The trouble with rial
Iran’s currency, the rial, is about to change if not disappear altogether. Iran’s Central Bank is seriously considering taking 4 zeros out of the embattled currency, and even changing its name, perhaps to something Persian sounding like parsi. Neither of these two actions, if they come to pass, deal with the real trouble with rial. I am all for taking the zeros out, and could go along with the name change if that would help people forget that the new rial is the old rial 160 times less valuable (compared to 1977).
Taking the zeros out makes sense because of the sheer difficulty of working with a currency one thousand of which cannot buy you a chewing gum. Iranian national account data show up in Microsoft excel as a bunch of # signs because the program can’t fit the numbers in its regular cell size. Turkey took out 6 zeros out of the Lira in 2005, and did not suffer any adverse consequence. The name change has less to recommend it. Parsi, the name that apparently has won the Central Bank poll, sounds awkward for a word people will be repeating all day because of its long syllable, but then it might just be able to chase out the word Iranians (mainly those abroad) use for our language– Farsi. They never hear any Germans say “I speak Deutsch,” but they prefer to say that they speak Farsi instead of Persian).
But, more seriously, is this a good time to re-denominate the rial? The answer is no. Re-denomination is not something a country can do very often, so it is better to wait until high inflation is behind us. In 2005, when Turkey re-denominated its currency, it had reduced its inflation rate steadily from over 100 percent in 1994 to less than 10 percent in 2004. And, more importantly, it was able to keep it there. Iran’s inflation at this time is surging, not falling. Inflation did reach below 10 percent last year temporarily, but is now running at over 20 percent, and no one is sure when it will peak. Until the inflation pressures arising from the subsidy reform have abated, changing the currency unit can wait. It is best to save this last arrow for a time when tranquility is in sight, which could be a while given the many sources of uncertainty that fog our vision of the future of Iran’s economy, including international sanctions.
Added to the fog is the government’s own decision to freeze the release of new economic data. We do not know what is the rate of economic growth, inflation, or unemployment. If the powerful head of the Parliament Research Center is complaining about lack of access to data (link is in Persian), you can imagine the situation for the rest of us.
The immediate trouble with rial is the rapid printing of money, which has been the instrument of choice to finance budget deficits in the past. Is the Central Bank talking about a new currency because the government is finally gaining a handle on its obligations? There is no way to tell. There is fear that the money it is collecting at the pump and from its subsidy free gas and electricity bills are not enough to pay out the cash it has promised. So, there is fear that more inflation is on its way. Hopefully, these fears are unfounded. But, with lack of transparency over basic indicators and the budget numbers, economic actors are not able to see the light at the end of the inflation tunnel even if we have already cleared it.
Rial’s troubles may not end soon, and certainly not until macroeconomic stability returns in the aftermath of the subsidy reform program. When it does, to make sure that a decade later we will not be looking to drop more zeros from the currency, future governments should keep follow the rules that they have known all along: that oil income should not be spent every time it surges, that improvements in living standards should follow increase in productivity and not redistribution, and that the government should focus on its main mission to build the infrastructure of productivity — in health, education, and communication. Making cash transfers to help the subsidy reform succeed was a great idea, but it should not become the main business of the government of a country in which millions of educated youth are unable to find their first job.