Iran plans revamp of national currency

The Iranian Cabinet has approved a bill to make major changes to the national currency. Under the bill, the new currency would be called the toman (already the unofficial name of the currency, with 10 rials equaling 1 toman). The new toman would be worth 10,000 current rials. After this plan is approved by the legislative bodies — the Majles (parliament) and the Guardian Council — the government would start a two-year process of moving to the new currency in the hope that it would have an overall positive impact on the country’s economy. In the mentioned period, both currencies would be in place to facilitate the transition for various stakeholders.

The idea for such a change has been in place for years, but it had never been presented as a bill to parliament. The current plan was originally drafted by the Central Bank of Iran (CBI) for technical reasons, mainly to reduce the burden of printing and maintaining banknotes. CBI governor Abdolnaser Hemmati has said there are 7 billion banknotes in circulation, with 700 million notes being replaced every year. As so many bills are being produced annually, the printing of new banknotes is not expected to present a major cost to the economy. And in the medium term, the maintenance of banknotes will be more economical as there would be a need for an estimated 3 billion banknotes in circulation. Considering all the efforts in Iran to promote cashless payments, the burden may even be reduced in due course. It can also be expected that the design of the new banknotes would take into account new security measures to prevent forgery, which has been very common in Iran. The CBI also says that high inflation has led to a situation where the metal value of Iranian coins is higher than their nominal value; the CBI hopes that it can regulate the metal and nominal values in the new currency system.

Beyond the CBI’s technical considerations, there are also social and economic reasons that compelled the Iranian government to advance this plan at the current juncture. 

One reason that many political figures, including President Hassan Rouhani, have mentioned is that the society at large does not use the term rial. The word toman (representing 10 rials) has been used in Iran since the 1930s. Taking into account the high inflation of recent decades, ordinary people have even started to refer to 1 toman as being 10,000 rials, as a toman worth 10 rials no longer has tangible value. In fact, the lowest value coin in Iran is 50 rials, or 5 tomans. 

The proponents of the plan cite other advantages for the initiative, such as:

• Containing inflation: This is a controversial claim, because the plan could actually increase end-consumer prices due to the rounding up of product values in the new currency. 
• Reducing the burden of carrying cash.
• Saving on the printing of banknotes and minting coins.
• Positive psychological impact due to the appreciation of the value of the country’s minimum unit of currency.
• Facilitation of accounting, auditing and transaction processes.
• Reducing the need for bank checks, which have been one of the sources of petty crime in Iran. In other words, if there is less need to utilize bank or travelers checks, then the operation of petty criminals would be restricted in this field.

Nonetheless, many argue that the plan would have no real impact on inflation and would cost the economy a lot of money. There are also other disadvantages that opponents use to dismiss the plan. These include:

• The high cost of printing new and replacing old banknotes and travelers checks. This has already been dismissed by the CBI and it appears that the revamping of the national currency would save the government money in the medium term.
• Inflationary impact. The inflationary impact would depend on the overall economic and distributive policies of the government once the new currency is fully in place.
• Mismatch between previous accounting and auditing reports and new ones. This can certainly become a headache for many experts in their professional work.
• Inertia in society and the business community, especially smaller commercial units such as street shops. This is also a valid concern, but as the plan foresees a two-year parallel utilization of both currency systems, the negative impact could be contained. 

While one can argue about the overall impact of this plan, it is important to note that these types of policies would only have their desired effect if they are part and parcel of a comprehensive economic and structural reform process. The government should introduce the needed instruments to make sure that the vulnerable social classes do not suffer as a result of the process. Furthermore, improving the overall purchasing power of the society as well as tax relief for commercial units that would require an adjustment to their business practices are among important reforms that should be considered.

In fact, on Aug. 13, Masoud Khonsari, president of the Tehran chamber of commerce, said lopping zeros off the national currency would not produce the desired results unless the initiative is intertwined with structural reforms. The Iranian economy needs a long list of structural and legal reforms, especially with regard to improving the business climate for the private sector. Some changes are already taking shape, such as reforms to the tax system as well as customs procedures. Nonetheless, many other reforms would be required to facilitate doing business in the country, which would then pave the way for the planned changes to the national currency. 

One potential upside in the process could be the unification of exchange rates that could take place in parallel with the revamping of the national currency. If managed well, some of the feared inflationary impact that a discontinuation of the lower governmental exchange rate would have in store could be absorbed through the revaluation of the national currency. This would be a complex process, but it is feasible and would remove the multitiered foreign exchange regime, one of the main platforms for corruption and embezzlement. 

It remains to be seen whether the various decision-making organs will approve this plan. While society and the business community await the political debates around this initiative in the next few weeks, it is valid to argue that one psychological aspect will drive the agenda. Iranians are a proud nation and having a national currency where one needs to pay 120,000 units to get one US dollar does not set well with Iranian pride. Twelve new tomans to the dollar would sound much nicer — and one would hope that once the new toman is in place, the authorities would manage to induce some sustainability into the new exchange rate.