Faced with surging inflation and a falling national currency due to harsh U.S. sanctions that were reimposed after the United States unilaterally withdrew from the nuclear deal with world powers in May, Iran is planning to remove four zeros from the rial, taking its current official exchange rate with the U.S. dollar from 42,000 to the more palatable 4.2. The official rate is meaningless on the street, however; in reality, the value of the rial is far less – this week, it was trading at 120,000 to the dollar on the black market. [...]
The redenomination proposal comes just over two years after a previous attempt on a smaller scale. In early December 2016, President Hassan Rouhani’s cabinet approved a measure aimed at removing one zero from the national currency, effectively introducing the toman as the new official unit. Officials emphasized that it was not an attempt at redenomination but merely an initiative aimed at easing day-to-day transactions. It was criticized as a costly and insufficient move, so the initiative remained in a state of limbo and was ultimately rejected by lawmakers in September 2018. [...]
But in addition to the currency crisis and inflation, the local political landscape is also different this time. There is much more cooperation between Rouhani’s administration and parliament in terms of reaching economic solutions. For months, parliament’s economic commission has been reviewing and gradually passing bank reforms that promise to deliver the biggest changes to Iran’s banking system in decades— including granting the CBI more independence. [...]
In 2005, neighboring Turkey took six zeros off its currency and redenominated the lira in response to an inflation rate of higher than 50 percent. The move was relatively successful because it was implemented in tandem with wider reforms. But Turkey’s 2018 currency crisis proved immensely challenging and again decreased confidence in the lira mostly due to a problematic banking system. Turkey’s central bank gained independence in 2001 in the aftermath of an economic crisis, but that hasn’t meant it has been fully free of government meddling.
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