On the 23rd of January, 2012, the Bank of
Zambia approved a monetary policy recommendation to rebase the Zambian
currency, the Kwacha. This monetary policy was approved with a view to address
costs associated with an accumulated loss in the value of the Kwacha that
undermines its basic functions such as store of value, medium of exchange and
measure of value. Following the announcement of this measure, a lot of public
debate and speculation followed. This paper seeks to explicate the monetary
concept of rebasing a currency and elucidate the pros and cons associated with
implementing a monetary policy of this nature.
In strictly economic terms, a currency
is a designated medium of circulation and exchange in goods and services.
In this sense, a currency can take the form of coins and paper money. The term
currency sometimes includes credit instruments and other forms of exchange.
This use of the term currency is of comparatively recent origin dating from the
period of the abolishment of the gold standard in 1929. Earlier uses of the
term were more restricted. Currency in an economy is cardinal as it is needed
to transact the business of an economy (Microsoft Encarta, 2009). Basically, the
volume of commodities and services in an economy has to be matched by a given
volume of currency. During periods of increased production, the volume of
currency tends to rise and during recessions it may fall. But overtime,
currency is more sensitive and vulnerable to inflation which intends to corrode
its functions as a store of values.
The Zambian currency is called the Zambian Kwacha
and Ngwee which were designated at the time of the country’s independence in
1964. The set of Zambian currency currently comprises nine banknotes and five
coins. Earlier this year, the Government announced that it was going to rebase
the Zambian currency, the Kwacha by slashing off three zeros and introduce
coins for lower value denominations instead of notes. The rebasing exercise is
intended to be implemented over a period of six months within which the
government hopes to withdraw the old currency. High currency denominations that
characterize the existing banknotes are intended to be reduced by introducing
new lower denominations with three less zeros. The announcement of this
exercise has brought much fervent discussions and speculation among economic
analysts, scholars, business people and the general public.
Currency rebasing or “lopping” as it is known in other
terms, is a monetary policy instrument carried out by the central bank of a
country with a view to lop off ,mostly, some zeros from a local currency.
Rebasing involves dividing of a currency unit by some denominator (BOZ, 2012).
In the case of Zambia, the Zambian currency note was recommended to be rebased
or divided by a common denominator of 1000. This recommendation implies that
the largest note which was K50, 000 will be divided by 1000 to now have the
newly rebased largest currency in circulation as a K50 while the lowest rebased
note will be K1 from K1, 000. In a contextual example, this means that if the
price of bus fares is K3, 500 before rebasing, the same fare after rebasing
will be K3.50. This in essence does not change the value of the currency or its
purchasing power. Currency rebasing also engrosses a broader review of currency
complexity like enhancing security features and introduction or reintroduction
of lower value denominations.
A number of reasons can be cited as to why central
banks rebase their currencies. Major among them is the value-eroding effects of
long run sustained inflation. “Zambia experienced high levels of inflation
during the 1990s and early 2000s which peaked at 188% in 1993. Such high levels
of inflation resulted in inconvenience and risks involved in carrying large
amounts of currency for transaction purposes, increasing difficulty in
maintaining book-keeping and statistical records and ensuring compatibility
with data processing software; and high costs on payment systems, particularly
the delivery of banking services through a greater use of technology such as
Automated Teller Machines” (Ibid). The recent years have seen declined
inflation to a single digit and fundamentals like steady GDP growth which are
said to have provided for a favourable implementation of currency rebasing in
Zambia.
Rebasing a currency is something that is implemented
from time to time in many countries and is usually done when macroeconomic fundamentals
or indicators of an economy are stable for a currency rebasing exercise. There
has been a lot of speculation and discussion about rebasing or “lopping” off
three zeros from the Zambian Kwacha and the effects that this might have on the
Zambian economy. Discussed hereafter are the pros and cons associated with the
monetary policy of rebasing the Zambian Kwacha on the Zambian economy.
A number of advantages arise from the exercise of
rebasing a currency. Firstly it should be noted that the policy of currency
rebasing is monetary neutral. This means that rebasing a currency does not
explicitly increase or decrease the value of the Kwacha, nor does it change the
exchange value against any foreign currency. Rebasing a currency only has the
major advantage of making commercial calculations and transactions in the
economy easier (Haabazoka, 2012). The exercise
of rebasing the Zambian Kwacha was inevitable as transacting in Kwacha had
indeed become inflexible with too many banknotes to transact. Rebasing also
comes with the advantage of improving transaction efficiency in the economy. In
perspective, a 1,000 denomination rebased currency can considerably reduce the
time taken to complete lofty cash value transactions thereby improving general
transaction efficiency in the entire economy.
