By Chisha Mwanakatwe
A Brief Comment on the Changes to The Zambian Currency Structure, 2025
There has been interesting debate from both the public and in parliament following the recent announcement by the Bank of Zambia, that a new currency structure would soon be introduced to circulate alongside the existing one, with the latter being gradually phased out of from circulation over a twelve month period.
Of particular interest has been the addition of two new High Value Notes (K200 and K500), the retention of low denomination coins in the new structure, and the timing of the change, not only from the perspective of the economic environment (which is inter alia, characterised by high inflation), but also due to the fact that the country will be holding parliamentary and general elections within the coming year.
I will try to limit myself to the aspects that seem to have raised public interest, and perhaps, it is at this point that I should state that the views I express are entirely personal.
During times of high inflation, the changing prices rapidly erode the purchasing power of the currency, resulting in two notable distortions.
Firstly, the upper end of the denomination structure no longer performs its intended role of being a convenient store of value and is relegated to a more “transactional” role. This loss of value at the high end invariably results in the introduction of “higher value notes” and when inflation persists at these levels, the denominations introduced may become so large that a re-basing (striking off of zeros) becomes the desired option in order to have a currency which can be used by the public with as little confusion as possible, and which is appropriate for use in forms of technology which may accommodate only a limited number of digits.
Secondly, high inflation has the undesired effect of rendering the lower end of the denomination structure virtually worthless over time. We are all familiar with the various coins that were introduced to facilitate very small transactions and to provide change for slightly larger ones. As we have all observed, when inflation persists, they no longer serve that purpose and simply disappear from circulation as they have no role to play. What is important to note here is that because small value denominations exchange hands so many times in so many transaction in a day, there is a need to make them as durable as possible, which is why the lower end of the denomination structure typically has coins. It is this constant usage (often referred to as high velocity), which makes a K2 note wear out rapidly and deteriorate to a point where it continued circulation becomes not just an inconvenience, but also a threat to public health. This is worsened in an economy like Zambia’s which still has a very large informal sector trading outside of the formal banking system, thereby making it difficult to withdraw low value notes which are of unacceptable quality.
And therein lies the dilemma presented by coins. Some studies estimate that the expected life in circulation could go as high as twenty six years. However, the cost of minting coins is extremely high (compared to paper notes) so it is expected that once put in circulation, coins will remain in use for a period of time long enough to justify the cost of their production. Therefore, while it remains a plain fact that coins would save the Central Bank the cost re-printing low value notes (which are withdrawn and destroyed in as little as four months), inflation levels have to be sustainably low enough to allow then to circulate for a period, long enough for their economic cost to be justified. At the current level of inflation which is over 16%, coins are simply not a viable option.
While on the subject of coins and durability, it would be unfair to point out why they are undesirable in times of high inflation, without giving a view on the possible solutions.
This vexing problem of finding an appropriately durable denomination for the lower end during times where coins are not viable, is not new.
In September 2003, The Bank of Zambia took a bold stance and introduced notes made out of the, then, novel Polymer substrate for some of its High-Velocity Notes (K500 and K1,000 pre-rebasing), having recognised the immense cost associated with printing on a cotton substrate, only to withdraw the notes, and have them incinerated after a few months. These two polymer notes were now serving the role that coins had been intended for and it was imperative to make them durable. Interestingly, this happened at the same time as the introduction of two new High Value Notes (K20,000 and K50,000 – pre-rebasing).
At the time, very few countries had introduced the use of polymer, with the pioneers being Australia, Canada, New Zealand, Thailand and Papua New Guinea. Zambia became the first African country to use the substrate.y
The use of polymer in High Velocity Notes in Zambia did not last long, and the Central Bank soon reverted to the more traditional, though perhaps less appropriate cotton substrate.
Since then, use of the substrate has been introduced in many countries such as the United Kingdom, Russia, Nigeria and China. It’s expected that by 2030, a further twenty countries would have adopted it. Most of these countries have reasonable levels of inflation and are therefore able to incorporate coins into their denomination structures, and their environments are not as harsh as ours, yet the cost/benefit argument has been compelling. The driving rationale is that although polymer notes cost about twice as much as paper notes to print, polymer lasts about 4-5 times longer than paper ones. Some studies done in Australia suggest that they may even last seven times as long. The ordering authority could therefore expect, over time, to benefit in from cost reduction in the range of 60-80%.
In confronting the challenge of durability, the Bank of Zambia has commendably, opted to use a “Hybrid Substrate”, which would be a mix of a cotton-based substrate and a durable substance. The Bank will elaborate more on the composition, texture and features, but the expectation is cleaner and more durable notes compared to what has been observed in the recent past.
Indeed, there may be compelling reasons why the Hybrid may be preferable over other durable options. It has been observed that because Hybrids do not differ very much from the traditional cotton notes, they are more easily acceptable when introduced.
What is important is to keep seeking a strong understanding of developments in currency technology which would be best suited for the harsh environment that the Kwacha operates in and ensuring that a critical assessment of costs and benefits is undertaken in order for outcomes to optimal.
My last comment is on the timing of the changes in the currency denomination structure. I begin by emphasising that reviewing the structure of the currency is a routine central bank function which is necessary for the denominations in circulation to be in the right quantities by denomination, and to serve their intended purpose, again by denomination. A rule of thumb is that once the concentration of value in circulation exceeds 60% in the largest note, this should trigger the consideration of higher denominations. How the rest of the value distribution is arrived at is a technical matter and perhaps, not necessary for this note. The announced changes are therefore nothing new, and are merely intended to facilitate a necessary adjustment given the high level of inflation which has had a telling impact on the value of the Kwacha.
Chisha Mwanakatwe
The Author is a Retired Central Banker