January 25, 2019
The Central Bank wants to drop four zeroes from the rial as quickly as possible, making 10,000 rials today the equivalent of one rial tomorrow.
The change, if approved by the cabinet and the Majlis, will return the rial close to the value it held against the US dollar when Reza Shah replaced the qiran with the rial in 1932. At that time, $1 was worth 17 rials. Now one dollar is worth about 110,000 rials. Dropping four zeros would make $1 worth 11 rials.
Central Bank officials and Majlis deputies have been talking about dropping some number of zeros for more than a decade, but in the end have done little more than talk. In 2016, the cabinet approved a plan to cut one zero off the currency and change its official name to the toman, making official the term Iranians have long used for 10 rials. But the Majlis has never acted on that proposal.
Active opposition to dropping any zeros has come from some hardliners who have argued that dropping zeros would only increase inflation, despite economists telling them repeatedly that there is no relationship between inflation and the number of zeros, and that inflation is the result of mismanagement of the currency.
Abdolnasser Hemmati, who became governor of the Central Bank a few months ago, told the state news agency January 6, “A bill to remove four zeros from the national currency was presented to the government by the Central Bank yesterday and I hope this matter can be concluded as soon as possible.”
The initial reactions in the media, both Conservative and Reformist, were generally negative. Many said, correctly, that the change wouldn’t halt inflation—but the Central Bank has never suggested it would.
Deputy Mohammad-Reza Pur-Ebrahimi, chairman of the Majlis Economy Committee, tried to parry the critics by emphasizing that the goal of dropping zeros was not economic, but just to simplify calculations and business transactions.
Hemmati said it would take about two years to complete the shift. He did not say how the currency would be dealt with before new notes could be printed. In most countries that drop zeros, the old currency continues to be used for months with everyone just mentally pushing the decimal point to the left.
However, he said the dropping of the four zeros would not be done until after planned banking reforms have been completed.
Hemmati also did not say anything about the name of the currency. Many countries change names when they shift zeroes. But others keep the same name. In 1960, for example, France dropped two zeros and referred to the new currency as the “new franc” and the previous one as the “old franc.”
Hemmati dismissed talk about the dropping of zeros having an impact on inflation.
Dropping zeros has no impact on the value of a currency. Its purpose is simply to make the currency easier for the public to deal with. To halt inflation, new policies must be adopted. In 1923, Germany’s currency went from 2,400 marks per dollar to 4,210,500,000,000 (4.2 trillion) marks. Germany drastically changed its currency policy and at the same time dropped 12 zeros, halting the inflation spree overnight.
More recently, the bottom dropped out of the Zimbabwe dollar in 2008. The country even printed a bill worth 100 trillion Zimbabwean dollars. In early 2009, the country simply abandoned its own currency and allowed foreign banknotes to be used, which continues to this day.
