Indonesian Rupiah Redenomination: How Will it Work?

Bank Indonesia has recently proposed a draft bill which covers the redenomination of Indonesia’s national currency, the Indonesian Rupiah. This will have many wondering how redenomination works and what the implications are for the Indonesian population as a whole. Those with their eye on the Forex markets, will also need to watch this space.

The Two Phases

The redenomination process will consist of two phases, and the whole process will occur between January 1, 2020 and December 31, 2038. The first phase will involve printing currency with the word ‘new’ on it, so that people know it is the First New Money.

This will be replacing the ‘Old Rupiah’, which is scheduled to be phased out by December 31, 2034. Once the first phase is complete, the second phase will begin, which will involve printing the new currency without the word ‘new’ on it. The money with the word ‘new’ on it will then be phased out by December 31, 2038.  

Individuals and Businesses

As part of the bill drafted by Bank Indonesia, businesses must make sure that the price of their goods shows both the price in the old currency as well as the new, given that both currencies will be in circulation (yet will have a different value).  

The value must remain the same when converting prices between the two, and those who do not follow the new rules could face a fine as well as a jail sentence.

Possible Economic Effects

As previously mentioned, those who trade in currencies will no doubt be eager to see if this will have any impact on the value of the Indonesian Rupiah. Given that the rate of the new currency’s introduction will be so slow, it is likely that any economic effects will be relatively minor.
Some lawmakers, however, believe that interfering with the currency could pose political risks, especially with elections closing in. In 1965, redenomination proved disastrous, and plunged the economy into disarray. It will be up to those in charge of the redenomination process to ensure the process is smooth, and to ally people’s concerns that 1965’s events will not be repeated.

It remains to be seen how the new redenomination process will work in practise, but it is likely that it will go smoothly if passed. It is still in its drafting phase, though, so it will still need approval before it is implemented. Ultimately, the economic effects would most likely be minor, provided the administrators learn the right lessons from the 1965 crisis. 

Financial disclaimer can be found here.