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Many prominent economists and analysts, including members of the government’s economic team, are apprehensive about the central bank’s recent proposal to trim some zeroes from the rupiah to increase efficiency.

The critics seem to believe that currency redenomination is one of the gravest sins a nation can commit in formulating economic policy.

But before rejecting the idea outright, it must be assessed from a strategic perspective taking into account Indonesia’s economics, politics and culture.

Redenomination is a process whereby a new unit of currency replaces the old. The most common way of achieving this is to remove three zeros from the old currency.

From an economic perspective, redenomination is a reform that can help manage inflation and boost the value of the domestic currency against foreign tender.

It can also improve control over the money supply, enhancing the central bank’s function as the lender of last resort.

On the political front, redenomination enhances a nation’s credibility by bolstering its monetary sovereignty.

It can also serve as an emergency measure when citizens lose confidence in the national currency and begin to use foreign tender to conduct business.

Indonesia is among the few countries that use the US dollar to set domestic price structures.

For example, most hotel stays, electronics, and computers are priced based on dollar exchange rates.

As dollarization becomes more prevalent here, it leaves the nation’s economic policy heavily influenced not only by international capital markets but also foreign central banks.

Once a government loses its monopoly on monetary control, its overall capacity to govern the economy is diminished substantially.

Most inflows to Indonesia’s through capital markets are short term due to the perception that the rupiah is “cheap.”

We consistently see that the volatility remains high in Indonesia markets remains due to such short-term horizon behaviors.

Redenominating the rupiah could signal a new era of economic and political reforms for the country.

It could enhance the stabilization process to change citizens’ inflationary expectations from the old currency regime.

Last but not least, a nation’s socio-cultural aspects have to be considered before changing something so basic as the money its citizen use every day.

Redenomination would provide administrative and personal convenience from the use of lower units of currency to execute high-value transactions.

The signaling effect of a new era and renewed monetary sovereignty may lead the general public to expect low inflation in the future and could lead to falling interest rates.

The expectation of lower inflation would likely also strengthen the domestic currency in the foreign exchange market.

As a result, there would be less incentive for short-term capital inflows and investors would take longer positions.

Redenomination would also improve the currency’s purchasing power in world markets.

Adjusting the currency would not only ease transactions, but it also affects citizens’ identity and the legitimacy of the government.

With this increased national pride and signs of change for the better, poverty might be more manageable and cultural conflicts would be easier to resolve.

There are several factors for implementing redenomination, but timing plays a crucial role.

Now is the best time for Indonesia to adjust the rupiah while it is relatively stable against the dollar, which has been on a downward trend against major foreign currencies.

Secondly, a strong fiscal policy should be implemented to stimulate the economy.

Finally, currency redenomination should be followed by a stabilization program to remove distortionary economic policies.


Soebowo Musa is chief executive of Kiran Resources Indonesia, which providing advisory services in corporate finance. He was a former deputy chairman of the Indonesia Bank Restructuring Agency.