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Iran plans lopping zeros off currency
Published in The Saudi Gazette on 02 - 09 - 2008

Iran is considering lopping three to four zeros off its currency, a top official said Monday, in an apparent effort to fight out-of-control inflation that many critics blame on the country's president.
The governor of the Central Bank of Iran, Tahmasb Mazaheri, told state run radio that monetary experts are studying three options: Cutting three zeros off the rial, cutting four zeros, or boosting each rial's value to one-hundredth of a gram of gold, or about 2,500 rials at current rates.
“We are studying all these three options,” Mazaheri said on state-run radio.
The Iranian rial is now traded at 9,600 rials to one US dollar. That compares to 70 rials against the dollar in 1979, the year an Islamic revolution toppled the pro-Western Shah Mohammad Reza Pahlavi.
In June, Iran's government put the inflation rate at a whopping 26 percent. Independent economic experts say the actual inflation rate is even higher, at more than 30 percent. Prices for vegetables have tripled and housing prices have doubled since last summer.
The sharp rise in inflation has provoked fierce criticism of President Mahmoud Ahmadinejad - not only from his reformist opponents, but also from senior conservatives who helped bring him to power but now accuse him of mismanaging the economy. The currency proposals are seen as an effort by the central bank to reassert control over the country's monetary supply from Ahmadinejad and supporters. Critics blame the president for unwisely investing Iran's oil windfall and pressuring banks to lower interest rates, leading to the inflation.
But private economists say lopping zeros off the currency won't resolve the underlying economic woes, unless the government also adopts measures to boost production and move toward liberalization and a market economy.
“The solution to contain inflation is economic liberalization, absorbing foreign investment and boosting production,” said economist Morteza Allahdad in Tehran.
The central bank's vice president, Hossein Ghazavi, had told several newspapers earlier this week that a special committee had already been set up to study the proposed currency reforms. In those interviews, Ghazavi acknowledged a 10,000 rial note now has the same purchasing power as 25 rials did three decades ago.
Mazaheri, the bank's governor, noted that the use of coins in Iran has become irrelevant because of the rial's low value. “If anybody wants to spend coins, he or she has to carry a kilogram of coins (to purchase food),” he said.
Mazaheri set no date for the currency reform but said the study would take at least a year before the bank could come up with a clear proposal. Any currency reform plan would need parliament's approval.
In recent weeks, Iran has issued higher-denomination notes to try to ease transactions, which can be complicated and time-consuming with smaller-denominated bills. The central bank issued 500,000 rial and one million rial notes that carry the figures 50 and 100 on their backs, prompting speculation that the rial might lose four zeros.
Both conservatives and reformists have blamed high inflation on Ahmadinejad's mismanagement of the economy.
Top conservative cleric Ali Akbar Nateq Nouri, a confidante of Iran's supreme leader, warned Saturday that Ahmadinejad's economic policies threaten to keep Iran from its goal of becoming a regional superpower by 2025.
Three years ago, Iran embarked on a 20-year plan to become a regional superpower and a leader in technological and economic know-how. In particular, the plan is focused on development in nuclear technology, science, industry and education.
The high inflation is blamed mostly on a huge increase in liquidity, caused by oil revenues' impact and Ahmadinejad's insistence on lowering bank interest rates, say independent economists. The central bank privately opposed his efforts to lower rates.
Iran earned around $80 billion from crude oil exports last year. Ahmadinejad's government converted most of that into Iranian rials and injected it into the country as loans, often to political favorites, some critics say.
Many economists had warned that such policies would lead to inflation, but they view fixes such as removing zeros as little help.
Mohammad Tabibian, an Iranian economist, said bringing discipline to monetary policies is the only true solution.
The troubled African nation of Zimbabwe drew attention to its chaotic economy this summer when it slashed 10 zeros from its currency. Private financial institutions say Zimbabwe's inflation rate was an astonishing 12.5 million percent in May and estimate it has climbed higher since.
Although Iran is less troubled, many people there, like in Zimabwe, have attempted to hedge by putting money into outside accounts in dollars or euros.


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