Redenomination talks keep in the air. The plan to simplify the currency values is always heating up again and again since 2010 it was first proposed by former Governor of Bank Indonesia, Darmin Nasution. In the development of the discourse, the reason for cutting the three zeros seems so simplistic, from avoiding mispronouncing to saving the paper and ink.
Despite the pure-blooded prominence of redenomination still being debated amongst academics, yet it has some positive sides. On the one hand, by slashing the three zeros, the rupiah will be more efficient as SWIFT only provides 14 digits for transaction messages sent. On the other hand, it boosts credibility and confidence. It will encourage and prouder public to hold local currency as it maintains stability against the greenback. By doing so, trust can be built among the local, regional, and international communities. In other words, dropping the zero will bring the rupiah to the next level, out of the world's five "junk currencies". The only game in town is not to let inflation climb.
In addition to inflation, the success of redenomination still depends on the critical period of dissemination and transition when there would be two nominal values of the currency. In the last decade, 60 countries across Europe, South America, Africa, and Asia have redenominated their currency by eliminating one zero, three zeros, and even six zeros. Perhaps, some noticeable ones like Zimbabwe, Brazil, Argentina, Germany, Belarus, Turkey, Romania, Bulgaria, Sierra Leone, Vietnam, and South Korea. Among those countries that have redenominated, while some claim the glory, others are set to dust.
The success of redenomination will be assessed inter alia against the inflation rate. If the inflation rate is too high or even hyperinflation, then the redenomination being applied fails, and vice versa. Meanwhile, other macroeconomic indicators are sustained economic growth and exchange rate stability---currency's credibility.
To be honest, the redenomination seems to not provide much benefit other than prestige and shorter numbers in the financial statements to read. That's why I don't think it is urgent. Besides, this is not an appropriate time to slash some zeros off the national currency. As many literatures stated, redenomination will be effective when it is employed on a very strong economic base. Another reason is redenomination occurs in the aftermath of economic calamities---inflation as the most important, needs to be relegated to the dustbins of history.
Before dealing with a set of problems mentioned, the monetary authority needs to shake hand with a state of panic that lead to economic turmoil. This panic is rooted in the misconception between redenomination (omitting zeros without reducing the purchasing power) and remediation---so-called 'sanering' (reliving the zeros with reducing the purchasing power) --- and the distrust of the rupiah itself. This nation has been built in the experience of sanering encountered economic turmoil and instabilities in both currency and inflation in 1950, 1959, and 1965.
Furthermore, the psychological effects sparked as low-income level and extra-economic costs. Imagine what could be done with the changing price in tag, accounting, and other financial aspects. Thus, at least for now, simplification at one point will only create complexity in many ways as redenomination affects all economic values such as prices of goods and services, financial assets and liabilities, salaries, debts, rents, committed payments, shares, fixed deposits, taxes, pensions, and other social benefits, and the like. A currency and economic catastrophe might happen due to speculative attacks before the new currency rolls out.
Redenomination is a means to an end and not an end in itself. That's why, although some have failed, several countries that have done so have an urgency of purpose. For example, the currency redenomination in Zimbabwe is a response to the economic crisis. In Argentina, Greece, Hungary, Yugoslavia, Germany, China, Nicaragua, Congo, and Peru skyrocketed inflation or hyperinflation makes it necessary. In Ghana, the central bank costs huge sums of money to meet the demand owing to the low value of the cedi. Indeed, other reasons in common include security, portability, time-saving, and difficulty in software and accounting procedures.
Redenomination is just polishing the fundamentals. Many contracts will be affected, especially those using foreign currency as a reference and those related to inflation and price increases. Above all, perhaps, the most critical is the stock market and bond spreads. The critical note in the stock market is so much more than price changes on the trading board, but the par price of shares can drop below a penny.
The capital market will in a serious headache, especially when there is a fraction of the share price or a price that investors can bid on. At least, stock trading will be more complicated due to the changes in price fractions. For example, imagine a stock with a price of Rp50 per share, would be 0.05 cents. Even if the trading board does not change overnight, there is still confusion about how to adjust the purchase price. Such problems certainly require a reverse stock split. This is a corporate action to consolidate the number of existing shares of stock into fewer shares and increase its price. Of course, it is not perceived positively by market participants and boosts the psychological effect on the market. Thus, the focus should be on the economic fundamentals, and the other macroeconomic indicators will follow. That is the only right time to launch to the next level.
