Zambia rebases the Kwacha

By Nawa Mutumweno – The Zambian Cabinet has approved the rebasing of the country’s currency, the Kwacha, by dividing the current notes by 1 000.

Minister of Finance and National Planning Alexander Chikwanda disclosed at a press conference on January 23, 2012 that this will consequently result in the removal of three zeros from the denominations of the 1 000 notes and above.

“For example K1 000 will be K1, K5 000 will become K5, K10 000 will become K10, K20 000 will become K20, and K50 000 will become K50. In addition, the Bank of Zambia will also re-introduce coins for lower denominations,” the minister elaborated.

A rebased Zambian Kwacha will address the costs associated with an accumulated loss in the value of the currency experienced during episodes of high inflation that undermined the Kwacha’s basic function as a store of value, medium of exchange and standard of value.

“In the accounting sphere, re-denomination of the Kwacha will reduce time taken to input financial data and time spent by management to review it. It will also reduce the cost often incurred in customizing standards accounting packages that are purchased by businesses,’’ he added.

Most of the current accounting packages are developed in jurisdictions where values, at maximum, tend to be in millions. The present situation in Zambia, where some organizations, especially banks, record values of trillions of Kwacha and, hence, require further customization of such packages to widen data fields. Therefore, rebasing the Kwacha will be of great value to businesses and will reduce inputting errors.

This is further expected to reduce transaction costs for businesses and the general public, and will tone down on inflationary spirals.

The Bank of Zambia (BoZ) says rebasing the Kwacha by removing three zeroes does not change the value of the currency and its purchasing power.

The Central Bank explained that if a person is currently able to buy goods worth K250 000, such a person should be able to buy the same quantity of goods  at K250 with the rebased currency.

“The loss of value is typically as a result of high inflation rates over a prolonged period of time and the high denominations that characterize the existing currency as a consequence of high inflation rates that Zambia experienced over a long period of time,” observed Kanguya Mayondi, BoZ’s head of public relations.

“During the recent years, inflation has declined to single digit levels such that in December 2011, it stood at 7.2 percent. This low level of inflation coupled with favourable macroeconomic conditions provides for an opportune time to rebase the Zambian currency,” he added.

He stated that BoZ has since commenced the process of procuring the rebased currency. Once the rebased currency is procured and delivered by printers and minters, it will be issued to circulate side by side with the existing currency for a period of time in order to allow for an orderly withdrawal of the existing currency.

“During the period over which the existing currency and the new currency  will be circulating side by side, providers of goods and services will be required to display prices in both the existing and new currencies, for example, if the price of bread costs K3 500, the provider of bread will display the price of bread as follows: K350 (K3 500),” Mr. Mayondi elaborated.

The Jesuit Centre for Theological Reflection (JCTR) says while currency rebasing is an acceptable economic exercise for countries, it is largely neutral on the quality of life of people as it does not change the buying power of the currency.

In a statement, JCTR observed that rebasing the Kwacha is not an end in itself and will not bring about the meaningful development that Zambians need.

“Rebasing may enhance confidence in the currency in the short run, but it is important to realize that it may fuel inflation, especially in the absence of other initiatives to tame inflation. People always have an illusionary feeling that they have lost buying power and thus tend to increase price of goods and services,” said JCTR.

“The transition must, therefore, be managed to maintain people’s confidence in the currency by widely disseminating information on the rebasing exercise. The convenience that comes with transacting with a rebased currency should result  in enhancing economic growth and economic development. This should be the ultimate focus of Government.”

JCTR further notes with concern that the rebasing of the Kwacha 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. There are just too many activities that Government is embarking on which were not budgeted for . For example, creation of new districts and the technical committee on the Constitution have not been catered for in the 2012 Budget. Government ought to depart from this kind of spending immediately or else we will be talking abouit the usual problems of budget overrun which contributes to poor budget performance and ultimately poor service delivery.

Meanwhile, with  regards to the recapitalization of the banking sector, Cabinet agreed that in line with Section 83 of the Banking and Financial  Services Act, the  Bank of Zambia (BoZ)  shall revise the minimum  capital for commercial banks in order to:- provide for the tiering of the minimum capital requirements for local and foreign banks operating  in Zambia; and increase the minimum capital requirements from the current K12 billion to K104 billion for local commercial banks and K520 billion for foreign commercial banks.

“The measure to raise minimum capital requirement for banks is intended to mobilize additional resources to enable banks participate more effectively in growing the economy by increasing credit available to the private sector. Further, the increase in the minimum capital requirement will make the banks more resilient to economic shocks.”