Rebasing the Kwacha also aids the economy by
improving exchange transactions through increased divisibility of currency. The
current Zambian currency has some rigidity in terms of divisibility. “Divisibility
is one of the properties of a good currency. There have been times when a person
buying an item using a bigger Kwacha denomination has had to be asked by a
cashier for an additional note in order to make it easier to issue change to
the customer. For example, a person who buys something for K6000 using a K10000
note, would be asked by a cashier to add another K1000 either as a single note
or other notes amounting toK1000, to the K10000 that he tendered to the cashier
so that he can be given a single K5000 note as change” (Sichiliango, 2012). The
intended currency rebasing exercise would help solve this problem of
divisibility as lower denominations and even Ngwee will be re-introduced for
easier divisibility.
A rebased currency can also aid participants in an
economy with portability, convenience and increased safety of money. This
aspect of rebasing the Kwacha would increase the agility with which business
transactions can take place. This would also help reduce cost and time incurred
in customizing standard accounting packages since most of these are developed
in countries where values are mostly in millions and rarely go into billions or
trillions. This would also help reduce complications incurred in input
accounting information by simplifying financial data entry and reporting in
lower or smaller numbers mostly going up to millions (BOZ, 2012).
Some
economic analysts have argued that the rebasing exercise might cause might
impart a psychological effect making economic players in the country feel like
they have lost some buying power or value of their incomes. This might make them
increase their prices and thus cause inflation which might be good for the
local economic players in the short-run. This inflation may
initially increases business profits, as wages and production costs tend
to lag behind price increases, leading to more capital investment and payments
of dividends and interest. This may also temporarily improve the balance of
trade if the same volume of exports can be sold at higher prices. Government
spending also rises because many programs are indexed to inflation rates to
preserve the real value of government services and transfers of income.
Officials may also anticipate higher tax revenues from inflated incomes (Jones,
2009).
The Jesuit Centre for Theological Reflection (JCTR)
posits that rebasing the Kwacha may enhance confidence in the currency in the
short run (JCTR, 2012). The exercise would also make it easier for foreign
investors to participate in the economy through enhanced transaction convenience.
This would attract investments that would lead to economic growth. This is so
because rebasing might have some positive effect on the kwacha as it, to some
extent, might show the monetary policy commitment of the government towards
lowering and stabilizing inflation. Among many considerations for investment
made by international investors is the viability of an economy in terms of
currency and exchange rate dynamics which are suppose to be secure and easily
calculated, this can be ensured by rebasing the Kwacha.
Rebasing in most case involves some changes in the print
layout of a currency to enhance security features. This helps to bring in high and
more confiscated security features to a currency and secures the economy
against counterfeit currency as liquidity control is ensured (Ibid). Investor
confidence is enhanced with an assurance of high standard currency security
features which in turn make an economy more attractive for investment. The
complexity of inflationary pressure that might be associated with counterfeit
currency in the economy is eliminated.
It must also be appreciated that the rebasing of the
Kwacha is a well meant declaration of political will and national determination
to take the Zambian economy to a position of sound performance. Rebasing of the
Kwacha will help money that has been kept out of the economic system resurface
in exchange for new currency when the process is in its implementation phase. This
will self regulate to keep in check how much liquidity is in circulation and
will serve as a control measure for curtailing illegal hoarding of large sums
of money, smuggling and underground economic activities that largely go
untaxed. The exercise in its totality will serve as a roll call of liquidity in
circulation; remove calculation, portability and transaction inconveniences,
and, if rightly implemented, improve the economic outlook of our economy for
enhanced chances of greater economic growth of the Zambian economy.
Currency rebasing comes with its own costs. These costs make up for
the cons of undertaking such a monetary policy exercise. Common to the
disadvantages of undertaking currency rebasing is the psychological effect that
the rebasing has on the general public and players in the economy. Illusionary
perspectives and misunderstanding that a rebased currency has some loss of
buying power is more common than not. Therefore, this “might cause a bit of
inflation as people are going to adjust prices upwards. People might want to
increase prices so that they feel comfortable because you receive your salary
in millions and all of a sudden it’s reduced. So, everyone would want to
increase the price on their rent, on the commodity to reach that million”
(Haabazoka, 2012). This in the short-run might cause pervasive “inflationary psychology” which might eventually
dominates private and public economic decisions.
Inflation ensuing from increasing prices caused by
change in the psychology of the economy might in turn make the economy unviable
and unattractive for investments. This Inflation might cause unwanted prices
and employment distortions and widespread economic uncertainty. It may further
erode the real purchasing power of current incomes resulting in reduced
consumption. Raw material and operating costs may respond quickly to
inflationary signals thus making the cost of doing business in the Zambian
economy high. This might further trigger high export prices eventually
restricting export sales and creating deficits in trade and services (Jones,
2009).
Rebasing the currency might also cause more pressure
on the by rattling portfolio investors to seek refuge in the US dollar and
abandon the Kwacha (Haabazoka, 2012). This would entail less demand for the
Kwacha thus its depreciation. Depreciation might in turn hurt the local economy
by making the cost of commodity and machinery imports high. This would make the
whole exercise of rebasing the Kwacha futile. Further, the cost-push inflation
created by the illusive loss of buying power might result in repetitive price
increases which would in actuality erode the purchasing power of money and
other financial assets with fixed values, thus creating serious
economic distortions and uncertainty in the Zambian economy (Microsoft Encarta,
2009).
