As per the new law, four zeroes will be shaved off from the national currency. “Iran’s currency unit will be toman and each toman will be worth 10,000 rials and 100 qerans,”Article One of the bill dubbed Reforming Monetary and Banking Law reads.
Provisions of the law stipulate a maximum two-year “transitional period” during which both the toman and rial will be circulated in parallel and both will be legal tender, the parliamentary news agency ICANA reported.
After the transitional phase “[financial] obligations that were previously settled in rial, will be settled only in toman”.
The Central Bank of Iran is obliged to prepare the groundwork for implementing the new law within two years.
Parity rate of the new legal tender against foreign currencies will be determined based on the new currency system.
The law was ratified amid voices for and against. Galloping inflation and rapidly declining purchasing power, the incredible volume of banknotes in circulation, daily hassles of using large digits in financial transactions, tanking of the rial against all major currencies and popularity of the toman are seen as enough reasons for the switch by its advocates.
Opponents, including lawmakers and private sector leaders, have criticized the government for ignoring other economic indices and pushing for the toman that very likely will culminate in higher consumer price inflation.
Bad Time
Mehrdad Lahouti, a lawmaker who is opposed, underscored the already high and rising inflation rates and the “chaotic economic conditions”, warning that the confusion created by removing the zeroes will further push prices up.
Pointing to the ill-timed move and recalling that the issue was floated several times by previous governments, the MP said “this could have been undertaken at an opportune time and under stable economic conditions.”
Economic and financial analysts say a new currency format will have zero direct impact on the economy unless it is part of a comprehensive and sustainable effort to restructure the economy and improve economic management.
Despite acknowledging the compulsion to change the monetary unit, Taqi Kabiri, another opposing lawmaker, dismissed the urgency in passing the bill at a time when the government is unable to meet its basic expenses.
Kabiri argued that the move will add heavier and unwanted costs on the treasury as it will require printing billions of new banknotes and designing new software.
Addressing lawmakers in the chamber, CBI Governor Abdolnasser Hemmati rejected concerns that the measure would lead to inflation.
“We are certain that lopping off four zeros will not have any effect on inflation,” he said, arguing that “chronic inflation of the past five decades” is indeed the primary cause behind the move, not its effect.
Given the diminishing value and prestige of the national currency emanating from high inflation, Hemmati said, “the rial has lost its reason for being … and toman has become the norm.”
Given the monumental amount of money in circulation due to the tanking of the rial, Hemmati said currently 8 billion banknotes are in circulation, 5 billion of which are below 20,000 rials.
“By changing the monetary unit, we can mint coins worth 2 tomans, which in fact equals the current 20,000-rial banknote.”
The senior banker recalled that the government spends 4 trillion rials ($25 million) to destroy mutilated banknotes and print new ones.
He spoke about the declining prestige of the national currency among major world currencies, saying that one Iranian rial is worth no more than 0.000006 dollar.
While the idea of getting rid of zeroes is not new in the halls of power in Tehran, it has gained traction during the rule of President Hassan Rouhani, particularly after the national currency dived to unseen lows in the past two years.
The idea of lopping off zeroes from the national currency has been floated by senior officials for almost 16 years, but has been put on the back burner for more reasons than one.
Removing zeroes is not unprecedented in the world. The policy was successful in several countries in the past. Turkey, for instance is a successful model. It removed six zeroes 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 hyperinflation since 2003, getting rid of zeroes failed to produce the desired results.