Caution: messing about with money usually ends in tears

PUBLISHED : Friday, 13 August, 2010, 12:00am
UPDATED : Friday, 13 August, 2010, 12:00am

Hong Kong residents planning a business trip to Jakarta, a holiday in Bali, or a diving jaunt to the underwater splendours of Manado will be delighted to learn that the Indonesian central bank is planning to lop three zeros off the face value of its currency, replacing the existing 10,000 rupiah notes with a new 10 rupiah denomination.

How much simpler mental arithmetic will be. Instead of 1,160 rupiah to the Hong Kong dollar, suddenly the exchange rate will be 1.16 to one - call it one to one just to keep things simple.

How much cheaper everything will seem. Instead of costing a pricey-sounding 6,000 rupiah, overnight your soft drink will cost you a mere 6 rupiah. Bargain!

And how much more grown-up Indonesia will appear as an economy when arriving visitors no longer become instant multi-millionaires simply by stopping off at the airport's bureau de change.

Yet many ordinary Indonesians are far from impressed with the central bank's plan. So widespread are fears that the proposed redenomination will involve a drastic loss of purchasing power that central bank governor Darmin Nasution was forced to issue a quick-fire denial, insisting 'redenomination does not affect the value of money'.

Yet despite a certain amount of supercilious snickering in the media at those simple folk who think knocking off the superfluous zeros will mean a reduction in the real value of their currency, concerned Indonesians have some good reasons for their fears. Messing about with the denomination of money all too often ends in tears.

Indonesians are especially sensitive here. Memories are still fresh of the 1998 collapse of the rupiah, which at one point saw the currency lose 86 per cent of its pre-crisis value against the US dollar, and of the runaway inflation that followed (see the charts below).

The planned redenomination is intended to draw a line under that episode once and for all. Yet history tells us that similar currency revamps elsewhere in Asia have backfired spectacularly.

The latest example comes from North Korea, where in December last year the government of reclusive dictator Kim Jong-il announced that it would cross two zeros off the denomination of the local won, replacing the old banknotes with new ones 'to strengthen the national currency and stabilise the circulation of money'.

Unfortunately it also decreed that households could only exchange up to 100,000 won of the old notes - about HK$450 - a move that immediately wiped out almost all the capital of the nascent private sector.

The predictable result was instant economic collapse and widespread hunger as the price of rice shot up 30-fold in just two months. The two hapless officials who got the blame for the fiasco were executed by firing squad a few weeks later in front of a specially invited audience.

Even more disastrous was the redenomination in 1987 of the kyat ordered by Burmese dictator Ne Win in line with his pledge to reform the country using 'political and economic mysticism'.

Obsessed with the magical properties of the number nine, Ne Win declared Burma's existing banknotes invalid, replacing them with 45 kyat and 90 kyat notes - denominations divisible by nine.

His command may well have satisfied some obscure mystical imperative, but it also wiped out the population's accumulated savings, triggering mass protests and their brutal suppression the following year.

But perhaps the most bizarre attempt at currency redenomination occurred in Indonesia itself back in the 1950s.

In an effort to rein in inflation running at 33 per cent, finance minister Syafruddin Prawiranegara ordered the people to cut their banknotes in half, declaring that henceforth only the left-hand sides would be legal tender, and that from now on they would be worth just half their face value.

Inevitably Syafruddin's attempt to control price rises failed. Inflation continued to spiral upwards, reaching 650 per cent in mid-1960s despite two further redenominations, which saw one zero knocked off the face value of the rupiah in 1959 and a further three crossed out in 1965.

With a history as ruinous as that, it is hardly surprising that many Indonesians are nervous about the central bank's latest plan to strike three zeros off the currency's face value. Experience suggests it would be better to leave them where they are, even if the mental arithmetic does confound visitors.