DOLARIZATION AND KWACHA REBASING NEED MORE CONSULTATION

BY: DR MBITA CHITALA - Executive Director – Zambia Research Foundation Following the understandable rejection and criticism of parts and process of the currency reforms that the Hon. Minister of Finance Alexander Bwalya Chikwanda and the Bank of Zambia have initiated, it is important that the rejections are put into context. It is well known that currency reforms are usually carried out by states to normalize monetary circulation and strengthen monetary systems and they take many forms including deflation, nullification, revaluation, devaluation and so on. In Zambia’s case, we have involved two aspects in our currency reform, namely, 1. Finance Minister Chikwanda signing a Statutory Instrument prohibiting the quoting and pricing of goods and services in foreign currency which appeared to criminalize dollarization and; 2. The announcement on 25 January, 2012 by Bank of Zambia in its Press Release that the PF Government had on 23rd January, 2012 approved their recommendation to rebase the Kwacha by dividing the existing banknotes by 1,000 which effect will cause the cancellation of three zeros on the existing banknotes. Dollariztion Currency substitution or dollarization is a phenomenon where a government allows the use of other foreign currencies to operate side by side with other currencies. This is the policy Zambia adopted on 29 January,1994 when it repealed the Exchange Control Act and abolished exchange controls in an effort to quickly stabilize the exchange rate and gain international credibility. This has worked well since then and a reversal to this policy would appear to be reactionary. Though the Law Association of Zambia has commented that Statutory Instrument 33 of 2012 which criminalized quoting and pricing of goods and services in foreign currency and signed by Hon Finance Minister AB Chikwanda was ultra vires the constitution and that it was therefore a nullity ab initio, it is also true that currency substitution or dollarization tends to undermine our government’s fiscal ability. A sober analysis must be made to determine the cost benefit of doing away with exchange controls since 1994. To some people which appears to include the Hon Chikwanda, in the years that our government allowed currency substitution (1994 to date), our country lost the ability to finance expenditure by printing money. The government also assumed the cost of obtaining the foreign currency that replaced the Kwacha. These costs are of course difficult to calculate but they are high. Dollarization, it has been argued, has prevented our policy makers to exercise any policy autonomy whatsoever and has tended to eliminate the Kwacha (which is one powerful symbol of our national identity and independence) as our national currency. On the other hand, many observers see the repeal of exchange controls allowing for partial currency substitution where the Kwacha was allowed to circulate alongside the US Dollar and other convertible currencies, was the best economic policy as it led to the stabilization of the Kwacha and brought about credibility of the Zambian economy. Following on this argument, the Zambia Association of Chambers of Commerce and Industry (ZACCI) represented by their Vice Chairman for the Northern Region Raj Karamuchand has criticized the introduction of Statutory Instrument No, 33 and argued that it must be withdrawn as it has “the potential of sending wrong message to would be investors and may curtail investment and foreign currency flows. This may lead to the depreciation of the Kwacha and increase inflation levels in the country…..The regulations have also the potential to create distortions in the economy which can boost informal activities at the expense of the formal economy, with adverse effects on the official sources of foreign currency sources and government revenue. The anxiety expressed by the ZACCI has been supported differently by other stake holders such as farmers growing wheat, soya beans, cotton and other export cash crops. The Mining companies who control more than 70% of our export earnings appear to be excused since they currently enjoy Development Agreements which allow them to bank all their export earnings overseas and continue to cheat on Zambia by exporting using FOB considerations but claiming CIF when they invoice for tax purposes. It is important that the government unambiguously states its policy. Is the country reverting to exchange controls as is the case in our neighboring countries including South Africa or we should continue as we have been since 1994 but repeal regulations that prevent investable money from coming to Zambia such as the one sided and subjective money laundering regulations. It is advisable that Minister Chikwanda consults a little more before unleashing potentially injurious policy directives such as the ones in the current currency reforms. Rebasing of the Kwacha Rebasing or redenomination of the Kwacha is another policy scheme which Minister Chikwanda together with the Bank of Zambia have decided to implement without much consensual agreement with the broad society. Contracts for this scheme have already been awarded and a campaign to explain the policy is ensuing. Rebasing in simple language refers to the reduction in