the public, including businesses and consumers, as well as a solid legal foundation regarding redenomination and its supporting policies (Bleaney & Veleanu, 2021). The weight of redenomination requirements encourages a country to thoroughly consider before implementing it. 

Some countries have met these requirements, including Japan. However, the implementation of redenomination policies is not considered a pressing priority because it requires significant efforts, including providing comprehensive education to the public. Public readiness is also a primary focus in redenomination policies (Asamoah & Owusu-agyei, 2020). In fact, Japan has conducted various studies repeatedly regarding the implementation of redenomination in their country. Among the public, there is often a perception that a large number of digits in a currency is considered to have low value compared to foreign currencies (Opare-henaku et al., 2013). 

Although redenomination has many benefits, the risks involved also need to be seriously considered. If these risks are not properly addressed, redenomination may potentially have adverse effects on the Indonesian economy. One risk to be wary of is price rounding, which can lead to high inflation rates. Excessive price rounding can result in significant inflation. Money illusion, this phenomenon occurs when we only pay attention to the numbers on money, without considering the actual purchasing power. For example, currently, we may be accustomed to spending tens of thousands on meals. However, when redenomination occurs and the nominal value of money becomes smaller, such as Rp25, we are likely to feel that the nominal value is too small and less valuable for use in purchasing food, even though its purchasing power is actually the same as the previous nominal value, which is Rp25,000. This can lead to a perception of disproportionate price increases, even up to 20%. 

Moreover, the implementation of redenomination also requires considerable costs. The socialization and implementation process of redenomination require a large budget allocation from the government. Considering Indonesia's vast geography and diverse socio-economic conditions, socializing redenomination becomes a challenging task. Costs are also needed for printing and distributing new money, as well as regulating legal processes related to redenomination. This change will also affect digital money recording, including bank accounts and digital assets such as stocks or mutual funds. Therefore, thorough planning, preparation, and readiness are crucial keys in implementing redenomination. Additionally, the economic conditions of the country must also support to ensure the process runs smoothly. 

Currency redenomination efforts are steps that can only be taken in stable economic conditions, with low inflation rates and consistently high economic growth. The success of redenomination lies in its implementation in a stable economic environment, where inflation is minimal. However, for redenomination to succeed, its steps must be taken gradually. Firstly, redenomination begins by printing new money while retaining the old model, but with the inclusion of a new value. Next, after the community understands and accepts the concept, new paper money or other new forms, such as gold coins or dinars worth 100 rupiah, are printed to replace old paper money or coins with the same value. Economic history records both the failures and successes of countries in conducting redenomination. Therefore, Indonesia needs to reassess economic growth and potential inflation rates, and thoroughly consider the benefits and losses that may occur due to redenomination. 

Although administratively the redenomination policy can already be initiated in Indonesia, its implementation still requires deeper studies considering Indonesia's economic stability is not yet fully guaranteed. Learning from Argentina's failures and Turkey's successes, there is a need for good education to the public to prevent inflation and money illusion. Ultimately, the success of redenomination is heavily determined by the readiness of both the Indonesian government and society. Redenomination is not just a monumental policy in one leadership period but requires in-depth studies in its implementation, as well as support through public campaigns and intensive education. 

Reference: 

Amir, Amri. "Redenominasi rupiah dan sistem keuangan." Jurnal Perspektif Pembiayaan dan Pembangunan Daerah 1.2 (2013): 91-96. 

Opare-henaku,A., Mensah, E. C., & Dzokoto, V. A. (2013). Ghanaians ’ Perception and Evaluation  of  the  New  Ghana  Cedi. International  Journal  of  Business,  Humanities and Technology, 3(4), 1–8 

Asamoah, J. Y., &Owusu-agyei, L. (2020). The Impact of ICT on Financial Sector Policy Reforms  in  Post-Financial crisis era in Ghana : An institutional theory perspective. Finance & Banking Studies, 9(2), 82–100. 

Bleaney,  M.,  &  Veleanu,  V.  (2021).  Redenomination  risk  in  eurozone  corporate  bond spreads. The European Journal of Finance, 27(13), 1303–1325.

https://doi.org/10.1080/1351847X.2021.1882524 

Marjuni, Ayu, Ridho Setyawan, and Maryani Maryani. "INDONESIA (TIDAK) SIAP REDENOMINASI (?)." Jurnal Multidisipliner Bharasa 2.02 (2023): 126-134.