Confidence test: Indonesia to lop the zeroes off its rupiah

JAKARTA – Indonesia is preparing to take a technically neutral yet symbolically significant step in its economic evolution: the redenomination of the rupiah.

The plan, long discussed within the government and Bank Indonesia, aims to simplify daily transactions and accounting by removing zeros from the currency. While the move will not change real value or purchasing power, it signals a maturing economy ready to modernize its monetary system calmly and deliberately.

At its core, redenomination seeks efficiency. A currency system filled with multiple zeros creates administrative friction, higher transaction costs, and greater risk of calculation errors. Converting 1,000 rupiah into one new rupiah would simplify bookkeeping, payments, and pricing. It would also enhance Indonesia’s international image by projecting confidence in the stability of its macroeconomic fundamentals.

Any reform touching the face value of money, however, inevitably awakens memories of Indonesia’s 1965 monetary trauma. That year, the government carried out a sanering, a real value cut rather than a nominal simplification. Under the December 13, 1965, policy, money in circulation and bank deposits was reduced by half.

A 1,000-rupiah note suddenly had a real value of only 500. Intended to contain runaway inflation and restore fiscal balance, the move slashed the real worth of savings and purchasing power overnight. Instead of rebuilding trust, it triggered panic, accelerated inflation, and deepened public distrust of monetary policy.

This history explains why many Indonesians still conflate redenomination with pemotongan nilai. The fear is understandable—once burned, twice shy. But the distinction is crucial: redenomination does not cut real value; it only adjusts the nominal scale of the currency while preserving purchasing power. Sanering was a confiscatory crisis measure; redenomination is a technical reform undertaken in stability.

Today’s conditions could not be more different. Inflation is within the central bank’s target range, the exchange rate is relatively stable, public confidence in banks is strong and digital payment systems are advanced. Indonesia’s fiscal position is far healthier than it was six decades ago. The preconditions for a smooth redenomination—stability, trust, and institutional readiness—are finally present.

Power of perception

History shows that perception can be as powerful as policy. Even if technically neutral, misunderstandings can trigger anxiety or opportunistic price hikes. Experiences from Turkey and Brazil show that poorly communicated redenomination can create “psychological inflation,” undermining an otherwise sound reform.

To avoid that, Indonesia’s government must prioritize public communication alongside technical preparation. Four measures are essential.

First, implement an extended transition period of 18 to 36 months during which old and new rupiah notes circulate together. All goods and services should display dual prices to help the public internalize the new scale.

Second, launch a broad and sustained education campaign. Every citizen must understand that redenomination is not a devaluation. The message must reach rural communities and microbusinesses, not just urban consumers.

Third, ensure all banking, taxation, and digital payment systems are upgraded before launch. A single malfunction in digital infrastructure could damage trust more than macroeconomic instability.

Fourth, empower consumer protection agencies to monitor and penalize unfair price adjustments so businesses cannot exploit the conversion to hide price increases.

Communication, transparency and timing matter as much as fiscal prudence. The 1965 sanering was imposed under duress without clear messaging or preparation. The upcoming redenomination must demonstrate the opposite: deliberate planning, clear communication, and institutional coordination.

Other nations offer useful lessons. Turkey’s 2005 redenomination succeeded because it was launched in a stable macroeconomic environment with a long dual-pricing phase and consistent public education.

Brazil’s 1994 reform paired redenomination with credible anti-inflation policies, allowing citizens to see it as modernization rather than a threat. These examples are useful for Indonesia, where memories of past missteps still shape public psychology.

Long-term effects

A key question for observers is how redenomination will affect the rupiah’s future value. In the short run, the policy is neutral because fundamentals remain unchanged. In the medium term, however, redenomination can strengthen perceptions of monetary credibility.

A simplified currency system signals institutional confidence, orderly policymaking and commitment to stability. These psychological signals can improve trust in the rupiah, reduce exchange-rate volatility and potentially narrow risk premiums.

The perception effect matters. Currency strength depends not only on inflation and interest rates but on investor belief that a country can manage reforms without instability. A successful redenomination would demonstrate that Indonesia can modernize without panic. Over five to 10 years, these credibility effects can support a more stable rupiah against currencies like the dollar and euro.

The reform could also affect Indonesia’s stock and bond markets. Redomination will not change the intrinsic value of shares or bonds, but it reduces numerical complexity, particularly for high-priced stocks.

This can improve market readability, attract more retail investors and allow better valuation comparisons with regional markets. For bonds, redenomination reinforces perceptions of monetary discipline, which over time can lower risk perceptions and potentially yields.

For foreign investors, the key concern is certainty of value. Redenomination provides that by maintaining real asset values while offering a clearer, more modern numerical structure. Investors often interpret smooth redenomination as evidence of mature economic and financial governance, which it turn supports stronger capital inflows and deeper financial markets.

Economic trust

In the broader economy, redenomination can help Indonesia transition into a more efficient and trusted economy and financial system. Over the next five to 10 years, its benefits can accumulate: transactional efficiency improves, public trust deepens and Indonesia’s integration into global financial systems strengthens. These effects are gradual but meaningful, reinforcing the country’s long-term resilience.

Ultimately, redenomination of the rupiah is less about numbers than credibility. It tests whether Indonesia can carry out a complex policy calmly, transparently and inclusively. If done well, it could simplify transactions, modernize financial systems and reinforce the perception of Indonesia as a confident and stable economy. If done poorly, it could reignite old fears and erode trust.

Indonesia now has the opportunity to show that this time is different. With disciplined preparation, clear communication and institutional readiness, redenomination can become not a reminder of past crises but a milestone of economic maturity. The nation can demonstrate that it is ready to move forward with confidence—supported by a stable currency, a stronger financial system and a more credible economic future.

Ronny P Sasmita is senior analyst at Indonesia Strategic and Economics Action Institution.