Time to Renew the Rupiah?

I was delighted to read in the Jakarta Post of 19th May 2008 an op-ed piece by Agus Firmansyah, suggesting that perhaps it was time to redenominate the rupiah. According to Agus, the rupiah is one of the lowest valued currencies in the whole world. The lowest denomination note now in circulation, Rp 1000, is worth only about 10 US cents these days, and coins seem to be hardly used at all. A single rupiah is worth only 100th of a US cent.

The idea behind choosing the value, or purchasing power, of the currency unit is that it should be useful or convenient in terms of the size of transactions typically undertaken with cash. When the currency is poorly managed over a long period of time, as the rupiah has been, its purchasing power declines significantly, such that even the smallest cash transactions require several hundred currency units.

Legally speaking, the rupiah, like the dollar, still consists of 100 cents. But I don’t ever recall having seen cent coins being used in transactions. Bank Indonesia’s customers (the general public, who use its currency for undertaking transactions) cast their votes long ago, reducing their demand for cents to zero. By virtue of the same process, they have reduced their demand for the low denomination rupiah coins almost to zero as well.

As editor of a journal on the Indonesian economy, I am frequently bemused by the tendency of many writers to report money values down to the last rupiah, rather than rounding them to millions, or billions, or even trillions. Does anyone imagine that the reader will be disappointed if an amount is reported as ‘Rp 24.2 trillion’ rather than the ‘correct’ amount of Rp 24,165,782,534,956 (which is often an estimate in any case)? On the contrary: it is far easier to eyeball numbers if they consist of three or four digits rather than a dozen or more (and of course many more numbers can be reported in a single table if they are rounded). For the same kinds of reasons, it is highly inconvenient to have to undertake low value transactions in very large nominal amounts.

The argument for introducing another ‘new rupiah’ is compelling. (The present rupiah was itself once new, having been introduced to replace the old one, which had become almost worthless as a result of the hyperinflation of the mid-1960s.) Quite simply, it is grossly inefficient to have to calculate and undertake transactions in the millions, when they could just as easily be done in hundreds or thousands.

I can think of only one counter argument: that the introduction of a new rupiah would be confusing and worrying to many members of the public. No doubt if the transition were not handled carefully, that would be the case. But people are not stupid. Provided high-level government officials explain the rationale for the change carefully and patiently, the general public will understand. Perhaps the most important aspect to stress is that the old currency will be exchangeable for the new at a rate of, say, 1000 for 1, for a reasonably long period of time. It would probably be sensible to introduce new cents at the same time.

It will be interesting to see if the monetary authority and the government take this very useful suggestion seriously. Will the monopoly supplier of currency grasp the reality that its customers have almost no demand for its low value products, and are unnecessarily burdened by having to deal with large denomination notes for even small transactions?