History of Zambian Currency
The Zambian Kwacha is a decimal type of currency with K1 being made up 100 ngwee. Before Zambia' s independence in 1964, the country then known as Northern Rhodesia used the British pound as legal tender before migrating to the Kwacha in 1965. The Currency Act of 1967 completely replaced the British pound with the Zambian Kwacha banknotes and the ngwee coins.
The New kwacha was then denominated into six denominations; namely; K10, K2, 50N, 20N, 10N and 5N denominations. Since 1967 the Kwacha has undergone several structural changes aimed at ensuring that it supports economic activities while maintaining public confidence in the national currency. Some of the notable changes include the following:
i. The Currency Structure of 1968 -1974
The Zambian Kwacha came into being after a government policy decision to decimalise the national currency. The Currency Act of 1967 saw the birth of the Zambian Kwacha and ngwee replacing the Zambian pound, shilling and pence in 1968. The new currency designated the main unit as the Kwacha comprising of 100 ngwee and had the following banknotes and coins in its family: K1, K2, K10 and K20 banknotes and 50 ngwee, 20 ngwee, 10 ngwee, 5 ngwee 2 ngwee and 1 ngwee in coins. The official rate of the Kwacha was one half of the old unit (pound) and or US$1.40. The new K1 was equivalent to the old 10s, while the £5 (Five pound) banknote was equivalent to the K10, the £1 was equivalent to the K2 and the old 5s was replaced by the newly introduced 50 ngwee paper note.
In coinage the old 2s piece was replaced by a 20 ngwee while the 1s and 6d were replaced by the 10 ngwee and 5 ngwee, respectively. Table 4 below illustrates the conversion of the old currency i.e. the Zambian pound shilling and pence to the Zambian Kwacha and ngwee.
Table 1: Conversion of Zambian Pound, Shilling and Pence to Zambian Kwacha and Ngwee
The Zambian Kwacha continued to be linked to both the British pound and the United States dollar and as such the devaluation of the US dollar on 15th August 1971 saw the Kwacha appreciate through its link with the British Pound (on 23rd August 1971). The rate of the Kwacha was then fixed at K1.7094 being equivalent to £1.00. In December 1971 Zambia broke her currency ties with the British pound. The Kwacha was then linked to the US dollar re-establishing the official exchange rate at K1 equivalent to US$1.40. The devaluation of US dollar in February 1973 saw the Kwacha' s gold reserves reduced by 7.89 percent. To cushion such shocks, the Bank of Zambia introduced a 4.5 percent fluctuation range for the Kwacha. During this period the Zambian pound circulated alongside the Zambian Kwacha until 31st January 1974 when the withdrawal process was completed and the sole legal tender became the Kwacha and ngwee.
ii. The Currency Structure of 1973-1974
Zambia political landscape changed and gave birth to the "One Party Participatory Democracy in 1973". To commemorate this historic event in Zambia' s political history the Bank of Zambia issued a commemorative 50 Ngwee coin to join the rest of the nation in celebrating the birth of the Second Republic on 13th December 1973. Other currency changes included changing the colour of the 50 Ngwee banknote in order to eliminate the confusion that appeared to exist between the 50 Ngwee banknotes and the new K5 banknotes; hence the multi-coloured 50 Ngwee banknote made its first appearance in April 1974 but was later phased out of circulation.
During this period the Zambian Kwacha depreciated marginally against the US dollar with the official exchange rate at K1 equivalent to approximately US$1.28. By the late 1970s the Kwacha had depreciated further and was below USD$1.
iii. The Currency Structure of 1980
The currency structure in 1980 remained the same with the highest denomination still being the K20. However, there was a change in the design of all the banknotes in 1980. By 1980 the 50 Ngwee paper note had been completely withdrawn from circulation.
iv. The Currency Structure of 1986 -1991
Low copper prices and continued increased fuel prices on the world market were some of the major contributing factors to the declining economy. Inflation from the mid 1980s to the early 1990s continued to gallop at 3 digits. In order to meet the public demand for cash in the economy it was necessary to introduce a higher banknote and in 1986 the Bank of Zambia issued into circulation the K50 denomination. In 1991, the K100 and K500 banknotes were added to the family of banknotes. During this period the K1 was replaced with a coin of the same denomination while the K2 paper note ceased to exist and was eventually withdrawn from circulation.
