SIMULATION OF A SHARIAH-COMPLIANT SYSTEM OF COMMODITY-BASED CONVERTIBILITY OF THE INDONESIAN RUPIAH

Abstract

Indonesia is the largest economy in Southeast Asia, and one of the emerging Asian economies that some refer to as newly industrialized countries. Considering Indonesia’s great economic potential, and its role as a member of the “D-8” group of leading Islamic countries, this paper analyses the potential benefits of implementing commodity-based convertibility of the Rupiah, using the Grondona system, by simulating its operation in Indonesia. It describes the automatic adjustment mechanism of a “Commodity Reserve Department” (CRD) by which the Grondona system of conditional currency convertibility exerts a stabilising influence on the real value of the currency of a country which implements the system. The simulations are based on the principles and guidelines suggested by Grondona (1975), and use the annual quantities and values of Indonesia’s imports of primary commodities, and their monthly market prices, for performing the simulations. Information about Indonesian primary commodity imports were retrieved from WITS (World Integrated Trade Solution) and monthly market prices of primary commodities were accessed from the IndexMundi website. The simulations were performed by using a program developed in C++. The simulation results shown how the Indonesian money supply changes with the change in the levels of reserves of the different primary commodities stockpiled by the Indonesian CRD. By this, the simulation results show how the automatic price adjustment mechanism of the Grondona System help to insulate the Indonesian economy from fluctuations in the business cycle and other external shocks.