Iran: Rial Revaluation Issue Returns

EghtesadOnline: The government on Wednesday approved a central bank proposal based on which four zeros will be shaved off and the national currency rial and the change from official rial to the popularly used toman.

News ID: ۷۴۸۰۶۸

04 August 2019

The Cabinet discussed the proposed bill in weekly meeting chaired by President Hassan Rouhani. To become law the bill must be debated in parliament.

Among other things, the initiative aims to improve the value of the rial, facilitate transactions, cut the cost of printing banknotes and coins and enhance the efficiency of the lethargic monetary system, the government website, dolat.ir reported.

Lopping of four zeros should simplify the workings and transactions in the stock market and banking system, says Mohammadreza Pourebrahimi, a member of the Majlis Economic Commission, according to Financial Tribune.

He said the bill will likely be approved by lawmakers because the “Majlis holds a positive view toward the proposal,” the parliamentary news agency ICANA quoted him as saying.

Galloping inflation and rapidly declining purchasing power, the ballooning volume of banknotes in circulation, hassles of using large digits in financial transactions, declining prestige of the tanking rial against all major currencies and popularity of the term toman are seen as other objectives of the oft-mentioned plan.

In light of the fact that the value of national currency has taken a drubbing since the spring of last year, the move will benefit the nation, the MP said.

Getting rid of the zeros is enshrined in the Islamic Republic Banking Bill, he recalled.

Following the Cabinet meeting, the government spokesperson, Ali Rabi’ee, told ILNA that the Cabinet has taken the initiative to render the national currency compatible with whatever is common among the people.

“Toman has a different connotation from rial and the people no longer use rial” in their day-to-day transactions,” he said.

Due to high inflation in the past decades, the rial, while the official unit, is rarely used in daily transactions. People prefer the toman instead.  (1 toman=10 rials).

Due to the bloody  1980-88 Iraq-Iran war, western economic sanctions and errant policies of successive governments, the economy has witnessed more than its share of ups and downs after the Islamic Revolution in 1979, causing the rial to fall incessantly.

Four decades when the revolution dismantled the monarchy one US dollar was hardly worth 70 rials. Today the greenback is sells for 120,000 rials!

Comparing inflation rates as per the Consumer Price Index in the last fiscal year (2018-19) with numbers reported half a century ago, the government website said in one earlier report that the index has grown 2,743 times.

This is while the biggest legal tender, the 500,000-rial ‘Iran Check’ has grown only 50 times in comparison to the biggest banknote (10,000 rial) of yesteryears.

Understandable Skepticsim

Economic experts and observers are pretty skeptical that the chopping off of zeros would have a positive impact on economic and monetary variables, viewing it largely as a cosmetic gesture that, at best, may have a psychological effect.

They say introducing a new currency format will have zero direct impact on the economy unless it is shown to be part of a comprehensive and sustainable effort to reduce inflation and improve economic management.

“The measure can be viewed from many perspectives. But it is crystal clear that if this is not accompanied by real economic reforms, it will be an exercise in futility,” the vice chairman of Iran Chamber of Commerce, Industries, Mines and Agriculture, Hossein Selahvarzi told ILNA.

Government and banking officials have at times concurred that the plan doesn’t aim to make any changes to macroeconomic variables, such as the purchasing power and galloping inflation.

“It is important to note that the move has nothing to do with inflation or purchasing power,” the government spokesperson emphasized on Wednesday.

In its official website, the government has looked into the possible effects of the measure on economic variables such as inflation, bank deposits and purchasing power, saying the effects would be dissimilar.

Lopping off zeros will not have any potential effect on the inflation rate. However, as adjusting to the new currency involves some rounding of numbers there are fears that some businesses and vested interests could misuse the move.

Bank deposits of the people and their purchasing power will not be negatively influenced by the redenomination is the official line.

Liquidity Connection

Regarding the influence of less zeros on purchasing power, the report said buying power, as a rule, is largely impacted by liquidity and its volume compared to economic growth.

The entire notion of fewer zeros from the fast tanking rial has appeared disappeared and reappeared time and again over the past 16 years but has never been implemented.

The plan was in limbo for about 10 years before it was refloated again during the tenure of former president Mahmoud Ahmadinejad, albeit to no avail.

In the Rouhani administration the plan reemerged in 2016 when his government proposed the currency's denomination from rial to toman as part of a Central Bank of Iran bill. The bill is still under review.

The idea, in its new form, was first floated in January by CBI Governor Abdolnasser Hemmati in a meeting with lawmakers.

The CBI has proposed two years as the transitional period for the currency transformation. After the gargantuan plan comes into effect, the toman will take the place of the limping rial as legal tender and all monetary transactions will have to be rewritten.