Zambia zeroes in on new banknotes

[DetroittoAZ]

WHILE South Africans get used to the new banknote series, with the Big Five moved to the back of the notes, Zambia is preparing to remove three zeros from its money.

The Bank of Zambia has announced that the kwacha will be rebased by dividing it by 1,000, dropping three zeros off the currency, on January 1.

Zimbabwe’s regular and drastic currency rebasing a few years ago might have created the impression that dropping zeros is a desperate and cosmetic exercise, but analysts say it is often necessary to rebase a currency, ideally when an economy is stable and growing.

“Currency rebasing is usually implemented when there is a need to address costs associated with an accumulated loss in value of the currency that undermines its basic function as a store of value, medium of exchange and measure of value,” said Janine Botha, economist at NKC Independent Economists.

The Bank of Zambia said high kwacha denominations were the result of high inflation for a long time. Zambia had very high inflation in the 1990s and early 2000s. Its inflation peaked at 188% in 1993.

Now Zambia has a K50,000 note, but this is worth less than $10. The Bank of Zambia said this resulted in inconvenience and risks in carrying large sums of money for transactions. It has also led to increasing difficulties in maintaining bookkeeping and statistical records, ensuring compatibility with data-processing software and higher costs in the payment system.

“Too many zeros on a currency simply becomes an administrative nightmare,” said Jannie Rossouw, economics professor at Unisa’s department of economics. “People have to walk around with bags full of money. Zimbabwe issued a Z$100-trillion note at one stage, and at some point there simply is not enough space left on a note to print all the zeros.”

Michael Keenan, currency analyst at Absa Capital, said that after the earlier hyperinflation in Zambia, which caused the currency to drop in value, Zambia’s economic backdrop had improved substantially.

“They have current account surpluses, inflation is about 6%, everything is kind of back to normal, but they still have this currency with all these decimals. It makes sense for them to drop off these zeros, because it will be a lot more convenient and safer.”

Ms Botha said a currency was usually rebased when economic conditions were considered favourable, with low and stable inflation, favourable macroeconomic conditions and good economic prospects.

She said that, in addition to making transactions easier due to the use of smaller units of money, the rebasing of a currency often tended to create greater confidence in the currency as too many digits or zeros could lead people to lose confidence in the currency.

“It also has the potential to enhance policy credibility, assuming that government remains committed to maintaining macroeconomic stability. This would be so as to avoid the return of many zeros on the currency.”

Mr Rossouw said some countries rebased currencies in the mistaken belief that it would curb inflation. “You need other steps as well. You cannot simply rebase your currency and do nothing else and think that will bring inflation under control.”

Mr Keenan said there was even a risk of inflationary pressure when a currency was rebased. “There will be some rounding, and while the effect will be small per item it could bring about a bit of inflation if you add them up. It happened in Ghana when they rebased their currency. The other potential disadvantage is you have the risk that people assume your currency weakens.”

Ms Botha said that, at the broadest level, rebasing a currency did not alter the value or purchasing power of the currency.

According to the Bank of Zambia, exchange rates will also be rebased, with the rule of 1,000 old kwacha equalling one new kwacha.

Mr Keenan said the South African Reserve Bank held some kwacha in its foreign reserve basket, but the foreign reserves were always measured in US dollars.

“If they drop the zeros off the kwacha, the dollar value of that portion of the reserves will remain the same. It will not increase or decrease the Bank’s holding of kwachas.”

How the old K1000 becomes the new K1

Zambia currently has banknotes for K20, K50, K100, K500, K1,000, K5,000, K10,000, K20,000 and K50,000. It has coins for K10, K5, K1, 50 ngwee and 25 ngwee.

After January 1 there will be a new note series for K100, K50, K20, K10, K5 and K2 and coins for K1, 50 ngwee, 10 ngwee and five ngwee.

