Central Bank Governor Mahmud Bahmani said the decision was made by the cabinet Sunday. He did not announce the new name of the currency, but said it would be published “soon” on the bank’s website.
Bahmani said it would take “at least three years” before the currency shift would take place. Back on April 20, Bahmani said it would take at least two years before Iran was ready to knock any zeros off its national currency. Ten days prior to that, Bahmani said the shift would take “one to two years.”
Bahmani gave no explanation for the constantly changing timetable.
He has, however, stuck with the intention to drop four zeros from the rial, converting 10,000 rials into one rial. He first announced the four-zero drop in April—changing from the three-zero drop that he announced in September 2009 after what he described as a long study by the Central Bank.
The shifting of implementation deadlines and the number of zeros to be dropped telegraphs considerable confusion within the Central Bank on what is really a rather minor policy issue with no impact on monetary policy. It begs the question of whether there is equal confusion on more important matters that could impact the economic health of the state.
Back in April, Bahmani said the shift from dropping three zeros to dropping four would give the rial parity with the US dollar. Right now, $1 equals about 10,500 rials. By shifting the decimal point four digits to the left, one dollar will cost 1.05 rials.
Bahmani failed to say why Iran would want the rial to have parity with a currency the Islamic Republic says is dying and is rapidly being rejected by the rest of the world. Three years ago, Ahmadi-nejad ordered all government agencies to calculate foreign exchange requirements in terms of the euro. But Ahmadi-nejad’s own budget continues to use dollar conversions and only a handful of government agencies state foreign exchange in terms of the euro.
Ahmadi-nejad started a vocal campaign against the dollar, calling it a weak currency. Perhaps not coincidentally, that was just after the US Treasury started its campaign to limit Iran’s ability to conduct transactions in the dollar.
The government has been talking about changing the national currency to get rid of the voluminous zeros ever since 2007 without ever actually doing anything about it.
The problem is that one rial will buy nothing. One rial is currently worth a tad more than 1/100th of a US cent. It takes 105 rials to make a single US penny.
The rial has dropped drastically since the Islamic revolution, from 70 to the dollar in 1979, to around 10,500 today.
Back in April, Bahmani said the name of the new currency would not change. He did not say Sunday why he had now changed his mind.
Bahmani said, “Some people think removing the zeros will weaken the national currency … but it will instead cut inflation. Removing four zeros will also facilitate trade.” But lopping off zeros is purely cosmetic and has nothing at all to do with inflation or the value of the currency. The main benefit of such a change is convenience. The public is no longer dealing with immense figures—millions, billions and trillions. A $100,000 house in Tehran is worth 1 billion rials.
If the rial indeed is configured to be close to a dollar, Iran will likely resurrect the dinar. The rial is officially divided into 100 dinars, but the dinar is now a relic recalled only by the very aged. The dinar effectively died with the gross inflation of World War II.
The rial was introduced in 1798 by the new Qajar Dynasty. In 1825, the Qajars changed the name to gheran. In 1932, the Pahlavi Dynasty switched from the gheran back to the rial, with the rial worth about 10 US cents of the day and divided into 100 dinars.
The Pahlavi rial slipped in value from about 10 to the dollar in 1932 to 70 to the dollar by the late 1950s. It then remained very stable—one of the world’s most stable currencies for two decades—until the 1979 revolution when it went into a sharp plunge.
The term rial (in various spellings) is currently used for the currencies of Brazil, Cambodia, Saudi Arabia, Yemen, Oman and Qatar.
Many countries shift the name of their currency when they lop off zeros and present the new currency as the end of inflation. Inflation, however, results from government policies, not the name of a currency.
Brazil, for example, used one new currency after another in the 1980s before creating the “real” in 1994 and simultaneously shifting its financial policies so as to end rampaging inflation.
Other terms that have been used for Iranian currencies over the centuries include the shahi, abbasi, naderi, dozari and toman. Most of those terms have monarchial connotations. Toman is in common usage, however, to mean 10 rials. It is the normal street term instead of rial. However, one toman is worth but 1/10th of a US cent.