Zambia Zeroes in on New Banknotes
|November 30, 2012||Filled under Featured Article|
Iraq planned to delete three zeros from its dinar next year, but its news agency has reported that this will not be done soon “due to the lack of security and economic stability in Iraq.”
WHILE South Africans get used to the new banknote series, with the Big Five moved to the back of the notes, Zambia is preparing to remove three zeros from its money.
The Bank of Zambia has announced that the kwacha will be rebased by dividing it by 1,000, dropping three zeros off the currency, on January 1.
Zimbabwe’s regular and drastic currency rebasing a few years ago might have created the impression that dropping zeros is a desperate and cosmetic exercise, but analysts say it is often necessary to rebase a currency, ideally when an economy is stable and growing.
“Currency rebasing is usually implemented when there is a need to address costs associated with an accumulated loss in value of the currency that undermines its basic function as a store of value, medium of exchange and measure of value,” said Janine Botha, economist at NKC Independent Economists.
The Bank of Zambia said high kwacha denominations were the result of high inflation for a long time. Zambia had very high inflation in the 1990s and early 2000s. Its inflation peaked at 188% in 1993.
Now Zambia has a K50,000 note, but this is worth less than $10. The Bank of Zambia said this resulted in inconvenience and risks in carrying large sums of money for transactions. It has also led to increasing difficulties in maintaining bookkeeping and statistical records, ensuring compatibility with data-processing software and higher costs in the payment system.
“Too many zeros on a currency simply becomes an administrative nightmare,” said Jannie Rossouw, economics professor at Unisa’s department of economics. “People have to walk around with bags full of money. Zimbabwe issued a Z$100-trillion note at one stage, and at some point there simply is not enough space left on a note to print all the zeros.”
Michael Keenan, currency analyst at Absa Capital, said that after the earlier hyperinflation in Zambia, which caused the currency to drop in value, Zambia’s economic backdrop had improved substantially.
“They have current account surpluses, inflation is about 6%, everything is kind of back to normal, but they still have this currency with all these decimals. It makes sense for them to drop off these zeros, because it will be a lot more convenient and safer.”
Ms Botha said a currency was usually rebased when economic conditions were considered favourable, with low and stable inflation, favourable macroeconomic conditions and good economic prospects.
She said that, in addition to making transactions easier due to the use of smaller units of money, the rebasing of a currency often tended to create greater confidence in the currency as too many digits or zeros could lead people to lose confidence in the currency.
“It also has the potential to enhance policy credibility, assuming that government remains committed to maintaining macroeconomic stability. This would be so as to avoid the return of many zeros on the currency.”
Mr Rossouw said some countries rebased currencies in the mistaken belief that it would curb inflation. “You need other steps as well. You cannot simply rebase your currency and do nothing else and think that will bring inflation under control.”
Mr Keenan said there was even a risk of inflationary pressure when a currency was rebased. “There will be some rounding, and while the effect will be small per item it could bring about a bit of inflation if you add them up. It happened in Ghana when they rebased their currency. The other potential disadvantage is you have the risk that people assume your currency weakens.”
Ms Botha said that, at the broadest level, rebasing a currency did not alter the value or purchasing power of the currency.
According to the Bank of Zambia, exchange rates will also be rebased, with the rule of 1,000 old kwacha equalling one new kwacha.
Mr Keenan said the South African Reserve Bank held some kwacha in its foreign reserve basket, but the foreign reserves were always measured in US dollars.
“If they drop the zeros off the kwacha, the dollar value of that portion of the reserves will remain the same. It will not increase or decrease the Bank’s holding of kwachas.”
How The Old K1000 Becomes The New K1
Zambia currently has banknotes for K20, K50, K100, K500, K1,000, K5,000, K10,000, K20,000 and K50,000. It has coins for K10, K5, K1, 50 ngwee and 25 ngwee.
After January 1 there will be a new note series for K100, K50, K20, K10, K5 and K2 and coins for K1, 50 ngwee, 10 ngwee and five ngwee.
An item that cost 1,000 old kwacha on December 31, will cost one new kwacha on January 1. From January 1 to June 30 next year all prices will be denominated in the old K-symbol currency and temporarily in the new KR currency. During this time, goods and services can be paid for in both currencies.
From July 1 next year, the old currency will not be accepted, but it will be exchangeable for a year thereafter for the new currency at the Bank of Zambia, commercial banks and designated agents. The new currency will get the symbol K.
From July 1 2014 to December 31 2015, exchanges will be at the Bank of Zambia only and thereafter old currency will have no value.
Losing the Zeros
South Africans are not strangers to the concept of a currency losing zeros, particularly as neighbour Zimbabwe has gone through several such exercises in the past decade.
However, the process in which Zimbabwe chopped a total of 25 zeros off its currency between 2006 and 2009 is not an example of how rebasing should be approached.
As inflation started to increase in Zimbabwe in the early 2000s, the central bank simply printed more money and larger denominations, fuelling inflation even further. In October 2008, one US dollar cost about 2.6-billion Zimbabwe dollars.
Zimbabwe stopped using its own currency in 2009 and now uses the US dollar and the rand.
Some of the more successful examples of currency rebasing have been in Ghana, which dropped four zeros off the cedi in 2007, and Mozambique, which lost three zeros from its metical in 2006.
Turkey knocked six zeros off its lira in 2005. Iraq planned to delete three zeros from its dinar next year, but its news agency has reported that this will not be done soon “due to the lack of security and economic stability in Iraq”.
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