I wonder at what time in each country’s own accounting period their redenom happened….. ???
We see Argentina did so in January , the beginning of their fiscal year .
Angola July 1, 1995 in the middle of their fiscal yr.
Brazil July 1, 1994
Currency rebasing or redenomination,
according to Bank of Zambia article(2012), technical Guideline on rebasing, involves the diving of a currency unit by a defined denominator and adapting that rebased currency to every amount expressed in both notes and coins. Similarly, Ahmed Bello. D (2011) defined currency redenomination as the process where a new unit currency replaced the old unit with certain ratio that is achieved by removing zeroes from a currency. It is the looping off some zeroes from a given currency. For the Zambian currency, kwacha entails removing the last three zeroes or dividing by one thousand (1,000). Rebasing or redenomination has both the advantages and disadvantages to both individuals and economy at large.
MERITS OF CURRENCY REBASING
The process of rebasing of kwacha has several advantages, which will be analyzed below. Initially, the newly rebased kwacha creates a much greater confidence among citizens and foreigners. It is likely to uphold or raise the credibility of the local currency to the outside world. Mosley (2003: International Monitory Fund, 2003) show that redenomination is meant to ensure credibility.
Enhanced credibility can not only improve government electoral fortunes, but can also improve a government’s treatment as a borrower, as a location for private Investments, and a defender of exchange rate in the eyes of global capital markets (Leblang, 2002; Jensen, 2005). For instance, a Zambia’s exchange rate of US$1 to K5, 210.41 will inspire less confidence to citizens and foreign investors than when US$1 equivalent to K5.21 after rebasing.
The latter exchange rate will show much credibility to the Zambian kwacha as it will be viewed to have much more value. Others have argued that rebasing will simplify accounting and ease of expressing monetary values, thereby minimizing error associated with imputing of financial data. For instance, computation of numerous figures in trillions or billions of kwacha in accounting database is not only tiresome and clumsy but also prone to error, which might render the process useless.
So rebasing would ease the systematic tabulation, as a figure like K250, 345.14 will be reduced to K250.35, which is easier to compute. Further, the rebased kwacha would evoke cardinal psychological effect, which creates a sense of identity. According to Lead Capital Limited (2007), the feel good effect of such reconstruction in currency presumes that the perception of the local currency would be enhanced because people invariably begin to subconsciously relate currency redenomination to revaluation.
This would affect citizen’s identity and hence the legitimacy of the national government.Sometimes, this emotional effect can make citizens and foreigners increase the substituting of using the foreign currency for the local one, hence raise its demand. The Bank of Zambia (2012) has further argued that there will be significant gains in terms of efficiency that should anchor expectations of policy credibility.
This implies that to avoid accruing more zeroes on the new currency, the government will remain committed to maintaining the necessary macroeconomic stability that is required before a rebasing exercise can be undertaken on efficiency. Certain writers have explained that rebasing or redenomination leads to a more portable currency and a significant reduction in dead weight of the money people carry and the associated risks. IMF, 2007; Tarhan, 2006) Lastly, Lead Capital Limited (2007) further identifies developmental effect of rebasing. It posits that government by reducing denominations in its currency would ordinarily introduce “high value” coins into the system.
These coins can facilitate the introduction of vending machines, car parking meters and other machines, which were inexistent, and these are a subset of much needed investment.
DEMERITS OF REBASING
Rebasing of currency comes with several costs to the economy of the nation. Tarhan (2006) groups such problems into four main categories; these are inflationary effects of rounding off prices, menu and administrative costs, costs of printing new and psychological effects of income loss. Rebasing if poorly handled may lead to fast increase in inflation levels especially due to rounding offs and menu costs. For instance, a good costing K10, 285.72 will now be priced at K10.30 (BOZ, 2012), which shows an increase by K0.01.
Other goods might increase by K0.05 or K0.5 and since there are thousands of such goods and services, general prices are more likely to rise, hence cause inflationary pressure. Worse still, when the rounding up is coupled with the accrued menu costs by retailers; inflation is more likely to increase than ever. Menu costs are costs acquired because of sudden changes in the price tags in markets.
Most if not all price tags must be changed or reprinted, picture displays must be changed and certain labels need to be reprinted to accommodate the newly rebased currency. All documents preprinted in unrebased system will have to be discarded to accommodate the new policy. So all the costs accrued by retailers will certainly be passed on to the consumers, something that will cause inflation.
Rebasing will raise the administrative costs in many sectors such as financial and non-financial institutions, mobile phone providers etc. For instance, earlier his year 2012, Standard Chartered announced that it would spend about K5 billion in this rebasing exercise. Zambia National Commercial Bank would spend K1billion kwacha, and all the remaining would spend almost the same amount during rebasing.
All these costs will be passed on to the customers. Further, it must be known that rebasing is a costly exercise. For example, the Bank of Zambia will spend more 200 billion in executing the whole exercise. This will include printing of new currency, training of staff involved in rebasing, sensitizing of the public on the rebasing, costs of advertizing the changes to citizens especially in rural areas where information access is low changing of software and balance sheet/accounting recorder. Finally, these are psychological effects of lower income levels by the citizens.
A marketeer at Chisokone market who sells tomato at K5000 per heap will feel as though she has lost much needed income after rebasing, as it will be tagged at K5 each heap. Hence, it is likely that after rebasing such marketeers will increase prices to K5.5 equivalent to K5, 500.In fact this rebasing might accelerate the loss of value of smaller notes that might1 be rendered useless
COUNTRIES WHICH HAVE REBASED OR REDENOMINATED THEIR CURRENCIES
Many countries have rebased or redenominated their currencies. However, in all countries where rebasing was done, inflation was very high. Some of the countries are;
ANGOLA rebased its currency in 1995 when inflation rate was 2,672 % while Brazil did the same when inflation in 1994 was 2076%.
