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Monday, 12 November 2012

Costs of Rebasing the Kwacha (A Response)

By Francis Ilunga

The article Costs of Rebasing the Kwacha, that was published on 7 November 2012, raised important questions, which cannot go without comment. Below are a few observations concerning the said article:

1. The author has alleged that businesses will spend a lot of money on reconfiguration of their IT platforms, and that most of these costs will be passed onto consumers in one way or the other. The author has however neglected to mention the costs that most businesses incur in reconfiguring/ customizing standard packages (accounting/audit, etc), that they acquire from time to time. You will appreciate the fact that the packages used in Zambia are developed in jurisdictions where values, at a maximum, tend to be in millions. The present situation in Zambia, where some organizations, especially banks record values in billions or trillions of Kwacha, requires further customization of such packages in order to widen data fields, which tend to be very costly. With the rebasing of the Kwacha, businesses will no longer be spending money on the reconfiguration / customization of newly acquired packages. The same goes for ATM machines, which have to be customized to dispense millions of Kwacha, as opposed to hundreds and a few thousands in jurisdictions where they are manufactured. Therefore, apart from this one off cost that businesses will incur in recalibrating their IT platforms to conform with the rebased currency, it is easy to see that businesses will stand to benefit more from rebasing than they will lose.

2. The author has also neglected to mention the fact that the K5 billion that Standard Chartered Bank Plc, has set aside in terms of systems and infrastructure upgrade, is just about 3% of the bank’s year to date profits of about K164 billion, as per the bank’s financial statements for the quarter ended 30th September 2012. The author has deliberately left out this fact to create an impression that the bank will spend beyond its capability, for the sole purpose of justifying his argument that the bank will have no option but to recover this huge expense from its clients through increased bank charges. As a matter of fact, everybody is advised to report any funny charges on their bank accounts, or any suspicious pricing after the rebasing, to the Bank of Zambia, and other agencies. This measure has been taken to ensure that the cost of rebasing is not passed on to consumers. Therefore, the author’s argument that banks/business houses will pass on costs of rebasing to consumers is just an hallucination. Further, banks and other business houses were informed about this exercise in January this year, and most of them have already raised/set aside enough resources for the associated ground work, in readiness for the change over to the new currency.

3. The idea of rebasing of the Kwacha was conceived in 2003, but couldn’t be implemented because prevailing macroeconomic fundamentals at the time did not permit such. For instance, high levels of inflation, would have meant returning to higher value denominations within a short space of time, as was the case in Zimbabwe. In the recent past, inflation has slowed down and dropped to a single digit. This low level of inflation, coupled with favorable macroeconomic conditions, has provided an opportune time to rebase the Zambian currency. Therefore, the rebasing of the Kwacha has nothing to do with politics as the author alleges. It is purely a Bank of Zambia decision and something that the bank has been working towards for some time. You will be pleased to note that the last 3 zeros on the current K50000 , K20000 , K10000 , K5000 , K1000 notes (in red), are all small and raised, and the reason for this is simple, the BOZ had in mind the idea of rubbing off these small raised zeros at an opportune moment, and that opportune moment is now. In other words, the idea of rebasing the Kwacha, was conceived from the time the current currency structure was being implemented. You may also wish to recall that the large number of zeros on our current currency denominations, is a consequence of high inflation rates that Zambia experienced over a prolonged period of time.

4. There are many other benefits associated with the rebasing of the Kwacha, besides "computational costs" to grandparents, as the author rudely put it. Some of the benefits are as follows:

a. The expression of currency in a new and smaller equivalent scale (thousands and millions as opposed to billions and trillions), will simplify /enhance book-keeping, understanding of accounts and reduce the drudgery in transactions. The ease of expressing monetary values, will help in minimizing errors associated with the inputting of financial data and time spent to review such data.

b. Rebasing will lead to greater confidence in the currency. It is just common logic that when there are many zeros in the currency denominations, people lose confidence in the local currency. In other words, a rebased currency improves the perception individuals have of the national economy, and I will leave it to the author to speculate on the benefits associated with increased confidence in the national currency.

c. Rebasing will allow the Central Bank to re -introduce coins in the high circulating denominations, such as the K1000 and K500, thereby increasing durability and consequently resulting into savings on costs incurred by the BOZ, in replacing the current high circulating denominations.

d. Re-introduction of the culture of using coins in Zambia will encourage technology transfer from developed nations in areas such as the use of vending machines, parking meters, toll gates, etc.

In view of the above, it is my personal opinion that the article Costs of Rebasing the Kwacha is misguided and analytically flawed.

The author is declares interest as an employee of the Bank of Zambia. The comments are made solely in his private capacity as an ordinary citizen of Zambia. 

5 comments:

  1. Well put Francis

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  2. You are indeed an economist Mr Ilunga- well written article and easy to understand! MI

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  3. The people complaining the most about costs are the same ones who complained about the cost of too many Zero's. Some of us will benefit without cost as we could not afford to reconfigure software and had rebased our accounts by three zero's already years ago. However there are some completely unnecessary costs that could have been avoided such as the cost of producing a coin to replace a valueless note (K50)and the cost of passing legislation on rounding off wages (which prevents an employee being cheated of K10 per year)The cost of dual pricing for six months is also not necessary and I expect most businesses will not comply with it. A straight switch on one day is far better and less confusing.

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  4. bravo, you are indeed and economist, we need such express information so that people are not lead to believe that rebasing of the Kwacha is just an acamedic & costly exercise meant to benefit a few individuals and institutions.

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  5. Rebasing: New Money, Same Value. However, somehow the goods may become slightly expensive. Yesterday, I was in one Chain store in Lusaka and prices have been rounded upwards. Say something that used to cost say K38,500 is now KR40; K69,500 is also KR70 just like that. People need to be careful when buy in the rebased currency especially in the early days. Having said that, other stores may also take advantage of the hiked prices in the competitors stores to keep their prices the same and increase their sales.

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