So let me add my voice to the debate. Clearly to correct what I have read and is out of line.
I feel good when i read about people talk about economic issues which make my daily life these days (can't believe I felt the same joy about Computers and IT a couple of years back!).
Rebasing on the Zambian kwacha should be viewed from an Economist point of view! I have been shocked by mis-leading statements about this and people will in the end be lost totally. We need to understand the fundamentals that control this in straight line and not assume the economics that is being dreamt about.
Rebasing the currency is redenomination which is different from devaluation. Wikipedia would simplify it better:
"Revaluation means a rise of a price of goods or products. This term is specially used as revaluation of a currency, where it means a rise of currency to the relation with a foreign currency in a fixed exchange rate. In floating exchange rate correct term would be appreciation. The antonym of revaluation is devaluation. Altering the face value of a currency without changing its foreign exchange rate is a redenomination, not a revaluation."
(I have read sites which have confused the two! Here)
On our case, only the face has been changed by deleting the extra three (3) zeros such that K5,000.00 will become K5.00 - simple! If you look at our currency now, K5000 is written as 5ooo (small zeros). Could be design or not, but assume the zeros are eliminated. So the new currency which will be printed will trade at the different rates. Such that, your K50,000.00 will be equal to K50.00. Hard to understand? Think of it this way, K5,000.00 is equal to $1.00, right? Assume now Kwacha2 is such that K5.00 is equal to $1.00. It simply means Kwacha2 K5.00 will be equal to K5,000.00 of the old kwacha (which we are using now). Put even simpler, its like changing kwacha to MaKwacha which is 1000 times more than the old kwacha.
There is no change in value. Just change in the face of the currency. if you go get a bag of mealie meal for K25,000.00 and you have K50,000.00, the store man will either give you K25,000.00 of the old currency or K25.00 of the new currency!
Bacause of the value being the same, it has no effect on imports or exports (all things equal as we love to say!). This is a redenomination and not a devaluation. It should be easier for people who transact across borders. You can either go buy a car in dollars or rands in durban! The vehicle worth K25 million will be the same if you buy it in Rands or Dollars. Your money simply changes faces (I know the differences in exchange rates will lead to some profit or loss, that's the exchange rate issue). All in all if you carry a stable currency like Euro and Pound, that element of loss or gain in exchanging them will be no more!
So why do countries redenomination? Simple, take our case in point. We have over the years been around the exchange rate of K5,000.00 to $1.00 if may fluctuate to K5,200.00 or K4,700.00 once in a while but we are stable in that region! So a redenomination will simplify our currency (like someone said, reduce the wheelbarrow to carry the money to pay for a car!). Will now only need K5.00 for $1.00! And can even bring back coins which are irreplaceable in some transactions like parking or toll-gates! Ever wonder why we have to buy tokens to play pool? In other countries you use your money in coins! So coinage will be part of the transaction!
There is also the issue of the buried K2.1 billions! People with buried money will either dig it up (so they exchange it for the new "currency" or lose the loot as it will only be worth to light the fire with! So it will rejuvenate transactions as there will be money which has been buried being dug up. And I hope some more people will be arrested for hiding the loot!
That is a simple explanation of what we will expect with this redenomination!!!
well explained mr munjunga
ReplyDeleteIntresting
DeleteWhat your view on the effect of debasing on foreign exchange rate and inflation?
ReplyDeleteHeres what i think.
The fact that people will be forced to pump money into the financial system through depositing old currency will increase velocity of money (ie the number of times money changes hands).
Since the quantity theory of money states that
Qty of money supply X velocity = Price level X volume of transaction
MV=PY
However the quantity of money will remain the same since central bank will marely be replacing collected old notes, M is constant.
GDP(PY) will go up either because prices will go up (inflation) assuming volume of transactions remain the same as the amount of goods and services remain the same
Henceforth,velocity will revert to normal so will price levels therefore the inflation will only be temporary.
I love economics
I love economics too!!!!
ReplyDeleteI had this observation,
From the quantity theory of money
MV=PY
Short-run will push inflation as a result of the velocity as you outlined. But the long-run has
M and P will be constant, therefore the increase on V will be off-set by the increase in volume of transactions. since these are on both sides, the net effect is zero!
The temporal inflation will be a result of nominal changes in money supply, but the real money supply will remain constant. Which makes sense because for every note that passes through the Central Bank, it will automatically be converted to the new note and the old note discarded. The real change will be with the number of transactions as people want to change to the new currency (the velocity).
On a practical level, people should know that some business houses may use this chance to hike the prices in order to take advantage of the increased transactions. This may lead to a temporal increase in the prices of goods and services (according to the classical theorists) but for people like me who share the Keynesian aspect of sticky prices, the increase in prices may not come down (because they are sticky) and will remain at the new prices. Seriously, Zambia has since the stickiness in prices! So we expect that Keynesian aspect to take charge! A reduction in fuel has rarely led to a reduction in bus fares. So what will make people in Kamwala reduce the price after a temporal increase?
We need to put in place ways that will make sure business houses don't increase prices and simply convert to the new notes!