A similar reform occurred in Ghana where Ghana replaced the old 10,000 Cedi with a new 1 Ghana Cedi by removing four zeros from the old currency. When the reform was implemented in Ghana, it resulted in the birth of an entirely new currency with new symbols (Mbita Chitala, 2012).
Similarly, Argentina in January 1992 rebased its currency by re-introducing peso to replace the austral at the rate of 1 peso=10,000 australs, and then pegged its international exchange rate at 1 peso=1US$.
After rebasing, inflation dropped from 172% in 1991 to 1% in 1998.Congo D.R rebased her currency in 1993 and 1998 whose inflation rates stood at 1987%.
Israel redenominated the currency in 1980 and 1987 with inflation at 131% and 307% respectively. Sudan in 1992 rebased because the inflation stood at 118%.
PERSONAL VIEW (CRITIQUE)
The fact of the matter is that there is not any ideology or economic theory postulates that a country that redenominated its currency would reap certain economic gains. It is just a symbolic reform without guaranteed benefits. Therefore, in my personal perspective I have never supported this policy as it provides more and clear disadvantages, but very few insignificant and blurred advantages.
The first certainty is that Zambian government will spend billions and billions of kwacha in this exercise. These huge costs especially on printing new paper money and coins will cost the hard-earned taxpayer’s cash, which will never be realized. Bank of Zambia will spend more than 200 billion on the exercise, but this amount would produce more guaranteed and visible benefits if it was allocated towards road construction in rural areas or enhance farm input support program.
Therefore, our decision to reallocate the much needed resources from more and obvious viable sectors with obvious outputs, to implement a policy whose benefits are not guaranteed, in both short and long run, is something that makes the whole process doubtful and unreasonable. When we look at countries that have redenominated or rebased currencies, they were experiencing hyperinflation and loss of economic confidence by private investors e.g. Zimbabwe (inflation at 1000% in 2003) and Argentina whose inflation stood at 106% in 1991).
However, today, Zambia’s inflation is standing at 6.8% and is one of the major investor destinations seeing at how much investment has risen since 2002. Therefore, the reason of raising confidence and credibility is invalid, as we have seen that we still attracted enough investment using the current kwacha.
Even the former Zambian Finance Minister Ngandu Magande criticized this rebasing. The Times of Zambia Newspaper, reported, “The Zambian Former Finance and National Planning Minister Ngandu Magande said the Government should have considered other options of strengthening the Kwacha rather than rebasing it.
He said that rebasing was employed in an economy that wanted to run away from inflation but that the current inflation of 6% and the current depreciation of the Kwacha against other foreign currencies did not require such a move. There was no need for Government to rebase the currency to run away from inflation levels.
The rebasing of a currency is normally done in a country where there is high inflation, where people are carrying a lot of money to buy products, but this is not the case in Zambia”.(Times of Zambia,25/01/2012) Then what is the point of spending K200 billion on an exercise that will not add to investment and create employment?
The other automatic effect of this policy, which has prompted me to criticize it, is the fact that by the end of its implementation, the cost of living will surely rise. The inflation rates might not rise significantly but price of many products and services will certainly rise.
The earlier mentioned menu and administrative costs will push up prices of many good. All the costs retail outlets will accrue in printing and reprinting price tags and menus re-calibrating machines, redesigning of adverts, re-documenting displays, retraining of personnel in new systems etc. will be for sure transferred to the customers whose budget lines will certainly increase.
Besides, all the costs accumulated by the banks and mobile provider in re-calibrating automated teller machines, changing accounting software and accounts, reprinting documents, refining/ redesigning adverts, training of staff, hiring of experts in particular electronic software and many more, will be passed to their customers. Some of the fees in the banks will increase to recover the cash wasted during rebasing, ATM charges, book balances, monthly account fees, and any other fees.
People will have to spend a little more in maintaining bank accounts in these banks. The unit charges in mobile providers and insurance companies will definitely increase in order to maintain the profit margins, which had dwindled due to rebasing costs. Again rebasing will definitely induce in some investors some sense of uncertainty and insecurity.
These new investors might not be sure on how rebasing will impact to the economy of Zambia, hence can adopt the ‘wait to see’ attitude. Since they may not be sure of how rebased kwacha will fair; investors might start offloading the kwacha into dollar or any stable currency. In fact, others will decide to halt the investment until they are sure all is well in the economy.
Therefore, it is more likely that rebasing will result in some percentage of capital flight as well as kwacha depreciation provided the kwacha is left to float freely on forex market; it will depreciate in a short run and later stabilize on a higher equilibrium.
The essay has in the first analysis explained dollarization as the adopting partially or fully of a more and stable foreign currency to replace the local currency. It has been shown why dollarization was initially legalized in the Zambian economy in 1994.Dollarisation was allowed in order to rescisitate the Kwacha and the entire economy.
The paper went further to distinct merits from demerits of dollarization and explained why the government of Zambia decided to ban the dollarization through statutory instrument 33. The second analysis involves the rebasing or redenomination of the kwacha.
In this component, the writer has defined the concept of rebasing and shown both the advantages and disadvantages of this exercise. Finally, the writer has provided a personal view on both rebasing and the banning of dollarization in Zambia, of which I have supported fully the banning of dollarization but criticized the process of rebasing
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