Maravi

Government removes three zeros from currency

Government removes three zeros from currency
By Bright Mukwasa and Kabanda Chulu
Tue 24 Jan. 2012, 13:00 CAT

THE government has knocked out three zeros from the kwacha, a move that is aimed at strengthening the local currency against major convertible currencies. And analyst Chibamba Kanyama has supported government's move to rebase the kwacha, saying economic stability should be anchored on strong production, exports and fiscal discipline so that the zeros do not resurface.

Meanwhile, finance minister Alexander Chikwanda says the government has reversed the sale of Zamtel because it was sold corruptly.

Announcing the government's key policy decisions during a media briefing in Lusaka yesterday, Chikwanda said the move to rebase the currency was necessitated by the government's effort to address the costs associated with an accumulated loss in the value of the kwacha, 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.

He said the move, which was approved by Cabinet yesterday, would result in the removal of three zeros from the denominations of the K1,000 kwacha 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," Chikwanda announced at a media briefing in Lusaka yesterday. "In addition, the Bank of Zambia will also reintroduce coins for lower value denominations. 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."

He said the decision would also reduce costs often incurred in customizing standard accounting packages that are purchased by businesses.

"The present situation in Zambia, where some organisations, especially banks, record values of trillions of kwacha and hence require further customization of such packages to widen data needs fields. Therefore rebasing the kwacha will be of great importance 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," Chikwanda said.

And the government has raised the minimum capital requirement for commercial banks from the current K12 billion to K104 billion for local commercial banks and K520 billion for foreign banks.

Chikwanda said the government also agreed in line with section 83 of the banking and financial services Act to revise the minimum capital requirement for the commercial banks.

"The measure to raise minimum capital requirement for banks is intended to mobilise 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," he said.

Chikwanda explained that the rebasing of the currency was not being done as a gimmick as those kinds of tricks had a tendency of backfiring.

"It must not be done as a gimmick I must assure because if it is being done as a gimmick, gimmicks backfire. If you have a very weak economy and you want to upgrade the economy by just removing the zeros from the kwacha when the goods and services are not available, the growth is not taking place then you are just taking yourself for a ride…we made reference to the fundamentals, the inflation is low, the economy is growing at a modest figure of seven per cent but there is no reason why, if we get the ministries and everybody working, our country cannot be growing at eight or 10 per cent per annum," Chikwanda said.

He said that was what made the Chinese economy to grow faster to even outstrip its neighbours like Japan to become the second largest economy in the world.

And Kanyama said the government should be credited for the decision as that was a pointer to the economy's stability.

"First, it is important to know that the debasing of the currency will not actually translate into an improvement in the purchasing power. However, the move will reduce transaction costs for many institutions. The process of change will be quite tedious, expensive and cumbersome for businesses and households, but will most likely have net benefits in the long run. The critical challenge will be acceptance among citizens as many will see this as a downgrading of their economic status; such as billionaires who will no longer be considered as billionaires; and for workers who will see a perceptive reduction in incomes," he said.

"The decision should be credited to many years of focus towards the stabilization of the Zambian economy. The government has simply signalled the economy is stable and what is needed now is to ensure this economic stability is anchored on strong production, exports, fiscal discipline so that the zeros do not come back again.

"It is a very strong challenge to the government to continue to attract investment, growth of the GDP above seven percent per annum, maintain the healthy reserves, stabilise debt-GDP ratios, maintain inflation at below 10 per cent. These are the actual and more realistic fundamentals that will support the debased currency and create an improvement in the lives of people. There will be another benefit of recalling money that has been kept away from the formal financial systems. Many individuals in the habit of storing money in mattresses will for a while be compelled to bring this cash into circulation. This activity will, however, have some temporary inflationary pressures."

But Ng'andu Magande has cautioned that the removal of zeros off the kwacha, if not properly handled, will send signals that the PF government has failed to manage monetary policies.

Magande, who is former finance minister, said rebasing or removing of zeros from a currency is usually done when the note is affected by external factors beyond government control.

"If they are external factors beyond government's control to appreciate its currency the way they did it in Zimbabwe because government could not control people who were bringing US dollars into the country, then you can pursue this path," Magande said, who is president for National Movement for Progress (NMP)

"And this is the impression that will be built in the market that the Zambian government has failed to manage its monetary regime to an extent where all they can do only is removing zeros thus creating a situation that the kwacha is very much valued, for example, from K5,000 to K5 per US dollar so this will create a psychology that the currency has appreciated but in fact it means it has failed to appreciate even to K3,000 because government has failed to take certain monetary measures."

And University of Namibia senior lecturer Dr Kazhila Chinsembu says the move to rebase the kwacha should signal a quick break from the previous regime of Rupiah Banda.

Dr Chinsembu said governments often re-denominate their currencies in order to reassert their credibility and commitment to low-inflation economic policies.

"As a matter of urgency, the Patriotic Front government of Michael Sata now wants to signal to voters in the post-election period that times in Zambia have changed, that the previous government of Rupiah Banda lamentably failed to manage our fiat currency, and that this move to rebase the Kwacha should signal a quick break from the past," said Dr Chinsembi.

Meanwhile, Chikwanda said only apostles of kleptocracy and high priests of theft who are not morally constrained to steal from the public were crying the loudest over government's decision to repossess Zamtel.

"We made a decision to restore Zamtel back to the people of Zambia.

Zamtel is a very viable company to be sold corruptly," he said.

Chikwanda said the PF government had irrevocable commitment to the public and would do everything possible to ensure the company continued to operate in the interest of Zambia.

Meanwhile, Bank of Zambia governor Michael Gondwe said the process of rebasing the currency was likely to be done within six months.

Labels: CHIBAMBA KANYAMA, KWACHA, ZAMTEL

posted by MrK @ 10:58 PM