TCCIM Examines Wisdom of Currency Redenomination

EghtesadOnline: In a comparative study the Economic Research Department of Tehran Chamber of Commerce, Industries, Mines and Agriculture has probed the experience of currency redenomination in other countries and the context within which the policies were implemented.

News ID: ۷۴۸۲۴۳

25 August 2019

Referring to the rial revaluation plan on the government agenda, the study points to similar decisions by other countries and says “the policy does not necessarily produce the desired results. Its success or failure is contingent upon the groundwork (before and after) for enforcing the plan”.

It said such plans have been successful in countries where governments have implemented comprehensive policies to overhaul the economy prior to embracing the redenomination strategy.

Moreover, in these countries corrective policies have been maintained by implementing a “stabilization program” years after enforcement of the redenomination plan, Financial Tribune reported.

This is while in countries saddled with a variety of economic crises like hyperinflation or huge budget deficits, the results have been largely negative.

Currency redenomination has been seen in approximately 50 countries so far.

TCCIM says currency revaluation has twin effects both domestically and internationally.  Many countries adopt the policy because of its psychological effect on the people.

On the international stage, nominal value of the new currency and the accompanying facial prestige against foreign currencies is crucial.

The report underlined the correct timing and technical paradigms as key to the success of such policies.

Turkey and Poland

Turkey is one example. It lopped six zeros from the lira in 2005 as a way to successfully escape decades of high inflation. It succeeded to get out of the crisis with the help of structural reforms and stabilization programs.

The country had suffered from persistently high inflation in the last three decades of the 20th century. Average inflation in the 1980s was 50% and reached nearly 80% per year in the 1990s.

Ankara undertook a stabilization program endorsed by the International Monetary Fund.   At the core of the program were structural reforms that were expected to heal perennial problems of the Turkish economy.

Reforms covered public sector reform, improving the banking system and liberalizing private sector markets.

The program was followed by strong economic growth in the middle of the first decade. GDP per capita increased and living standards improved. Inflation of the declining order and in 2004 prices went up 9%.

For the first time since 1970, Turkey’s economy achieved single digit inflation growth.

After stability in macroeconomic variables, the Turkish central bank kept a firm grip on reforms and the government concentrated on controlling expenditure and raising taxes.

The country was later committed to abiding by European Union standards with regard to financial discipline and power and independence of the central bank.

The report says that removing zeros from Turkish money was successful only when it was accompanied by efficient corrective measures.

Another successful example is the case of Poland. It too lopped off four zeros from the zloty in 1995.

The country suffered 35.3% inflation two years prior to the currency redenomination before reducing it to the single digit (7%) in 1995.

Poland tried to implement the tenets of market economy for years before getting rid of the unwanted zeros.

Examples of Failure

TCCIM referred to negative outcomes of currency revaluation policy in Russia, Argentina and Brazil.

The policy in Russia was implemented in 1998 when the country removed three zeros from the ruble, aiming to boost the national currency and avert capital flight.

The initiative flopped and was blamed on years of recession and negative economic growth of -5.3%.

Moreover, the measure took place in a rather short time with people and banks barely able to adapt to the switch.

Both Argentina and Brazil tried but failed to change the face value of their legal tender. The main drawback of the polices of the two Latin American countries was the fact that they implemented the risky policy during a period of hyper inflation.

Iran’s Context

The idea of removing zeros from the rial has been floated several times in Iran over the past years. This may come true during the two years remaining in President Hassan Ruhani’s tenure. His government drafted a bill to this effect and sent it to the Majlis on Wednesday to be debated.

As per the proposed bill, four zeros will be shaved off the national currency and the monetary unit will switch officially from the rial to the commonly used toman.

The government says it is pushing the plan to lift the value of the rial, facilitate monetary transactions, cut the cost of printing banknotes and coins and enhance efficiency of the lethargic financial sector.

Due to the very reasons mentioned in the report, there are voices of concern that lopping off zeros does not have any positive impact on the economy and people’s livelihood. The policy imposes unwanted cost on the struggling economy, opponents say.

The head of TCCIM, Masoud Khansari, insists that the plan will not produce the desired results unless it is intertwined with structural reforms.

Although recent statistics indicate signs of gradual improvement in some economic indices, the country is still grappling with the high inflation rate of 48% and recession due to the harsh economic sanctions imposed by the United States.