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
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.