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Zambian Economist Clarrifies On Redenomination Of The Kwacha

By Choolwe Muzyamba (Economist)

The recent 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 ngwes.
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.

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Posted by on September 25, 2012. Filed under BUSINESS, LATEST NEWS. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

22 Responses to Zambian Economist Clarrifies On Redenomination Of The Kwacha

  1. Mo taim Reply

    September 25, 2012 at 10:57 am

    Yeah man ! Thanks for this piece of information.I have learnt quite a lot from this piece.Epashili pakuleka.

  2. davis Reply

    September 25, 2012 at 11:29 am

    we are just going back to zim problems,instead of the government being honest that they want to introduce the K100,000.they start telling us lies of re basing

  3. collins Reply

    September 25, 2012 at 11:35 am

    Nostalgia!!UNIP days

  4. Ronaldo Reply

    September 25, 2012 at 11:55 am

    I am an economics student and this piece has given me valuable material for my assignment. Thanks.

    Pls, not politics all the time.

  5. MIP Reply

    September 25, 2012 at 11:59 am

    Written by Choolwe Muzyamba, nice one.

  6. Besa Chimbaka Jr. Reply

    September 25, 2012 at 12:19 pm

    Sense

  7. Chakaka Reply

    September 25, 2012 at 2:14 pm

    they shd have also introdued a K200 note.

  8. irrational man Reply

    September 25, 2012 at 2:21 pm

    this makes sense

  9. Amson Reply

    September 25, 2012 at 2:29 pm

    well well at last there is someone who is able to look at the Pros & cons of Kwacha rebasing. thanks

  10. Southern watchman Reply

    September 25, 2012 at 2:42 pm

    GOOD THOUGHT PF GOVERNMENT….KEEP IT UP GUYS, YOU ARE GREAT THINKERS.

  11. Eyes that see Reply

    September 25, 2012 at 4:28 pm

    What are monitory “headaches”?
    . monetary headaches?

  12. Chikundula Reply

    September 25, 2012 at 6:05 pm

    Is da auther Dr.Maimbo?

  13. Financial Economist Reply

    September 25, 2012 at 6:39 pm

    A good piece but fellow Economist learn to cite your sources of information in your future articles. Downloading other people’s works from the internet is an offence and is tantamount to plagiarism. Also, further note that it’s monetary and not monitory. Good effort though l can give you a bare pass for lack of citations.

  14. Scholar Reply

    September 25, 2012 at 6:56 pm

    @Financial Economist apo walasa. In fact, we are not redenominating the currency to some other name. It will still remain Kwacha. All what we are doing is debasing the currency not rebasing as we have been hearing.

  15. Shameless Reply

    September 26, 2012 at 6:57 am

    But i can’t see a K1. Does it mean we won’t have it?

  16. Maano Reply

    September 26, 2012 at 8:21 am

    Choolwe Muzyamba,

    Imagine somebody crossing out three zeroes from each denomination and abracadabra the dead weight if the notes reducing – real magic!

  17. brozber Reply

    September 28, 2012 at 6:49 am

    young man a good piece of work but you can still do better

  18. KAYA Reply

    September 28, 2012 at 9:41 am

    Can someone plz help us clarify on exchange rates. For instance 1US$ will be equivalent to K5, what about the Rands, Will it less than the kwacha in value terms? Do your calculation and enlighten us plz. Just as one write said, plz cite where you got this info coz we know its not your own data.

  19. ISAAC Reply

    September 28, 2012 at 11:56 am

    good work guys.

  20. Voltron Reply

    September 30, 2012 at 1:12 am

    @ KAYA initialy K 1000 = R 600 S0, 1 R = K 1.6 meaning 1kwacha 6 ngwee.

  21. mbesuma Reply

    October 5, 2012 at 4:43 pm

    tuoneka bbwino twamene tundalama twanu utu

  22. Dr Jacob Mwanza Reply

    October 8, 2012 at 4:38 pm

    Choolwe Muzyamba is an Economist?
    Article kwati ni answer ya assignment ku UNZA.

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