Rebasing of the Kwacha: an analysis
By C. Chibwe
The proposed rebasing of the Zambian Kwacha is emotive to some degree. It evokes feelings such as fear: is this the prelude to a mimicking of the Zimbabwean Dollar debacle? And confusion: why are we or should I say they, (the government doesn’t often feel for or by the people), doing it?
The arguments put forward by the government for this radical step certainly have a surface truthful logic. The argument goes that the days of hyper inflation are behind us and therefore the endless number of zeros that accompanies all our denomination of notes is not reflective of the benign macroeconomic stability we currently live under and that has been forecast for our future.
There is, I understand, a more tangibly practical reason for the proposed change. You require 250 of our smallest denomination note, the K20, to make up the equivalent of $1. As the smallest note it will naturally enjoy a wide circulation/usage, resulting in the inevitable wear and tear. This of course leads to high maintenance costs as the notes require replacement. Replacing currency is an expensive business. Hence the idea that these smaller denomination notes should be substituted for coins as they are more durable and (“abundant paper money also offers far more extensive facilities to Knavery”). Yes I hear you cry “what about the outlay for the coins”?! Indeed it will be high but epitomises the idea of a beneficial long-term investment.
And let’s not forget, it will make computation a lot less cumbersome and Kwacha spread sheets significantly more manageable.
Naturally we must turn our minds (in the eternal quest to entertain ourselves) to the conspiracy theories that surround this bold move, and of course they abound; it is said that “The Morals of the people depreciate with the currency”. We have been entertained in the news over recent months with stories of politicians with mountains of cash stuffed in holes in the ground in their gardens, and it is believed that what has been discovered is just the tip of a very large iceberg. “Substantive” proof is supposed to be found in the fact that the decline of the Kwacha over the last few months has not been due just to fears of “hot money” (speculative) investors about the new government’s potential expropriation of foreign owned asset tendencies but due, in some part, to tax evaders and black market businessmen (potential cash contributors to opposition party campaigns) taking their illegal Kwacha cash holdings from under their beds and laundering it back into the system via daily currency transactions at the bureau de changes. This, obviously following the laws of supply and demand, has led to an increase in the supply of Kwacha and a reduction in the availability of dollars. Yes I hear your mind churning “well what accounts for the sudden recent appreciation of the Kwacha?” God only knows we wait with bated breath for the rational explanation from the conspiracy theorists.
In the proverbial “days of old”, currency had to have five intrinsic characteristics; ductility, durability, divisibility, portability and value. The first is no longer relevant as most currencies are now fiat paper currencies, but the remaining four still apply. Let’s see how the Kwacha in its current form qualifies as regards measurement against these virtuous characteristics of currency;
- Durability (capable of standing wear and tear or decay): Most readers will be familiar with the sensation of receiving from a super market teller or retrieving from one’s own pocket the dilapidated, ubiquitous shredded K20 note. You are embarrassed that it’s in your possession, and entirely incredulous that it is still legal tender. If it was a coin one would be less scornful, you expect so much more from the promise of a note!
- Divisibility (the capacity to be divided into parts): the disappearance of the Ngwee in practice makes this a mute point.
- Portability (carried or moved with ease): Let’s begin with the more decadent example, a night on the tiles with six friends commencing with cocktails, followed by a three course dinner at a top restaurant and then pushing on till dawn can easily cost a generous individual with well heeled guests K10 million circa $2000. $2000 is a very portable sum, K10 million in K50 000 notes will not slide easily, if at all into the standard wallet. This brings me to the less decadent example. The small trader in town with a kantemba or small stall, dealing with low income customers buying cooking oil by the cup or individual tomatoes. It is very possible for them to do K5 million’s worth of business in a few days of sound trade. Can you imagine the packaging that is required to make K5 million in K50 and K100 notes “portable”? The dust bin bags we use for storing our refuse spring to mind.
- Value (the worth, the regard in which it is held): The very fact that you need so much of the Kwacha (the zeros, the amount you need to carry) certainly conveys a lack of worth. Money in fact is just paper, it is a means of exchange. This means that it only has value if it is perceived by people in the market to have value. In our current position, though it has been a gradual process people have lost confidence in the value of the Kwacha as the K50 000 notes have begun to lose their purchasing power.
The Kwacha has not fared well in our analysis, using the historical characteristics of money as a bellwether, giving some spurious justification to the argument in favour of the government’s proposed rebasing of the currency.
Why do I say “spurious” you ask, well of course I will tell you. I agree hyper inflation seems to be something we have left behind in a mercifully forgotten era of chronic mismanagement of the economy. However, I feel that the environment that should have precipitated this move has not manifested in a sufficiently concrete form. Let me try and explain:
Confidence in the public exchequer is intrinsic to confidence in the currency. If the government is entirely unable to fund its own budget through its revenues and borrowing on the public capital markets (we still require donor financing to fund a significant portion of our budget), then it is vulnerable to the temptation (or necessity depending on your view point) to print large sums of fiat currency to meet its obligations. This printing of money can be managed in more developed markets (such as those of the United Kingdom or the US) because of the dynamism of their economies and the capacity of their markets to attract foreign currency. If for whatever reason we lost our donor funding, which in turn triggered capital flight as we have witnessed recently, our mono copper export economy would not be able to continue to attract inflows of foreign currency that would make a quantitative easing program (printing of money) practical. This is not to say the printing wouldn’t happen, it would, and our currency would collapse. This is not an unrealistic dooms day scenario, it is extremely possible and the overnight loss of confidence in our newly rebased currency would have catastrophic effects including the fall of the government that chose to delude the people as to the strength of their economy in such a manner.
What I am essentially saying is that the prevailing conditions in our strengthening but still fragile economic structure make the proposed changes to our currency seem more cosmetic than substantive. However if the value of a currency is in the confidence that it’s perceived value inspires, and if this process is helped by the fact that the people “feel” that the new and improved Kwacha will indeed have more worth and as a bonus inadvertently help in the war against the carnival of fraud and corruption that culminated in people secreting billions of ill gotten Kwacha in their gardens, then the proposed new measures to rebase the currency will satisfy the most important characteristic role of a currency, perceived Value.
Mr. C. Chibwe works in Corporate Finance. He was educated entirely in the United Kingdom including attending Rugby School and Royal Holloway, London University. He is a Principle for the Zambia office of Kilbracken Capital, a boutique Corporate Finance Advisory firm. He writes in his personal capacity.