v. The Currency Structure of 1992
In the early 1990s, Zambia' s political landscape changed yet again with the country holding its first multiparty elections in October, 1991. The advent of multiparty politics ushered in the Third Republic and an era of economic liberalisation. Under the new liberalised economy, the government made policy decision that led to the changing of the features of the Zambian currency from bearing the portrait of the Head of State to the current features which bear the famous Fish eagle and other important national monuments, wildlife and bird life that characterize the rich culture and heritage of the Zambian people. Apart from changing the appearance of the banknotes, there were no additions to the family of banknotes. However, other changes included the replacement of the K5 and K10 paper notes with coins in the same denomination. Smaller denominations of coins were slowly disappearing from circulation and thus the lowest coin in circulation was the newly introduced 25 Ngwee. As inflation levels continued to remain high, the members of the public did not readily accept coins given their diminishing purchasing power and this resulted in increased public demand for banknotes.
vi. The Currency Structure of 1996
As inflation remained relatively high and the demand for cash in the economy began to increase, the Bank of Zambia further introduced three banknotes in May 1996 namely; the K1,000, K5,000 and K10,000. Continued poor economic performance with annual GDP growth averaging 2 - 4 percent in the late 1990s contributed to the public' s loss of confidence in other forms of formal payment instruments such as cheques further increasing the public' s heavy reliance on cash for many of its transactions. This led to an exponential increase in currency in circulation (CIC) during the same period from K65.4 billion in 1994 to K671 billion in 2003 (i.e. representing a 926 percent increase).
During the mid-1990s the Kwacha' s depreciation against the US dollar had worsened with approximately K1,000 equivalent to US$1.
vii. The Currency Structure of 2003
In 2003 as a reaction to the increased demand for banknotes for daily transactions, the Bank of Zambia introduced two more denominations to the family of the Zambian currency i.e. the K20, 000 and K50, 000. The family of Zambian currency now had nine (9) banknotes; namely; the K20, K50, K100, K500, K1, 000, K5, 000, K10, 000, K20, 000 and K50, 000. The K20, 000 and K50, 000 were introduced as high value notes in September 2003. In coinage, though not in circulation, there were five (5) denominations as follows: 25ngwee, 50ngwee, K1, K5 and K10. In addition to the two new denominations, The Bank introduced two polymer banknotes in the K1000 and K500 denominations. The change in substrate was intended to extend the circulation lifespan of these two high velocity banknotes. This family of banknotes was in circulation until 2013.
viii. The Curreny Rebasing Project of 2013
The Government of the Republic of Zambia approved the recommendation of the Bank of Zambia Board to re-denominate the national currency on 23rd January 2012.
The old family of the Zambian currency was characterised by high denominations as a consequence of high inflation rates experienced over a long period of time. Zambia experienced high levels of inflation during the 1990s and early 2000 which peaked at 188.0% in 1993. The objective of re-denominating the Zambian Kwacha was, therefore, mainly to address costs associated with an accumulated loss in value of the currency that undermined its basic function as a store of value, medium of exchange and measure of value.
The Currency Rebasing exercise entailed dividing all denominational values by a denominator (1,000) and this resulted in the replacement of all Zambian banknotes and coins in circulation with the rebased currency. The Bank introduced two (2) K100 and K2 banknotes to the family of the Zambian currency. The current family comprises six (6) banknotes (K100, K50, K20, K10, K5 & K2) and four (4) coins (K1, 50N, 10N &5N). The Bank generally maintained the features of the old currency on the rebased currency.
Reasons for Rebasing the Zambian Currency
The Zambian Government approved the recommendation to rebase its currency because of the need to address costs associated with the accumulated loss in value of currency arising from high inflation rates over a prolonged period of time. The high levels of inflation resulted in:
- Inconveniences and risks inherent in carrying large sums of money for transactions;
- Increased difficulties in maintaining book-keeping and statistical records and ensuring compatibility with data processing software;
- Higher costs on the payments system, particularly the delivery of banking services through a greater use of technology.
Benefits of Rebasing the Zambian Currency
Rebasing the currency resulted in a number of benefits including;
- Facilitating easier business transactions because it leads to the use of smaller units of money. It simplifies accounting and the ease of expressing monetary values, thereby minimizing errors associated with the inputting of financial data and time spent to review such data. It achieves a more efficient use of calculation and accounting record systems. Thus, rebasing simplify book-keeping and reduces the drudgery in transactions, record keeping and banking transactions.
- Creating greater confidence in the currency. When there are many zeros or digits, people may lose confidence in the local currency.
- Reduction in the cost often incurred when customizing standard packages that are purchased by entities. This is because most of the current accounting packages are developed in jurisdictions where values, at a maximum, tend to be in millions. The present situation in Zambia, where organizations record values in billions and trillions of Kwacha, requires further customization of such packages in order to widen data fields. Thus, currency rebasing will limit the extent of customization of standard application packages.
- Efficient payments systems and encouraging the use of mechanisms such as pay phones, vending machines, car parking meters and other related technologies.
- Re-introduction of a culture of using coins which are more durable.