By Choolwe Muzyamba(Economist)
The announcement by the government to redenominate the Zambian Kwacha has been received with mixed feelings. It should be noted that this move is not new in modern economics. It a measure which has been used by several countries before which experienced different forms of monitory “headaches”
The two major reasons why currency recalibration is undertaken is significant inflation and currency devaluation. Several countries in the world have at one point or the other recalibrated their currencies.
Currency redenomination is the process where a new unit of money replaces the old unit with a certain ratio. It is achieved by removing zeros from a currency or moving some decimal points to the left, with the aim of correcting perceived misalignment in the currency and pricing structure, and enhancing the credibility of the local currency.
Redenomination, unlike revaluation and devaluation, does not in any way translate to any change in the currency’s value or worth hence purchasing power remains the same. Currency revaluation is an increase in the value of a currency vis-à-vis other currencies under a fixed exchange rate system, that is when the government or monetary authorities arbitrarily fix the exchange rate.
Devaluation, the opposite of revaluation is a decrease in the value of a currency vis-à-vis other currencies under a fixed exchange rate system .
Redenomination has a long history. It dates back to the 19th century when governments faced shortages of gold or silver, they sometimes adjusted the value of their coins accordingly but the most spectacular one was that of the German currency in the 1920s.Bulgaria also redenominated its currency. The Bulgarian lev was redenominated due to inflation arising at the end of the Second World War. After the redenomination, one “new” lev was equal to 100 “old” levs. The lev was redenominated three times in the twentieth century.
Perceived Benefits of the redenomination of the Kwacha.
1. Generally, redenomination will lead to a more efficient kwacha by knocking off three zeros.
2. Redenomination will facilitate business transactions because it will lead to the use of smaller units of our kwacha.
3. Redenomination will lead to a more portable kwacha and a significant reduction in the dead weight of the money people carry and the associated risk
4. Redenomination will reduce the phenomenon of money illusion that people suffer from when there are many zeros. Money illusion tends to generate inflationary pressure.
5. Redenomination will lead to greater confidence in our kwacha.
6. Redenomination can sometimes reduce inflationary tendencies in an economy if the underlying causes of chronic or hyperinflation (which is not the case in Zambia) and low valued kwacha are resolved before the redenomination exercise and if the process is well managed.
7. Multiple zeros complicate statistics and transactions.
Costs and Risks of Currency Redenomination
1. Cost of printing new notes of our kwacha and minting new ngwees.
2. The cost of disposing of the old kwacha notes.
3. The cost of public education and advertising the change to Zambians. This could be substantial.
4. Risk of massive disruption in the pricing mechanism in the economy and short-term inflationary pressure arising from the “announcement
effect.
5. The uncertainty and instability that is inherent in major changes in economic policies which could lead to increased speculation,capital flights, drop in foreign remittances, increased risk aversion,adoption of “wait-and-see” attitude by investors and increased sharp practices.
CONCLUSION
Redenomination in Zambia is not completely a bad policy; it is worth trying despite all the problems associated with it as discussed in this above.
To be effective however, it has to go beyond the psychological and portability effects; it has to be associated with broader macroeconomic and fiscal reforms. It should be complimented with strict and disciplined fiscal policy measures. Government should not rely solely on monetary policy in its attempt to attain economic growth and development. Focusing on inflation targeting should not mean there will be a neglect of other broader objectives of macroeconomic policy such as output growth (or increased productivity), export promotion, job creation and favourable balance of payments position.
Further, the government should not use it in isolation of other complimentary efforts of the government including increasing the size of the formal economy relative to the informal.Redenomination of the kwacha should be seen as a means to an end and not an end in itself. Therefore, there should be increased infrastructural development especially in the rural areas and a certain portion of government expenditure should be devoted towards
uplifting the general standard of living.
Good brief education here on redenomination. Wish you could contextualise your points by specifically referring to local situations in the zambian economie. This would have made much more sense if you could make “behaviourial” projections of what is likely to happen in Zambia and then make recommendations. 5/10 (credit).
Since I carry alot of cash, it will be easy for me to switch from using a travelling bag full of money tojust say, a wallet or small bag. Otherwise other things being constant.
Kwacha Ngwee!!!!!!!!!!!!!!!!
Better, the Zeros just messed us up. Please educate the people as they would still be paying more or be cheated. Make sure this move is covered on TV and Radio stations. Welcome back Ma Ngwee
Is K100 supposed to be K100,000.00 or what? I know that K50 is K50,000.00. So since we did not have K100,000.00 can we conclude that K100 =K100,000.00?
nusosa,yes papa.u r correct
The economist well done…Choolwe, UNZA product. Well said.
