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Redenomination of Rupiah: Decrease in Currency Value?

Redenomination of Rupiah

In August 2022, the Government of Indonesia and Bank Indonesia officially released seven new 2022 money. One aspect of innovation in strengthening the 2022 money is the reduction of the last three zeros in the new money when viewed from a translucent perspective. This gives rise to issues and discourses on redenomination of rupiah which again becomes a topic of discussion in the community.

A. Redenomination in General

The definition of redenomination according to Bank Indonesia is the simplification of the value or nominal stated in a certain currency without deducting the exchange rate of the money itself, accompanied by adjustments to commodity prices in the market and exchange rates with foreign currencies (foreign exchange). For example, if the value of Rp. 1,000 (one thousand rupiah) is redenominated, it will experience the removal of three zeros so that it becomes Rp. 1 (one rupiah), but the value remains the same. 

Redenomination itself is not a new practice in the economic world. As a comparison, redenomination has been carried out in several countries, such as Turkey. Turkey is an example of a country that has succeeded in redenomination by eliminating 6 (six) zeros in its currency. Apart from Turkey, the countries that have succeeded in redenomination are Poland, Romania, and Ukraine. However, not a few have failed in redenomination efforts, for example, Argentina, Zimbabwe, Brazil, and North Korea. These countries apply redenomination at an inopportune time when the economy is unstable and has high inflation rates.

Redenomination of Rupiah

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B. Rupiah Redenomination Efforts in Indonesia

In 2017, the Ministry of Finance and Bank Indonesia formally submitted the Currency Redenomination Bill for the first time. At that time, the Minister of Finance Sri Mulyani together with the Governor of Bank Indonesia (2013-2018 period), Agus DW Martowardojo, submitted a request to President Joko Widodo (Jokowi) for the Bill on Currency Redemonination. Initially, the implementation of rupiah redenomination was targeted to be realized on January 1st, 2020. However, the legal basis had yet to be released. The redenomination discourse continued, but the discussion on the legal basis was never completed until the end of the term of office of the 2014-2019 House of Representatives of the Republic of Indonesia. 

From 2018 to 2020, the 2020 rupiah Redenomination Bill was not included in the national legislation program. Now, the plan to redenominate rupiah is resumed amid the Covid-19 pandemic. This is stated in the Regulation of Minister of Finance Number 77/PMK.01/2020 on the Strategic Plan of the Ministry of Finance for 2020-2024 (“RMF 77/2020”). 

The Governor of Bank Indonesia and the Association of Indonesian Economic Scholars (“ISEI”) recently conducted a study on the redenomination of rupiah and found various economic benefits. ISEI has also conveyed its views regarding this redenomination to the Government of Indonesia. However, the implementation of rupiah redenomination depends on the decision of the Government of Indonesia

C. Purpose of Redenomination

The Minister of Finance stated that the main purpose of redenomination is to simplify denominations so that transactions become more efficient, convenient, and effective in recording financial books. Large denominations of rupiah have begun to cause problems for the public, especially in conducting financial transactions, and redenomination is expected to make the calculation process become easier because the last three zeros in the money are no longer used. In banking terms, the simplification of currency digits by removing three zeros from rupiah will save the cost of the technology used. In addition, the simplification of currency digits also makes it easier to read financial statements in accounting practices.

Redenomination of Rupiah

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D. Current Preparation

The Director of the Center of Economic and Law Studies (“CELIOS”) states that redenomination is not appropriate if it is carried out in the next 2 (two) to 3 (three) years in Indonesia. One of the potential issues to consider is inflation stability, which must be maintained before redenomination. In addition, the fear of hyperinflation must also be considered because changes in the nominal value of money can cause traders to increase rounding value. For example, the price of goods before redenomination is Rp. 9,200 (nine thousand two hundred rupiah), then there is a possibility that the price of goods becomes Rp. 9,5 (nine point five rupiah) after redenomination, and later the price is rounded to Rp. 10 (ten rupiah). As a result, the price of goods rises significantly. 

The Government of Indonesia and Bank Indonesia will have difficulty controlling this condition. In addition, the Government of Indonesia and Bank Indonesia must take lessons from the failure of redenomination carried out by Brazil, Russia and Argentina due to the lack of technical preparation, socialization, low trust in the government, and the momentum when the economy is experiencing external pressures, and the same might happen to Indonesia with its large population and business units. 

Redenomination should be carried out when economic conditions and inflation are stable, and under these conditions, it will take at least 10 (ten) years of preparation after the redenomination regulation is made. Furthermore, the Government of Indonesia needs to intensify socialization efforts to the public from the early stage so that there is no confusion in transactions because the public understands that the redenomination of rupiah is not a reduction in the value of the currency, but only a reduction in the nominal currency. 


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