the par value of the Kwacha.The question to be asked is what is the rationale for Zambia engaging itself in rebasing its currency? There are two views on rebasing the Kwacha. First, that it is justified to rebase the Kwacha since rebasing or redenomination of the Kwacha according to the Bank of Zambia is aimed at addressing the costs associated with the accumulated depreciation of the Kwacha since 1991 which they allege had undermined the basic function of the Kwacha and furthermore created transaction difficulties. It is argued that since inflation has been broken and Zambia now qualifies as a moderately stable economy with high public confidence in the economy, we can now rebase the Kwacha. This reasons advanced by Bank of Zambia is debatable. It is true that inflation in 1993 was 188% but it not so anymore. It has been below 10% for a couple of years. In all countries where reebasing was done, inflation was very high. For instance Angola reebased its currency in 1995 when inflation rate was 2,672 % while Brazil did the same when inflation in 1994 was 2076%. Now, Zambia’s inflation rate has been below 7% lately and very stable. Public confidence in the economy is very high as evidenced by the growth of FDI in the country. Instead of using this stability argument as the reason for rebasing, on the contrary, it is a good argument for not rebasing the Kwacha at all and leave the status quo. Some policy analysts therefore contend that rebasing the Kwacha is not economically justified. It is a costly inconvenience. Furthermore, contrary to the BOZ that there will be no loss of value, the fact is that, there will be a reduction in the par value of the Kwacha. The new unit of the Kwacha shall replace the old unit with a certain ratio. A similar reform occurred in Ghana where Ghana replaced the old 10,000 Cedi with a new 1 Ghana Cedi by removing four zeros from the old currency. When the reform was implemented in Ghana, it resulted in the birth of an entirely new currency with new symbols. Similarly, Argentina in January, 1992 rebased its currency by re-introducing peso to replace the austral at the rate of 1 peso=10,000 australs, and then pegged its international exchange rate at 1 peso=1US$. After rebasing ,inflation dropped from 172% in 1991 to 1% in 1998. However, the fixed exchange rate which was 1 peso= 1 US$ led to constant flight of dollars and led eventually to de industrialization, unemployment and general recession. In 2001, Argentina abandoned the exchange rate peg and the peso depreciated by 240% and inflation rose from negative levels to 25.9% in 2002 and now has stabilized at 9.6% while international exchange hovers around 3 peso = 1 US$. Of course one good reason why rebasing or redenomination of currencies are implemented is to allow governments to reassert their monetary sovereignty. If citizens and residents lose confidence in the national currency, they may start to use foreign currencies, in other words, they may engage in currency substitution . This can be a psychological and economic blow to a government as the economic policy of a country will be at the mercy of foreign capital and foreign central banks. That is why it is considered important that the government symbolically convinces Zambians that the Kwacha is a worthy currency and that hyperinflation is now a thing of the past by rebasing the Kwacha. Rebasing of the Kwacha can further be justified if it is argued that the PF government intends to make the country attractive to Foreign Direct Investment (FDI). In other words, FDI will come to Zambia if the Kwacha is directly and easily linked and monitored by the world reserve currency the US Dollar which effect will increase FDI confidence in the Kwacha. However, this poses onerous challenges on the government and the Bank of Zambia. The monetary authorities must ensure that inflation will be strictly controlled and that the Kwacha value relative to all foreign currencies will be sustained. In other words, this will mean the Bank of Zambia shifting from their current monetary targeting as agreed with the IMF currently to inflation targeting with all its challenges. The Future Currency reforms should never be used or designed to punish people or to expropriate much of peoples savings as occurred in North Korea in 2009 which resulted in so much damage to Korea and where media reports indicated that the alleged responsible official Park Nam-Ki was dismissed and reportedly executed for his failure to lead the currency exchange successfully. The current currency reforms need not be rushed nor should commentators be told that this is a fait accompli. We should learn from the examples of other countries including our neighbor Zimbabwe and North Korea so that we do not repeat the same costly mistakes. The Statutory Instrument Number 33 of 2016 signed by Hon Chikwanda should be momentarily be suspended to allow for further consultations as it may be unlawful and injurious to our economy. The rebasing of our Kwacha, though, from the economic point of view was unnecessary, needs to be managed well so that the monetary authorities continue to effectively manage the general price level – so that Zambia continues to enjoy low inflation. Email:mbitachitala@yahoo.co.uk www.mbitachitala.blogspot.co. Mobile: 0976 030398