An item that cost 1,000 old kwacha on December 31, will cost one new kwacha on January 1. From January 1 to June 30 next year all prices will be denominated in the old K-symbol currency and temporarily in the new KR currency. During this time, goods and services can be paid for in both currencies.

From July 1 next year, the old currency will not be accepted, but it will be exchangeable for a year thereafter for the new currency at the Bank of Zambia, commercial banks and designated agents. The new currency will get the symbol K.

From July 1 2014 to December 31 2015, exchanges will be at the Bank of Zambia only and thereafter old currency will have no value.

by René Vollgraaff, November 25 2012, 16:15

Losing the zeros

South Africans are not strangers to the concept of a currency losing zeros, particularly as neighbour Zimbabwe has gone through several such exercises in the past decade.

However, the process in which Zimbabwe chopped a total of 25 zeros off its currency between 2006 and 2009 is not an example of how rebasing should be approached.

As inflation started to increase in Zimbabwe in the early 2000s, the central bank simply printed more money and larger denominations, fuelling inflation even further. In October 2008, one US dollar cost about 2.6-billion Zimbabwe dollars.

Zimbabwe stopped using its own currency in 2009 and now uses the US dollar and the rand.

Some of the more successful examples of currency rebasing have been in Ghana, which dropped four zeros off the cedi in 2007, and Mozambique, which lost three zeros from its metical in 2006.

Turkey knocked six zeros off its lira in 2005. Iraq planned to delete three zeros from its dinar next year, but its news agency has reported that this will not be done soon “due to the lack of security and economic stability in Iraq”.

* This article was first published in Sunday Times: Business Times

http://www.bdlive.co.za/world/africa/2012/11/25/zambia-zeroes-in-on-new-banknotes

Edited December 22, 2012 by DetroittoAZ

[fib1618]

Smoke!

Go RV!

[Osmosis]

This was posted about 3.5 weeks ago; Zambia and Iraq have very little in common economically.

[hammer911]

This was posted about 3.5 weeks ago; Zambia and Iraq have very little in common economically.

Dito... But thanks for the post!!!GO RV!!!~~~

[keepmwlknfny]

This was posted about 3.5 weeks ago; Zambia and Iraq have very little in common economically.

maybe so but that doesnt matter when trying to erase the after affects of really high inflation......aka an inflated currency.....

[SocalDinar]

Thanks Detroit AZ

I dont think they will drop the Zeroes this Jan as stated near the end of the article also

This is a good thing, I do think that we will see the IQD rate move and maybe be corrected.

[boomer113189]

this is in the wrong section but yes this is what iraq plans on doing to there currency sometime in the future. this would be good for there currency but no good for any of us at all.

[snooz]

Smoke!

Go RV!

Nope, it aint smoke...!!

http://www.indexmundi.com/zambia/inflation_rate_(consumer_prices).html

Inflation rate in that country peaked at 188% in 1993, and is now stable at around 8% since 2010...

See the graphs by yourself...!!

SnooZ

[snooz]

Yep, they are going to drop of the zero's...!!

From July 1 2014 to December 31 2015, exchanges will be at the Bank of Zambia only and thereafter old currency will have no value.

But, the big question here is " What does Iraq have that Zambia don't "

I think everyone as the anwser to that ...!!!

Lets see how it turns out...??

SnooZ

And oh, Thank you Detroit...Nice find !! ++ :)/> ;)/>

Edited December 22, 2012 by snooz

[boomer113189]

it does not matter what iraq has. when ever they do drop there 3 zeros they will replaces the old unit with a fixed number of old units being converted to 1 new unit. If inflation is the reason which it is for them . positive integral power of 10,100,1000,1000000 will be the exchange rate for the old to the new unit of currency

[snooz]

it does not matter what iraq has. when ever they do drop there 3 zeros they will replaces the old unit with a fixed number of old units being converted to 1 new unit. If inflation is the reason which it is for them . positive integral power of 10,100,1000,1000000 will be the exchange rate for the old to the new unit of currency

Lets see how it turns out...??

