Rupiah rides rocky road over time<\/p>\n
By Edith Hartanto<\/p>\n
JAKARTA (JP): Since it became the accepted legal tender in
\nIndonesia 51 years ago, the rupiah has had its share of troubles.<\/p>\n
The overall trend has always been downward.<\/p>\n
The rupiah's value has fallen so low at times that the
\ngovernment has had to step in to cut the nominal value. Add to
\nthis various drastic devaluations of the currency, and continuing
\ndepreciation, and the overall picture is not glowing.<\/p>\n
Indonesia's first vice president, Mohammad Hatta, announced
\nthe establishment of the rupiah as the only legal tender in
\nIndonesia on Oct. 30, 1946. The currency was then called ORI,
\nshort for Oeang Repoeblik Indonesia (Indonesian Republic
\ncurrency).<\/p>\n
It replaced four different currencies that were still widely
\nused more than a year after Indonesia declared independence from
\nDutch colonialism on Aug. 17, 1945. Currencies in use at the time
\nwere that issued during Dutch colonial era; one issued by the
\nJapanese government before their actual occupation in 1942, and
\ntwo different currencies issued by the Japanese occupation
\ngovernment in 1943.<\/p>\n
Hatta's announcement was politically as much as economically
\nmotivated, coming at the peak of the fierce struggle against the
\nreturning Dutch forces, who were backed by Allied support. It was
\na statement of Indonesia's sovereignty and a way to stem the
\nstrong inflationary pressures of the war years.<\/p>\n
Even in peacetime after 1949, the rupiah has had a rough ride.<\/p>\n
In 1952, the monetary authorities halved the value of the
\nrupiah by ordering every rupiah note be literally cut in two.<\/p>\n
The infamous \"Sjafruddin Cut\", named after then finance
\nminister Sjafruddin Prawiranegara, was designed to drain the
\nmoney supply from the economy, collect cash for development and
\nreduce the government's budget deficit.<\/p>\n
Only the left half of the bill remained valid legal tender,
\nbut the right half was exchangeable as government bonds carrying
\nannual interest rates of 3 percent, and payable in 43 years.<\/p>\n
Seven years later, the government came up with yet another
\ndrastic monetary measure known as the \"rupiah's castration\". It
\ncut the rupiah's nominal value to a tenth of its original worth.<\/p>\n
\"I remember those days clearly. My Rp 10,000 was reduced to Rp
\n1,000 in one move,\" says Emil Gondokusumo, a 62-year-old
\nbusinessman.<\/p>\n
The government also froze time deposits of Rp 25,000 and more
\nat banks, and devalued the rupiah against the US dollar.<\/p>\n
Troubles continued to beset the rupiah.<\/p>\n
Inflation hurtled along, sometimes running at more than 400
\npercent annually.<\/p>\n
In December 1965, following years of economic turmoil, the
\ngovernment cut the nominal value of the rupiah. A Rp 1,000 note
\nbecame a mere Rp 1.<\/p>\n
Although it did not change the rupiah's face value, the move
\nsparked massive panic and further fueled inflation.<\/p>\n
Amid the chaos, most people simply did not understand the
\nmove, and were unable to accept the changes. Fuel prices shot up
\nand transportation fares increased five fold.<\/p>\n
The economic muddle combined with political confusion
\neventually brought down Sukarno, Indonesia's first president, and
\nushered in the New Order government under Army Gen. Soeharto.<\/p>\n
Soeharto rode into power on promises of restoring economic
\nstability and, most importantly, economic development and growth.<\/p>\n
He achieved those objectives gradually over the next 30 years,
\nbut the rupiah was hardly free from troubles and pressures.<\/p>\n
Since the New Order era began in March 1966, the government
\nhas devalued the currency against the US dollar four times.<\/p>\n
On Aug. 23, 1971, it was devalued by 9.8 percent, from Rp 378
\nto Rp 415.<\/p>\n
The government devalued the currency again on Nov. 15, 1978,
\nbringing its value down to Rp 625 from Rp 415.<\/p>\n
In the third devaluation on March 30, 1983, the rupiah dropped
\nfrom Rp 702 to Rp 970.<\/p>\n
The last devaluation occurred on Sept. 12, 1986, when the
\nrupiah's value dropped from Rp 1,134 to Rp 1,164 to the dollar.<\/p>\n
That last move proved to be a telling factor for the rupiah
\nbecause people were losing confidence in the currency. That lack
\nof faith was evident by several recurrent runs on the rupiah that
\nwere sparked by wild rumors.<\/p>\n
Currency stability was eventually restored, with the
\ngovernment pledging to float the rupiah, while allowing it to
\ndepreciate by 5 percent a year.<\/p>\n
This helped traders and manufacturers to plan ahead without
\nfearing any further sudden devaluations.<\/p>\n
Matters took a decided turn for the worse this past July when
\nthe rupiah became the target of speculative attacks, part of the
\ncurrency contagion laying waste to Southeast Asia.<\/p>\n
The government, finding itself powerless to arrest the slide,
\nwas forced to abandon its policy of setting an intervention band.<\/p>\n
The rupiah was fully floated in the market for the first time
\nin history, and the currency plunged from around Rp 2,400 to the
\ndollar, sinking to Rp 3,900 at one time last month.<\/p>\n
There have been concerted steps in the last two months
\ndesigned to shore up the rupiah's value. They include tightening
\nliquidity, postponing several costly government projects and
\nperiodic direct intervention in the currency market.<\/p>\n
Negative responses to these measures attested to the low
\nconfidence the market -- the rupiah is now widely traded in the
\nglobal market -- had in the Indonesian currency and the economy.<\/p>\n
The government's decision two weeks ago to call in the
\nInternational Monetary Fund (IMF) helped curb further declines.<\/p>\n
But as negotiations with the IMF dragged on, the rupiah
\nfluctuated sharply to reflect market jitters and expectations
\nabout an impending deal.<\/p>\n
The deal with the IMF was finally announced on Friday.<\/p>\n
Will the rupiah be able to regain the confidence it once
\ncommanded? The crucial next few days and weeks will tell.<\/p>",
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