Economy, Business And Markets

Redenomination: A Distant Memory

Redenomination:  A Distant MemoryRedenomination:  A Distant Memory

T he Central Bank of Iran (CBI) has recently announced it will restart printing Iran Checks–the unofficial upper echelons of Iran’s paper currency–after the parliament signed a decree allowing their reproduction.

Iran Checks are financial instruments which the CBI issues with the permission of the government to help money transactions. Iran Checks, although they are not actual currency, act as real money, with shopkeepers accepting them and ATMs issuing them.

Commercial banks in 2007 were permitted to issue Iran Checks with a maximum value of 500 thousand rials. Recently one million rial checks have begun circulating–much to the relief of the general populous. In 2008, the commercial banks were forced to stop printing the checks for a number of reasons and the Iranian Mint took over full control and release of the notes.

To avoid a hike in the money supply, the CBI stated it is required to freeze the equivalent amount in rials– to avoid an over-supply of paper cash. This is also a relief to many people, as small denomination notes are often dog-eared and joined together with sticky-tape.

Iran Checks remain a major source of physical monetary exchange within the country, moreover they remain the only sustainable large denomination note in circulation, and so by necessity people use them for most purchases.

Thus, to counter the over-supply of money, the central bank and other financially responsible authorities have pushed digital money transfers via ATM and online payment as an alternative to carrying large wads of cash. It is also a lot safer.

Digitizing the money-supply is advantageous as it helps with people’s day-to-day transfers, but there is another lingering problem even if money is transferred digitally, that is, galloping inflation. Yes this bugbear of Iran’s financial system has been with the country for decades. US sanctions imposed on Tehran over a nuclear dispute exasperated the situation from 2012 and it continues to the present day.

The Rouhani administration has done an a good job in curbing inflation, but nevertheless prices continue to creep on consumer spending.

 Cutting Zeros

The previous administration of Mahmoud Ahmadinejad proposed a radical policy of chopping the extra zeros off the rial and bringing it more in line with currencies without galloping inflation.

Although the project was well intentioned, it never saw the light of day during his presidency due to the fluctuating rial-dollar exchange rate. If he did attempt to implement it during the latter years of his reign, it would ultimately confuse people, annoy shopkeepers and in the end be a huge waste of investment due to the ever creeping prices.

The redenomination question was laid to rest in January 2014, when a CBI official said that the central bank had “delayed plans to revalue the Iranian rial, but the option remains on the table” Mehr news agency reported.

“The issue will be included in the central bank’s serious agenda as soon as the economic situation has improved and inflation reduced,” said Akbar Komijani, a CBI deputy governor.

The official added that the CBI understood that dropping the zeros was an important thing but not a priority. Around that time the CBI also floated the idea of renaming the Iranian currency.

In July 2011, it suggested names such as Parsian, Irani, Toman, Derik (Drachma) to in the parliament and on a public vote on their website. In the public vote, both “Irani” and “Toman” were the favorites. Neither is surprising as there is little love for the rial currently. In the case of the latter name, toman has been the de-facto unofficial currency in Iran for the past few decades, with people using it to the bemusement of foreigners. Each toman is 10 rials.

Although talk of redenomination has been put on the back-burner for the moment, it is likely once nuclear talks with six world power known as P5+1 have been concluded, and given further time to settle the fluctuating rial, the subject will rear its head again. If current projections are to be relied upon, it is likely the Rouhani administration would likely pick up the subject in another 18-24 months. What the name of the new currency will be is still a mystery.