7 Reasons Why A Country May Redenominate Its Currency

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The core reasons why a country might redenominate are to fight high inflation, to simplify accounting, for political reasons, to boost investor’s confidence, to enhance pegging, and to show that a form of monetary reform.

In 2007, Ghana redenominated its currency due to inflation. In 2009, the Zimbabwean Dollar was rebased due to hyperinflation.

It is the same in many countries from Europe to Africa,  most of the countries that have redenominated their currencies mostly hinged on inflation and breakup.

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This post explores the reasons behind currency redenomination, advantages and its challenges with the list of countries that have rebased their currency in the past.

What it means to redenominate a currency

Rebasing in an act of changing the face value of a currency. Rebasing is usually done by the Central Bank of a country when a currency experiences significant inflation and nominal values become unmanageable.

Does rebasing change the value of a currency?

Experience from countries that redenominated their currencies have shown that such policy doesn’t really alter the purchasing power of the currency, rather it standardizes its presentation to make transactions and accounting more manageable.

Example:

If a country decided to rebase its currency by a factor of 100:1, this means that banknotes previously valued at 10,000 units would now be denominated as 100 units. Economic analysts around the world do not have the same view about rebasing a currency. Most of those who do not love the idea believe that it is purely cosmetic does not affect the underlying economic fundamentals and does not change the global exchange value of the currency.

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Reasons why a country may redenominate its currency

Hyperinflation:

Before Zimbabwe re-denominated the Zimbabwean dollar, citizens needed to carry the local currency in a sack of bags to grocery stores for purchases.

So, if everyday items cost millions of units of currency, it becomes difficult for consumers and businesses to conduct everyday transactions. In such a situation rebasing may become inevitable.

To simplify accounting:

Redenomination can make calculations easier, facilitate cash transactions, and simplify accounting processes. It can also help in producing coin and note denominations that are more practical for everyday use.

Psychological impact:

High nominal prices, even if not resulting from real value changes, can deter consumers. Redenominating can make prices appear more “normal” and can boost consumer confidence even if in a real sense, that doesn’t change the real value of the currency. Ghana is a typical example.

Boosting investor confidence:

A country may choose to redenominate its currency to signal to foreign and domestic investors that it has taken steps to stabilize its economy, even if the act is mostly symbolic.

Modernization and reforms:

Redenomination can be part of broader economic reforms, such as the transition from a planned economy to a market-driven one.

Political reasons:

A new government or regime might redenominate the currency to show a break from the past and to project a new beginning or direction for the country.

For instance, the rumor about the Naira re-denomination emanated from the fact that the administration of Bola Tinubu has rolled out several economic and monetary reforms since the assumption of office. Some of the monetary reforms include the floating of Naira and the unification of the exchange rates (which we earlier explained here). Only time would time if Nigeria will be re-basing its currency.

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Currency pegging:

If a country decides to peg its currency to another (like the U.S. dollar or Euro), it might redenominate to make the conversion rates more straightforward.

Again, Nigeria is another typical example here, it doesn’t want $/N to go beyond a certain rate, yet it wants the market – demand and supply – to be the rate determinant.

Disadvantages of currency rebasing

Transition costs:

The process involves significant logistical and financial costs. These include the printing of new currency, recalling old currency, adjusting ATMs, reprogramming electronic systems, and launching public education campaigns.

Temporary economic disruption:

The period immediately after rebasing can see disruptions in the marketplace. Businesses need to adjust prices, update accounting systems, and train staff, which can lead to short-term inefficiencies.

Public confusion:

If not communicated effectively, people might misunderstand the change, leading to pricing errors, misinterpretations, or even panic.

Loss of historical comparability:

Financial and economic data prior to the rebasing can become harder to compare directly with post-rebasing data. This might complicate economic analyses and forecasting.

Potential for exploitation:

Unscrupulous businesses might use the confusion during the transition period to hike prices under the guise of rebasing, leading to potential inflationary pressures.

Perceived devaluation:

Even though rebasing doesn’t change the actual value of a currency, the public might perceive it as a devaluation, which could undermine confidence in the currency and the economy.

Misinterpretation by foreign observers:

International investors and stakeholders might misinterpret rebasing as a sign of economic instability or lack of fiscal discipline, especially if the rationale and process are not communicated clearly.

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Dependence on broader economic policy:

If rebasing is seen as a mere cosmetic change without accompanying substantive economic reforms, it might not yield long-term benefits and can even backfire by eroding public trust.

Potential for hoarding:

In some cases, the public might hoard old currency denominations, especially if they mistrust the rebasing process or believe that old notes might have value in the future.

Countries that redenominated their currencies

Below is a list of currency redenominations and the year it was implemented:

  • Poland: 1924
  •  Hungary: 1946
  • Germany: 1923
  • Yugoslavia: 1994
  • Nicaragua: 1991
  • Bolivia: 1985
  • Peru: 1991
  • Georgia: 1995
  • Angola: 1999
  • Turkey: 2005
  • Ukraine: 1996
  • Argentina: 1993
  • Ghana: 2007
  • Brazil: 1994
  • Uzbekistan: 1994
  • Uganda: 1987
  • Mauritania: 2008
  • Mali: 1984
  • Zimbabwe: 2009 (fourth time)
  • São Tomé and Príncipe: 2008
  • China (Republic of China): 1949
  • Democratic Republic of the Congo: 1993
  • Venezuela: 2021 (fourth time of re-basing)

Is Nigeria planning to rebase Naira?

In September 13, 2023, the Central Bank of Nigeria (CBN), debunked a rumor that it was planning to redenominate the Naira.

A report was circulating on social media that the apex bank was planning to make $=N75, in what has been described as re-basing.

At the time CBN made the disclaimer, a US Dollar was N775 at the official rate, which is known as I & E Window while it closed at $/N950 at the parallel market.

If Nigeria plans to rebase, it means the country will be knocking out two or dropping two zeros from the currency or moving into two decimal places to the left, which will consequently revive coins back to circulation.

At the time of this publication, Nigeria has debunked plans to rebase, but hyperinflation continues to knock the majority of its citizens to extreme poverty.

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