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CBU lecturer urges longer time frame for kwacha rebasing

CBU lecturer urges longer time frame for kwacha rebasing
By Chiwoyu Sinyangwe and Kabanda Chulu
Wed 25 Jan. 2012, 13:54 CAT

REBASING the kwacha by lopping off three zeros might result in cost-push inflationary pressures and further weakening the under-pressure kwacha, warns Copperbelt. University business studies lecturer Dr Lubinda Haabazoka.

Dr Haabazoka urged the government to postpone the time frame for rebasing the kwacha from targeted six months to two years to allow the country's economic systems to stabilise and also the external environment to improve.

On Monday, finance minister Alexander Chikwanda said the Bank of Zambia would rebase the kwacha, a move that should make it easier for foreign investors to participate in the economy.

Chikwanda said the rebasing had to be done when all the fundamentals like inflation and GDP growth were right.

Currency rebasing usually does not change the exchange value of the currency and is introduced to make commercial calculations easier.

"The net effect of this is that savings of the people won't change because we are only removing zeros but it is about the psychology around the economy," Dr Haabazoka.

"Maybe in the short-run, it might cause a bit of inflation as people are going to adjust prices upwards. So, you expect prices to shoot up because people will have a feeling that they have lost some savings…people might want to increase prices so that they feel comfortable because you receive your salary in millions and all of a sudden it's reduced. So, everyone would want to increase the price on their rent, on the commodity to reach that million…"

Dr Haabazoka said the government should have waited for investors to gain more confidence in the new regime as well as the improvement of the external environment before rebasing the currency.

He said the current weak world economy on the backdrop of the prolonged euro zone debt crisis, coupled with the fragile US economy, made rebasing the Zambian currency ill-timed.

Dr Haabazoka said the upcoming crucial elections in United States, the elections in France, Russia, and Germany worsened the global economic outlook.

"The revaluation of the currency is long overdue but it's a bit misplaced," he said.

"The new government just came in, the new minister of finance, the new Bank of Zambia governor, and the new deputy governor for operations. So, basically, when you are rebasing currency, you need a stable environment, and for the last four months, our kwacha has been under pressure not because of the economic policies of this government but because of the uncertainties surrounding Zambia now. Six months period is too short for them to implement that policy of rebasing the kwacha. We needed to wait for the next two years so that things stabilise. I think the decision is correct but the timing needs to be adjusted."

Dr Haabazoka said rebasing the currency might cause more pressure on the kwacha as the monetary policy decision might rattle portfolio investors to seek refuge in the dollar.

He said the government needed strong education and campaign to accompany the currency rebasing decision.

"Once you are trying to tamper with the currency, people will try to move to stable currencies," said Dr Haabazoka.

"So, you are going to see in the next six months, a lot of pressure on the kwacha because definitely investors would want their money to be in the dollar. Now, it's up to government to come in to explain to everybody what exactly they are trying to do and explain, not in an economist language but in simple language that a basic citizen is going to understand. Rational investors want to keep their money in dollar."

And Dr Fred Mutesa said rebasing the kwacha is necessary but government should focus on increasing production to sustain economic growth to have a stronger currency.

Dr Mutesa, president for Zambians for Empowerment and Development (ZED), said the development has been discussed and considered over a period of time.

"It has not come with the PF government but what comes to mind immediately is that money that is hoarded and kept out of the banking system will have to come to the banking sector since there will be exchange of currency. We shall get to know how much liquidity is in circulation so it is a control measure meant to curb smuggling and control of parallel economy which goes untaxed," Dr Mutesa said.

"Rebasing the currency is something that is implemented from time to time in many countries but while it might be good to rebase the currency, what is important is to increase production and grow the economy in order to have a strong currency especially that we have not yet gone through this experience before to understand the effects on the economy. For example, Zimbabwe tried to curb inflationary pressures by knocking off the zeroes but failed and settled for US dollar, so government has to proceed cautiously and ensure that there are experts providing sound advice and experiences from elsewhere otherwise this matter can have negative impact in the longer term if not carefully handled."

He said increasing capitalisation for banks may be meant to restrict proliferation of banks and bringing some element of stability.

"Many people have observed that growth of banks in Zambia and banking services has not reduced cost of credit and benefits haven't been passed on to people so there is a notion of Zambia being oversubscribed by banks but yet there are limited savings available and if successful, this measure will force banks to be more creative and invocative with types of services offered to clients," said Dr Mutesa.

"But it will also squeeze out local banks and I don't see new indigenous Zambians emerging on the market but international banks will afford it."

Labels: BANKING, FRED MUTESA, KWACHA

posted by MrK @ 2:07 PM