Beauty or nightmares of rebasing Kwacha

Rebasing or redenomination is the process of changing the face value of banknotes orcoins used in circulating currency.  For the first time, Zambia, under the Patriotic Front Government is about to experience the beauty or nightmares of having our national currency rebased. Simply put the Zambian Kwacha will have its unit value of the Kwacha reduced and coins will be re-introduced.
For one reason or another the Michael Sata led Government has joined the likes of Turkey, Sierra Leone, Nicaragua, Argentina, Chile, Ghana and other developing countries that have rebased their currencies with varied outcomes. The million dollar question is “Why do Governments engage in the redenomination of their currencies?”
While, in an era when money is backed by confidence (fiat money), rather than by gold and silver, governments may be tempted to manipulate the value of the public’s currency stocks as a revenue-generating measure.
One means of manipulation is inflation: a government can reduce its own domestic currency-denominated obligations by allowing a dramatic expansion of the money supply, while another means of manipulation is currency reform, in which the government introduces a new currency, but makes it difficult for citizens to convert their holdings of old currency. Do we foresee citizens being told this is fake Kwacha you cannot change it?
Notwithstanding the forgoing, rebasing of a currency not be misplaced when executed under the right environment with all the economic fundamentals stable. For example countries that have had successful rebasing of their currencies had low levels of inflation, stable exchange rate, tight fiscal discipline and credible policies backed by deeds and not rhetoric.
But do we have fiscal discipline in Zambia, where for example we are experiencing creation of new unbudgeted projects such as creation of new districts, chief’s salaries, and other anticipated Presidential populist pronouncements that may bust the budget?
But one thing for sure is rebasing does not mean there will be more money in the people’s pockets. If you were paying your maid K419, 000 her new salary will be K419. But she will still buy and afford the same things she is able to now. She won’t still afford those things she could not afford before this exercise.
In any case, the psychological ‘loss’ of revenue by many individuals and companies may lead to price increases in order to reach psychological profit benchmarks that people were making before this exercise, unless government resorts to UNIP style strict price control measures that are not in tandem to current free market enterprise.
And of course, there will be associated huge costs to be incurred by the people of Zambia in implementing this exercise such as printing the new money and destroying the old money in billions of Kwacha. There will also be costs of re-calibrating the ATMs, fuel station pumps, cash registers, change of accounting software packages and the likelihood of increased inflationary pressures through the determination of higher prices on account of unchanged mindsets of consumers.

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