Economy, Business And Markets

Prerequisites for Nat’l Currency Reforms

Prerequisites for Nat’l Currency Reforms Prerequisites for Nat’l Currency Reforms

The plan to cut zeros from the Iranian national currency—the rial—has been deliberated by the Central Bank of Iran for sometime now. The policy was successfully initiated by several countries in the past: Turkey, for instance, lopped six zeros from its lira in 2004 as a way to say goodbye to decades of high inflation.

Pundits in Iran have welcomed a similar act, saying that revaluation of the rial is imperative under the current circumstances. They mention the expensive conditions of the economy as well as the exorbitant cost of printing money as reasons for removing at least three zeros from the currency.

Mohammad Hadi Mahdavian, former economic deputy at the CBI, says since banknotes are an essential component of everyday life, the government should inform the citizens in advance and mentally prepare them for such a move.

“This is one way to prevent psychological shocks,” he wrote in an article published on the Banker news website.

Mahdavian rules out claims that currency revaluation would have inflationary effects, saying that the worries about inflation hike involve the “timing” of the revaluation.

“Although this temporal anxiety is feasible, emergency decisions have defied this “time” element in the past and besides, it is always possible to prevail over “time” by adopting judicious and comprehensive policies,” he added.

“Hence, the timeline for this project should be practical, and on the other hand, it should be noted that “money” is only an arbitrary instrument whose number of zeros has no direct bearing on daily transactions.”

 Dos and Don’ts

One sticking point in the way of currency reform—or any other reform—has been a holistic approach that stipulates any single reform should come in tandem with correlative improvements in other sections of the economy. But according to Mahdavian, that should not always be the case.

“Freeing the economy, privatization, curbing inflation and economic stability could all be preconditions for currency reform but we may never have all these constituents ideally together,” he contended.

“Even if one intended to take on the task of freeing the economy, the question would be raised: where are the other elements?” he asked. Mahdavian countered the view that advocated printing larger denomination banknotes, saying that the central bank had tried this policy in the past and all it got was an epic disaster.  “Back in 2008 the CBI took away banks’ checks and published its own checks, resulting in huge debts being incurred by banks to the CBI,” he complained. “A portion of the country’s financial woes could be traced to this phenomenon but in countries, where currency reform was initiated, liabilities are shared between the state and banks.”