Currency quick fix won’t solve Iran’s economic problems

Prompted by US pressure and deteriorating economic conditions, as well as by the Iranian currency’s loss of its purchasing power, the Iranian parliament has approved a bill to redenominate the country’s national currency, allowing the government to delete four zeros from the rial. The bill also changes the official Iranian currency from the rial to the toman, with 10,000 rials equivalent to 1 toman in the new currency. In August last year, the Iranian government introduced this bill to parliament for approval, with the previous Mahmoud Ahmadinejad government also proposing the same bill.

We are left to ponder why the Iranian parliament has approved the redenomination bill, at least for the time being, and how it will be implemented, as well as what its consequences and benefits could be.

We cannot address the approval of the bill to change the country’s official currency without linking it to the very fragile economic conditions currently facing the Islamic Republic. Iran is experiencing possibly its toughest economic conditions since the 1980-88 war with Iraq. The government and the ruling regime face two bitter challenges. The first concerns the dangerous fallout from the coronavirus disease outbreak, which has disrupted the country’s economic activities, affecting the incomes and lives of millions of Iranians. The second concern for the government and regime is how best to adapt to the challenges posed by the US economic sanctions imposed on the country two years ago.

The two challenges’ combined result is a bleak picture with exceptionally negative economic indicators. Iran’s national currency has lost more than 60 percent of its value during the past two years, recently falling to 161,000 rials to the dollar. The already massive budget deficit is mounting, despite austerity measures and enormous borrowing. The growth rate of minus 12 percent predicted for the end of this year is disastrous. Unemployment is estimated to reach at least 19 percent, while this year’s trade balance deficit is expected to hit $8.5 billion for the first time since 1988, amid a severe decline in foreign exchange reserves, according to The Economist Information Unit. Meanwhile, the average goods and services consumer price index grew by 37 percent, according to the Statistical Center of Iran.

Will the decision to redenominate the national currency solve or mitigate any of these problems? The simple answer is no. On the contrary, this move will be wholly counterproductive.

The main reason for this bill’s approval, without linking it to any pre-emptive measures, is to achieve psychological rather than economic objectives. In short, this move is a desperate effort by the Iranian leadership to reassure the public and assuage the mounting anger among the people, whose fury is growing due to the harsh and ever-worsening living conditions and soaring prices of the past two years.

The implementation of this redenomination policy requires the approval of Iran’s ruling clerics and a two-year preliminary period for the central bank to fully implement it.

It is true that removing zeros from the national currency will reduce the current difficulty in financial transactions and mitigate the burden of carrying massive wads of banknotes for even the most minor purchases. At present, 1 kilogram of tomatoes alone costs 64,040 rials. So the redenomination of Iran’s national currency will have a positive emotional and psychological impact, as the price of consumer goods becomes, at least nominally, cheaper than before.

Iran’s leadership is also hoping that the redenomination will deceive the Iranian people into believing that the currency’s value has become stronger and that it can now be used to purchase more items. This could reduce the panic of Iranians to abandon it and replace it with foreign currencies, which have become scarce and whose prices on the black market are increasing daily.

Those who support the redenomination policy claim that, to enhance the national currency’s value and reduce inflation, it is imperative to remove zeros from the currency. In fact, boosting domestic production and demand for the national currency via increasing exports would be more beneficial.

This means that, to really increase the national currency’s value, the economy needs to be geared toward boosting production. The government needs to create a domestic environment that helps increase foreign and domestic investments, encourages free competition, and strengthens the private sector. In addition, it must curb liquidity and adopt other prudent policies to strengthen the country’s economy in line with the requirements of the domestic situation.

However, if Iran’s leadership had implemented serious economic and structural reforms before this redenomination policy, the removal of zeros from the national currency could have brought about some desired economic benefits, as it has previously in some European countries, such as Italy. However, without any other pre-emptive reform measures and steps to revive the economy, it will achieve nothing.

The redenomination policy actually contradicts the Iranian leadership’s objectives, with the decision to remove zeros from the currency likely to have negative consequences and bring new challenges the government will need to address.

The first of the negative impacts is a possible rise in prices following the implementation of the new policy, with traders and retailers randomly re-evaluating the price structure for their goods and services or increasing their profit margins under the new currency. This is in addition to the cost that the government will incur in collecting the old banknotes, printing new ones, and modernizing banking systems.

Speaking about the new policy, Iranian banking expert Khashiar Jamalinejad warned that changing the national currency will impose new costs on the state budget and slow down the banking network, since it will necessitate the introduction of new banking systems and logarithms. In the meantime, he said, there are major shortcomings in the economic, educational, political, cultural, and administrative environments and structures that are necessary to apply this policy. Jamalinejad added that the Iranian economy does not seem ready to implement this ambitious plan in light of the current conditions of economic instability, and he urged the government to opt for other policies to counter inflation.

The main reason for this bill’s approval is to achieve psychological rather than economic objectives.

Dr. Mohammed Al-Sulami

Given all these factors, while it is possible the decision to redenominate Iran’s national currency could achieve positive, short-term objectives, it is more likely to inadvertently turn out to be a burden for the government and the Iranian people, especially if there are no effective policies to combat inflation, stimulate the economy, motivate local and foreign production, and confront the current economic problems.

These issues are nearly impossible to address without engagement with the global economy — a matter that requires sacrifices from the current regime. It would need to reorient its priorities toward rescuing Iran’s citizens and economy via effective policies, not through offering temporary, symbolic solutions whose superficial positive effects will quickly evaporate because the underlying causes of the problems remain unresolved.

• Dr. Mohammed Al-Sulami is Head of the International Institute for Iranian Studies (Rasanah). Twitter: @mohalsulami