The implementation of rebasing comes with high minting costs and
many demands of educating and disseminating information to the masses. Usually
this is done to enlighten the public and maintain confidence in the currency.
But attached to this are high costs associated with printing and information
dissemination. “JCTR notes with concern that the Kwacha rebasing exercise was
not provided for in the 2012 budget. Resources will have to be redirected from
other activities to this one or government will have to borrow outside the
budget” (JCTR, 2012). This mighty make the government run on a budget deficit
with negative implications for the local economy like reducing credit for local
investors if the government was to borrow internally.
More so, government budget deficits are not good in themselves and
detrimental to the economy. The rebasing exercise was not budgeted for when in
fact it should have been on the top priority noting that designing, minting and
distributing the new currency was going to cost the government billions of
Kwacha. “If the country fails to instill discipline in the way it spend public
resources, then the three zeros that are been knocked off from the currency now
will soon resurface” (Mutesa, 2012). This will only fritter to waste foreign
currency that the government could have used on other economic growth ventures.
Another point of concern is the short and speedy period of time
within which the currency rebasing exercise is to be implemented. “Six months
period is too short for them to implement that policy of rebasing the kwacha
because of the uncertainties surrounding Zambia now. We needed to wait for the
next two years so that things stabilize. I think the decision is correct but
the timing needs to be adjusted” (Haabazoka. 2012). The government should have
waited for investors to gain more confidence in the new regime as well as the
improvement of the external environment before rebasing the currency” (Ibid).
The speedy process with which the rebasing exercise is being done might cause a
lot of ill speculations among investors and they may seek to secure their
investments in other currencies or countries thereby making our local economy
more vulnerable to economic shocks and more ill speculations.
During the introduction of new notes, there may be serious cases of
fraud and counterfeit notes if the process and transition is handled in an
effective manner. Fraud is likely to be part the collateral damage to the
rebasing process but it will sure make a number of people especially in the
rural areas lose their financial muscle to contribute to the growth of the
Zambian economy. Therefore government will have to spend more and ensure the
rebasing process and transition is done in a simple language that every citizen
is going to understand. The rebasing exercise also requires expertise to
cautiously move and “provide sound advice and experiences from elsewhere
otherwise this matter can have negative impact in the longer term if not
carefully handled” (Op. cit). Added to this is the extra burden of providing
supplementary policy initiatives that might harm the local economy but be
necessary to aid the complexity of currency rebasing.
Currency rebasing may boost confidence in the local currency in the
short run, but it may also stimulate inflation especially in the absence of supplementary
policies measures to deal with the inflation. The implementation of
supplementary policy measures may drive the countries policy makers to
concentrate efforts on curbing inflation at the expense of implementing other
important economic policies. This might negatively affect the local economy as
policy measures meant to curb inflation usually have a negative effect on the
economy. For example, the government through the central bank might have to influence
the availability and cost of money and credit by controlling financial reserves
and restraining monetary expansion. These efforts may offset the existing
economic balance, reduce real output and employment (Jones, 2009).
In conclusion, it can be said that rebasing the kwacha is necessary
and a show of government commitment towards restructuring the Zambian economy.
However, government should have vigilantly planned for this exercise to include
it in the national budget and give it a longer implementation period of say one
to two years. Nonetheless, the
government should supplement this monetary policy measure with sustainable
economic growth policies aimed at strengthening the local economy through
increased real output, diversifying the local economy, stabilizing
macroeconomic variables and instilling a disciplined fiscal policy system.
References.
BoZ, (2012), “Press Statement; REBASING
OF THE ZAMBIAN CURRENCY”: Lusaka.
Jones, S. L.,
(2009), “Inflation and Deflation.” Microsoft® Encarta® 2009 [DVD]. Microsoft Corporation:
Redmond.
Microsoft® Encarta® (2009) [DVD]. Microsoft
Corporation: Redmond.
JCTR. (2012), “Press Statement on Currency Rebasing”.
Retrieved from www.jctr.org.zm/DATPress&News.html
on 18th March, 2012.
Habazoka, L. (2012), Advise on Currency Rebasing. Retrieved
from http//.radiophoenixzambia.co.zm/blogbang/govt-advised-to-put-hold-on-plans-to-rabase
and http//www.lusakatimes.com.
Sichiliango W., (2012), “The Rebasing of the
Zambian Kwacha Curreny”, Zambia Daily Mail of February 15, 2012. Retrieved from http.//.www.boz.zm on 15th
March, 2012.
Mutesa, F. (2012), Comment on Rebased Currency.
Retrieved from http//www.lusakatimes.com/2012/03/27/banknotes-printing-starts/.
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