Zambia Redenominates The Kwacha

Zambia Redenominates The Kwacha

Zambia has finally agreed to redenominate its currency, which, following periods of inflation, has become unwieldy.

Zambian Cabinet has approved the redenomination of the country’s currency, the kwacha, by removing three zeros from the current denominations of the 1,000 kwacha and above notes.

Minister of Finance and National Planning Alexander Chikwanda, explained what this will mean. “For example,” he said, “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 reintroduce coins for lower denominations.”

The much-anticipated redenomination is expected to address the 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.

“The loss of value is typically as a result of high inflation rates over a prolonged period of time and the high denominations that characterise the existing currency are a consequence of high inflation rates that Zambia experienced over a long period of time,” observed Kanguya Mayondi, Bank of Zambia’s (BoZ) 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% . This low level of inflation coupled with favourable macroeconomic conditions provides for an opportune time to rebase the Zambian currency,” he added.

Pointing out the benefits of a rebased currency, Minister Alexander Chikwanda said, “In the accounting sphere, redenomination 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 customising standard accounting packages that are purchased by businesses.”

Most of the current international accounting packages are developed in jurisdictions where values, at maximum, tend to be in millions. The present situation in Zambia is that some organisations, especially banks, record values of trillions of kwacha and hence require further customisation of such packages to widen data fields. Therefore, redenominating 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 inflationary spirals.

The Bank of Zambia (BoZ) explained that the new currency denominations will not change the value of the currency and its purchasing power. The Central Bank explained that if a person currently buys goods worth K250,000, the person should be able to buy the same quantity of goods at K250 with the redenominated currency.

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 is K3,500, the provider of bread will display the price of bread as follows: K3.50 (K3,500),” BoZ’s Mayondi elaborated.

However, the influential Jesuit Centre for Theological Reflection (JCTR) says 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 realise that it may fuel inflation, especially in the absence of other initiatives to tame inflation. People always have an illusory feeling that they have lost buying power and thus tend to increase the 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.”

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Written by African Business Magazine

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