Invest in Africa, AfDB chief urges investors at US-Africa business summit

In his latest television interview, Banque du Liban Governor Riad Salameh briefly mentioned the possibility of eliminating zeros from the currency (Lebanese lira). A key instrument of this operation is to raise the interest rate on the national currency to a record high, with the aim of encouraging residents and businesses to hold and use the local currency and to prevent dollarization.

To restore confidence in their currency, encourage and attract investors through bank deposits, or buy debt securities such as bonds and treasury bills, the process of suppression can be a prelude to the demise of a state. struggling and financially bankrupt (like Lebanon, which stumbled financially in March 2020) to the International Monetary Fund, international financial institutions and others.

Lebanon may not be alone in considering a currency renaming (redenomination), as Germany, the eurozone’s most powerful economy, did following a crisis financial and economic caused by its war and the devastation of its infrastructure. More recently, Iran and Turkey have implemented such measures and as a result, the purchasing power of their citizens has fallen, prices have risen and their currencies have collapsed leading to record inflation (2005).

It is a political measure that simplifies the use and management of the national currency by expressing it in a smaller comparable band. When inflation occurs, the same amount of monetary units are used to gradually weaken purchasing power, which includes: the prices of goods and services sold in the country; salaries and treatments; savings; retreats; loans; rents; and other committed payments; the exchange rate; and taxes.

It is possible for the government to overcome this difficulty with a conversion rate greater than 1 in most cases. There are several ways to describe “zero elimination”, but the most common is a multiple of ten, such as 10, 100, 1000 and so on.

Financial and accounting matters will be affected, but the impact on the economy is indirect, since the value of money and purchasing power remain the same. The real impact on the economy in partial and total terms will be nil, because the demand and supply of goods does not change. Following a global shift in net investment and government spending, and the net balance of payments from exports, the level of household consumption will not change.

As inflation and government concerns about the currency’s reputation and its impact on national identity play a role, some countries have decided to rename their currencies. Additionally, the name change has been linked to other political variables, such as government time horizons, ruling party ideology, governmental and parliamentary fragmentation; as well as the degree of inequality within society.

Inflation causes the value of money to depreciate at a rate depending on its speed; this in turn makes the goods and services that a previously purchased amount could buy seem more expensive than they actually were, and this is why the name change occurs.

This decision to rename its currency is influenced by many factors, including the sense of national identity, as well as national and international political considerations. Inflationary pressures, psychological effects, foreign exchange regulations and domestic politics are just a few of the possible causes, although this list is far from complete. Political stability is essential to the rebranding of the currency, and removing the zeros from its name will have a favorable physiological effect on the credibility of the currency, reducing inflationary expectations and improving the ease of transactions and calculations.

It can also be seen as a way for governments to demonstrate their authority over currency. People may start using other currencies, especially those with a higher reputation, if they lose faith in the original currency, which could have a psychological and economic impact on the government. After economic emergencies such as viruses and natural disasters (such as hurricanes and earthquakes), the central bank is unable to offer lending functions, which is why renaming processes are common. In some situations, this can help prevent high levels of inflation, if the name change is planned correctly.

The removal of zeros from the Turkish lira has minimized the technical and operational issues that emerge from using numbers with multiple zeros. As a result, monetary expressions have been simplified and thus it has become easier to manage records and conduct transactions. All in all, it was a must to switch to the New Turkish Lira because it can have a favorable impact on the reputation of the currency and also due to technical considerations. The removal of six zeros from the Turkish Lira, according to the Central Bank of Turkey, has helped the currency regain respect among Turkish citizens as well as internationally. People’s confidence in the Turkish Lira has been restored, leading to huge investments in financial instruments and the issuance of new Turkish Liras as a result of this process.

Hyperinflationary countries struggle to regain the confidence of domestic and foreign markets. More directly, this can be achieved through a stabilization program that uses exchange rate-based monetary targeting, improving the operational independence of the central bank, and repealing policies that were skewing the economy. In other words, if governments simply remove the zeros from the national currency and do not pursue comprehensive economic changes, they will have no impact.

Comments are closed.