Structural Reforms First, Rial Revaluation Later

EghtesadOnline: Head of Tehran Chamber of Commerce, Industries, Mines and Agriculture says lopping off zeros from the national currency will not produce the desired results unless the initiative is intertwined with structural reforms.

News ID: ۷۴۸۱۷۷

14 August 2019

Addressing the TCCIM  board of representatives Tuesday, Masoud Khansari noted that restructuring macroeconomic variables is a prerequisite if the measure is to deliver.

The government last week approved a central bank proposal based on which four zeros would be shaved off the rial and the legal tender will be changed to the commonly used ‘toman’.

To become law the bill must be endorsed by the parliament, according to Financial Tribune.

Khansari pointed to the galloping inflation as one of the key economic variable, which if not harnessed will render the whole plan futile.

If chronic inflation continuesd, more zeros will be added to the currency over time.

“If inflation is at 30%, it means a zero will be added to the prices every three years,” ISNA quoted him as saying.

Comparing inflation rates as measured by the Consumer Price Index in the last fiscal year (March 2018-19) with numbers half a century ago, the index has grown 2,743 times.

According to the latest report by Statistical Center of Iran, the inflation index witnessed a year-on-year increase of 48% in the Iranian month to July 20 compared to the same month last year.

While underlining the need for meaningful economic reforms, Khansari commended the potential plus side of the plan in easing and streamlining financial transactions.

“The plan can have a positive outcome in that the people no longer use the rial (as monetary unit) and toman is the dominant unit. ”

Holding a similar view, government and banking officials too have concurred that getting rid of zeros does not intend to make deep changes in macroeconomic variables, such as improving purchasing power and taming inflation.

The government says the initiative aims to revive the prestige of the tanking rial, facilitate financial transactions, cut the cost of printing banknotes and minting coins and lift the key financial sector from its long slumber.

The idea of lopping off zeros from the national currency has been floated by senior officials for almost 16 years, but has been put on the back burner for a variety of reasons.

Threat of Unbridled Inflation

Rating the success of similar plans in other countries and taking into account the present economic conditions in Iran, an economist warns that removing zeros off national currency runs the risk of high inflation.

Recalling the rising inflation in Iran over the past months, Sajad Barkhordari, a faculty member of Tehran University, says under the present circumstances implementing the plan is ill-advised.

He pointed to the possibility of rounding numbers when the currency unit changes (from rial to toman), recalling that in such occasions the prices are always rounded to higher digits.

This gives rise to fears that some businesses and vested interest could abuse the situation for personal gain.

“Lopping off zeros in the present climate would pose a huge risk,” he said, recommending those in charge to take extra caution and look at the bigger picture.

“The government should have a precise assessment of its administrative capabilities. It should draw on the successes and failures of other countries”.

Removing zeroes from the legal tender is not unprecedented. The policy was successful in several countries in the past. Turkey, for instance is a successful model. It lopped six zeros from the lira in 2004 as a way to get rid of decades of high inflation.

However, in other countries like Zimbabwe, which is grappling with high inflation since 2003, getting rid of zeroes failed to produce the desired results.