The Iranian government has adopted a plan to replace the riyal with the toman with four zeros removed, the second attempt by Tehran in this direction, after the government presented a similar plan to the Shura Council (parliament) in 2016, but it has not been passed yet rejected by The latter then. Implementing the measure would, in a way, help Tehran strengthen domestic and international currency confidence, facilitate financial and business accounts for individuals and businesses, and reduce the cost of printing banknotes. However, the impact on the exchange market seems to be short-lived, especially as it needs broader measures to address its long-standing multiple deformities.
New plan
Iranian government spokesman Ali Rubaie said on July 31, 2019 that the government had passed a bill to delete four zeros from the currency, the same measure already taken by many countries, including Turkey, against the backdrop of the deterioration of the value of its currency.
One toman is set to be worth about 10,000 riyals, according to a plan by the Central Bank of Iran, which he presented to the Iranian government and parliament in January. However, the implementation of this plan may take a long time, requiring the approval of Parliament and the Guardian Council, to become law after that.
The main reason behind the plan was the economic and financial pressures faced by Iran recently, following two rounds of economic sanctions imposed by the United States in August and November. The economy shrank by 3.9% in 2018, and is expected to sharply increase to 6% in 2019, according to IMF estimates.
In light of these developments, the value of the local currency has deteriorated in the recent period and the gap between the formal and informal exchange rate markets has widened considerably. The official value of the riyal is about 42 thousand riyals against the dollar, while the value of the informal market reaches more than 117 thousand riyals for the dollar. . As the gap widened, the country's inflation rate doubled to around 48 percent last July.
Several motives
Iran's tendency to replace its currency and omit several zeros can be explained by four main considerations: First, the limited effectiveness of the current monetary policy in containing the exchange rate deterioration. Among various measures, the central bank injected $ 5 billion into the exchange market from March to July. However, this did not prevent the riyal's decline against the US dollar in the recent period.
The second relates to the strengthening of local and international confidence in the currency, as deleting these zeros can relatively enhance local confidence and credibility in the value of the currency, and will enhance the global reputation for it, as it is likely to have a positive psychological impact in the dealers of local and international markets who will see the value A relatively stronger currency rather than its previous price of over tens of thousands.
The third is to facilitate financial and business accounts, as this step will make accounting and auditing of financial and business transactions easier, rather than settle with very large transaction values for both the private and public sectors and the public. "Some experts say this will not have any effect on inflation," Central Bank Governor Abdel Nasser Hemti said in January.
The fourth relates to reducing the cost of printing banknotes. When the exchange rate of the local currency to be launched improves in the future, the need to print more banknotes or new categories will be relatively low. Banknotes in the category of 5000 riyals up to 80% of their cash value (about 4000 riyals).
Weak effect
Replacing the riyal with the new currency is undoubtedly a complex and time-consuming process. Passing the bill through parliament, the Guardian Council, withdrawing old banknotes and printing new securities will take nearly two years, according to the central bank. The current conditions of the exchange market will remain the same for a long time.
Probably the initial positive psychological impact of short-term currency exchange will not contain the country's high inflation unless the authorities address the real causes of the depreciation of the local currency, notably the decline in foreign exchange liquidity due to US sanctions. US to zero Iranian crude oil exports to international markets.
Abnormalities
Iran's exchange market has been distorted for a long time, the most prominent of which is the same rigid and bilateral exchange rate regime. Central Bank authorities do not allow currency movements according to supply and demand mechanisms, i.e. they control exchange rate movements, which allows for a relatively stable official exchange rate that determines import prices and some government transactions, and another exchange rate that is widely traded in the market of licensed exchange offices. The unlicensed black market also determines, in most cases, the rest of transactions between individuals and companies.
Accordingly, the government and the central bank's tendency towards zeroing the currency appears to be limited in the face of exchange rate depreciation, unless further measures are taken that could contribute to remedying the current market distortions.
The cost of printing banknotes in the category of 5000 riyals up to 80% of their cash value, or about 4000 riyals
The initial positive psychological impact of short-term currency replacement will not contain the country's high inflation unless the authorities address the real causes of the depreciation of the local currency, most notably the decline in foreign exchange liquidity due to sanctions aimed at zeroing exports. Iran's crude oil for international markets.