Rupiah rides rocky road over time

By Edith Hartanto

JAKARTA (JP): Since it became the accepted legal tender in Indonesia 51 years ago, the rupiah has had its share of troubles.

The overall trend has always been downward.

The rupiah's value has fallen so low at times that the government has had to step in to cut the nominal value. Add to this various drastic devaluations of the currency, and continuing depreciation, and the overall picture is not glowing.

Indonesia's first vice president, Mohammad Hatta, announced the establishment of the rupiah as the only legal tender in Indonesia on Oct. 30, 1946. The currency was then called ORI, short for Oeang Repoeblik Indonesia (Indonesian Republic currency).

It replaced four different currencies that were still widely used more than a year after Indonesia declared independence from Dutch colonialism on Aug. 17, 1945. Currencies in use at the time were that issued during Dutch colonial era; one issued by the Japanese government before their actual occupation in 1942, and two different currencies issued by the Japanese occupation government in 1943.

Hatta's announcement was politically as much as economically motivated, coming at the peak of the fierce struggle against the returning Dutch forces, who were backed by Allied support. It was a statement of Indonesia's sovereignty and a way to stem the strong inflationary pressures of the war years.

Even in peacetime after 1949, the rupiah has had a rough ride.

In 1952, the monetary authorities halved the value of the rupiah by ordering every rupiah note be literally cut in two.

The infamous "Sjafruddin Cut", named after then finance minister Sjafruddin Prawiranegara, was designed to drain the money supply from the economy, collect cash for development and reduce the government's budget deficit.

Only the left half of the bill remained valid legal tender, but the right half was exchangeable as government bonds carrying annual interest rates of 3 percent, and payable in 43 years.

Seven years later, the government came up with yet another drastic monetary measure known as the "rupiah's castration". It cut the rupiah's nominal value to a tenth of its original worth.

"I remember those days clearly. My Rp 10,000 was reduced to Rp 1,000 in one move," says Emil Gondokusumo, a 62-year-old businessman.

The government also froze time deposits of Rp 25,000 and more at banks, and devalued the rupiah against the US dollar.

Troubles continued to beset the rupiah.

Inflation hurtled along, sometimes running at more than 400 percent annually.

In December 1965, following years of economic turmoil, the government cut the nominal value of the rupiah. A Rp 1,000 note became a mere Rp 1.

Although it did not change the rupiah's face value, the move sparked massive panic and further fueled inflation.

Amid the chaos, most people simply did not understand the move, and were unable to accept the changes. Fuel prices shot up and transportation fares increased five fold.

The economic muddle combined with political confusion eventually brought down Sukarno, Indonesia's first president, and ushered in the New Order government under Army Gen. Soeharto.

Soeharto rode into power on promises of restoring economic stability and, most importantly, economic development and growth.

He achieved those objectives gradually over the next 30 years, but the rupiah was hardly free from troubles and pressures.

Since the New Order era began in March 1966, the government has devalued the currency against the US dollar four times.

On Aug. 23, 1971, it was devalued by 9.8 percent, from Rp 378 to Rp 415.

The government devalued the currency again on Nov. 15, 1978, bringing its value down to Rp 625 from Rp 415.

In the third devaluation on March 30, 1983, the rupiah dropped from Rp 702 to Rp 970.

The last devaluation occurred on Sept. 12, 1986, when the rupiah's value dropped from Rp 1,134 to Rp 1,164 to the dollar.

That last move proved to be a telling factor for the rupiah because people were losing confidence in the currency. That lack of faith was evident by several recurrent runs on the rupiah that were sparked by wild rumors.

Currency stability was eventually restored, with the government pledging to float the rupiah, while allowing it to depreciate by 5 percent a year.

This helped traders and manufacturers to plan ahead without fearing any further sudden devaluations.

Matters took a decided turn for the worse this past July when the rupiah became the target of speculative attacks, part of the currency contagion laying waste to Southeast Asia.

The government, finding itself powerless to arrest the slide, was forced to abandon its policy of setting an intervention band.

The rupiah was fully floated in the market for the first time in history, and the currency plunged from around Rp 2,400 to the dollar, sinking to Rp 3,900 at one time last month.

There have been concerted steps in the last two months designed to shore up the rupiah's value. They include tightening liquidity, postponing several costly government projects and periodic direct intervention in the currency market.

Negative responses to these measures attested to the low confidence the market -- the rupiah is now widely traded in the global market -- had in the Indonesian currency and the economy.

The government's decision two weeks ago to call in the International Monetary Fund (IMF) helped curb further declines.

But as negotiations with the IMF dragged on, the rupiah fluctuated sharply to reflect market jitters and expectations about an impending deal.

The deal with the IMF was finally announced on Friday.

Will the rupiah be able to regain the confidence it once commanded? The crucial next few days and weeks will tell.