Choolwe is craft. Did Chikwanda pay you to come up with this article. Your conclucsion is the negatives of the whole exercise. I salute you number one. well said and hope choolwe can eand mxpre in relation to the pros and cons as zambian situation.o
Argentina did the same after coming from brink of collapse of their economy. And it has worked well for them . Congo DRC did the same and it worked well. But Zimbabwe did the same ,it did not work
THE REASON IT DIDNT WORK IN ZIMBABWE WAS BECAUSE OF THE HYPER INFLATION AT THE TIME…..THE ZIM DOLLAR JUST GOT WORTHLESS PAPA.
I like the new bills. Something comforting about seeing familiar imagery. I wonder who the people are on the K2, K10 and K20. Perhaps BOZ can provide an accurate description of each bill as part of their information dissemination and ensure even online that they edit Wikipedia themselves for accuracy.
It appears that Choolwe’ article hasn’t clearly articulated the contentions around the redinomination of the Kwacha. The question that most proponents of currency redinomination is what economic value does a currency redinomination contribute to economic growth, employment creation and future investments? The answer is zero on all three dimensions which, raises the pertinent question of why then are we undertaking this non-productive expenditure? The opportunity cost of the redinomination are constructing a power station that would put an end to load shedding, paying farmers for their produce so that they can afford inputs for the next farming season and, paving rural feeder roads to mention but a few.
The other issue proponents of the redinomination need to clarify is how can the wholesale replacement of close to 500 million notes in circulation could practically be be more cost effective than partially replacing 150 million in damaged notes only in a given year?
Choolwe if you from Unza then no wonder CBU does better. Your article does not take to account many things, for example if you are an economist you should know historically such measures have never worked in the long run, read any economics book worth its salt.
The dynamics of implementing the new currency actually bring in more uncertainty and generally sends alarms signals that something is wrong hence such extreme measure as re-denomination. The list of points and examples space cannot allow, please dont cheat people with arguments miss the mark if you aRE REALLY an economist worth yo salt
There is no economic option that is a cure-all. There are always unsavoury side effects. It is the sum total that matters at the end of the day. If you expect an elixir to all our economic problems, then you are living in Cloud Cuckoo Land. That’s why Keynesians and Monetarists seldom agree. Economics is a social science and as such it is fraught with uncertainties. It is actually a gamble through and through. The World Bank and the IMF have some of the best ecomists in the world but which country has their economic prescriptions elevated from dirt-poor to a thriving First World Economy? Come back to Earth brother!
I for one welcomes these new notes. I used to hate the ‘thousand’ vibe for anything you used the money for. Having not followed this redenomination closely, I would prefer BOZ Zambia gave a full description of each note, front and back. My biggest concern in matters of this nature is the fact, we have in Zambia a good population of citizens in rural areas. What is GRZ or is it BOZ doing to make sure that, everyone is aware of these new notes. January is around the corner and just not sure what has been done, if anything. I am here to be enlightend if anyone cares to do so. Thank you!
All the benefits hifhlighted by this economist are psychological and nothing economical but the costs are mainly economical. So the issue of opportunity cost and priority comes. Is currency redenominatation a priority for zambia now when farmers are languishing in desparation after surrendering their produce? When unemployment rate keeps increasing day in and day out? When retirees has been subjected to destitutes?
boz is not ready to introduce these notes. why am i saying this, the masses have not been educated esp those in rural areas. u guys will cause chaos!
Redenomination is just window dressing.Priority shud be to make the economy sound with more productivity,more exports and low inflation.Countries like Iran,Iraq,Vietnam & Cuba with higher exchange rates than zed aren’t rushing to redenominate yet they have higher standards of living.This just voodoo economics to confuse illiterate zambians.
I can not see the difference in portability because one needs twenty k50 000 notes to cary k1 000 000,after redenomination/rebasing you will still need twenty k50 notes to carry k 1 000, any way may be the difference is the same. :d
Plagiarism, plagiarism, plagiarism. Is this what they’re teaching at yunza these days?
Where did this chap study “Economics”, on Google Search With Bad Connection University? lol
The advantage is very simple – if someone says to you “57 trillion kwacha”, a normal calculator cannot convert that to dollars or any meaningful number
vaupuba..alot of money has been spent on this crap..!
Why you people discuss things you don’t understand? Are that an article or classroom assignment? I am almost giving him 4 out of 10. I will use this for my next week lecture.
The only advantage is that you can now say to a person ” one US dollar is equal to five zambian kwachas”….that all i need
A cost left out is the cost of changing the computer systems for businesses like zamefa, Mopani, banks and KCM.