December 2009, No. 54

Banking

After Mahmoud Bahmani, governor of the Central Bank of Iran, announced that three zeros would be removed from Iran’s national currency unit and then admitted that implementation of the plan has been postponed, speculations about cutting three zeros from the currency started. Those speculations which were focused on reduction of inflation made economic experts announce that the plan would not reduce inflation and if the government thought the plan would reduce inflation or prevent an increase in inflation rate, it would be much mistaken.

They maintained that removal of three zeros would only serve psychological purposes, but could not reduce inflation. Gholamreza Mesbahi Moqaddam, former chairman of the Majlis Economic Commission proposed that toman (one toman is equal to 10 rials), rather than rial, be introduced as the unit of the Iranian currency while admitting that chopping three zeros off the currency would not do anything to curb inflation.

He added that although the measure would be ensued by positive psychological effects, it would not reduce inflation. The MP noted that he had proposed removal of two zeros from the Iranian currency unit some 15 years ago, but the proposal had been disregarded. Mesbahi Moqaddam then explained about the experiences of various countries and said, “Following World War II, Germany slashed 14 zeros and France 6 zeros from their currency units.”

Referring to long-term inflation in the country, he talked about the necessity to increase the value of the national currency in comparison to other countries’ currencies. “This is important for us from an international point of view because when our national currency is compared to those of other countries, we should not feel humiliated. Per capita number of banknotes is 110 in our country while the figure for European countries is 10-12 and for regional countries, is about 15. This shows high exchange of banknotes in our country, which can be made up for by issuing various credit cards because using those cards, we could conduct 12 percent of transactions without using money.”

The MP continued by saying, “Introducing traveler’s checks issued by the Central Bank of Iran was my proposal which has practically led to removal of four zeros from the national currency and has been more effective than removing three zeros.”

Emphasizing on the need to change the currency unit from rial to toman, the Tehran lawmaker said that while people use toman in conversations instead of rial, it would be only superfluous to use rial in state statistics although in budget reports and official state reports, toman is practically used instead of rial. “Therefore, I believe that changing the currency unit from rial to toman and cutting three zeros from the national currency would be in the interest of our monetary system.”

He said the government should forward a bill in this regard, adding, “Although the measure would be ensued by positive psychological effects, it would not reduce inflation.”

Although Mesbahi Moqaddam maintains that removal of three zeros would do nothing to curb the inflation, member of the presiding board of Iran Chamber of Commerce, Industries and Mines has noted that cutting three zeros should be done in parallel to controlling the inflation. He says that slashing three zeros from the national currency should be done in parallel to accurate plans aimed at controlling the inflation.

Ebrahim Jamili adds, “Under conditions when we are facing economic recession, slashing three zeros from the national currency should be accompanied with inflation control. Otherwise, without suitable mechanisms to control inflation, none of the country’s economic goals would be achieved.”

Jamili has also emphasized on formulation of an overarching economic plan, saying, “Elimination of three zeros should be done in parallel to changes in the banking system. In many countries money turnover takes place more than 18 times, but it is 2-3 times in Iran. The speed of money turnover can pave the way for reduction of cost price of commodities. If our banks simply attended to banking activities and the situation of the capital at state-run and private banks was determined, it would certainly speed up money turnover in the country.”

Now, although the plan has been postponed according to governor of the Central Bank of Iran, complications of a high inflation rate and concerns of economists about a two-digit inflation rate has turned all eyes toward this plan as a remedy to high inflation and everybody is expecting the government to introduce mechanisms for reducing inflation before launching the plan.