[boomer113189]

yeah it will turn out that for fact the only fact i am still wondering is which one will it be 10,100,100,1000000 which of those will be the exchange rate for 1 new dinar. there has been muti articials stating 1000 to 1

[SgtFuryUSCZ]

Yep, they are going to drop of the zero's...!!

But, the big question here is " What does Iraq have that Zambia don't "

SnooZ

***///

Lots and lots and lots of USD, that's what... (for one....)

And considerably more 'natural' resources for another.

Iraq can apparently afford to play the waiting game, as long as we play, too, to a point.

If they tell us to take our toys and go home and take our USD with us,

it'll be a whole different ball game in Iraq.

Now, Zambia is no Iraq, that's for sure.

However, if TPTB are using the Zambians for a distraction, guinea pig, or other 'purpose',

they did achieve one thing....

they sure got our attention!

SNOOZ is right.... let's wait and see how this turns out.

Plus 1, SNOOZ.

[SINGH]

I don't think iraq will do the same or in the same way. Zambia did not spend nearly as much time, study, money, all out effort Iraq did with it's currency, to from what it sounds like.......LOP. now the article didn't mention what happen to the exchange rate or how it affected it. This is your typical article that tells what they did, but don't give enough detail to clarify what exactly happen to the currency and exchange rate and give a "let's say" scenerio, like what we are doing and hoping for the IQD.

[boomer113189]

I don't think iraq will do the same or in the same way. Zambia did not spend nearly as much time, study, money, all out effort Iraq did with it's currency, to from what it sounds like.......LOP. now the article didn't mention what happen to the exchange rate or how it affected it. This is your typical article that tells what they did, but don't give enough detail to clarify what exactly happen to the currency and exchange rate and give a "let's say" scenerio, like what we are doing and hoping for the IQD.

what do you you mean they didn't mention what happen with Zambia exchange rate they said 1000 Zambia for 1 New one

[SINGH]

what do you you mean they didn't mention what happen with Zambia exchange rate they said 1000 Zambia for 1 New one

That is saying what they did with the note, not the actual exchange rate.

What was the before and after exchange rate?

[boomer113189]

That is saying what they did with the note, not the actual exchange rate.

What was the before and after exchange rate?

idk but it worse then iraq right now

[boomer113189]

they said the current Zambia banknotes will be exchanged at 1000 current notes for 1 new banknotes when they come out with them

[SINGH]

idk but it worse then iraq right now

That's what I'm saying, these articles never give the whole story/details. I believe Iraq will be different and we will make a profit......(Kuwait)

[RVPleaseToday]

They did give the whole story:

"“If they drop the zeros off the kwacha, the dollar value of that portion of the reserves will remain the same. It will not increase or decrease the Bank’s holding of kwachas.”

[boomer113189]

same thing with the Indonesian currency they Plan to Redenominate AKA Dropping 3 zeros its currency Rupiah in 2014 at the exchange rate of 1000 current banknotes into the 1 new banknote when they come out

[SINGH]

They did give the whole story:

"“If they drop the zeros off the kwacha, the dollar value of that portion of the reserves will remain the same. It will not increase or decrease the Bank’s holding of kwachas.”

For me that quote from the article isn't clear. That is no different than Iraq explaining the "dropping the zero's" plan. We still debate the meaning up til today. Call me stupid, but I would rather get the "explanation/meaning 101" told to me than creating smoke from ears, figuring what they write or get translated.

[boomer113189]

how can you not understand it ? is that even possible ?

[RVPleaseToday]

SINGH, with all due respect, Zambia isn't being ambiguous at all. It is perfectly clear what they are saying. And, since they are going to do it in 10 days, why would they obfuscate their intent?

Sometimes a cigar is just a cigar.

[SINGH]

how can you not understand it ? is that even possible ?

Do you understand exactly what Iraq is say when they talk about dropping the zero's?

Watch the replies if you say yes and give the meaning......