Tyranny of numbers

The trouble with rial

Posted in General, Macroeconomy by Djavad on July 25, 2011

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.

10 Responses

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  1. Dr. Hamed H. said, on November 30, 2011 at 4:31 pm


    Just wanted to know if you are ok. It has been ages since you wrote another one of your commentaries. I hope the next one is fast coming up specially with many recent events economic or not.

    Thank you.

  2. tohid said, on August 28, 2011 at 8:08 am

    Of course it has some economic benefits. currently, about 60 percent of the “value” of paper money in circulation are 500000 rial travelers cheques while they are only about 5 percent of the total “number” of notes circulated in the hands of the public.
    but, when p2p inflation has crossed 27.5 per cent (SCI) and about half of the sources needed to distribute among people come from extra budget sources, so the redenomination – which is a policy usually implemented in a decreasing trend of inflation – seems to be a psychoecological operation rather than a pure economic decision: a – to send people on a wild goose chase in a two or three years money changing festival and b – establishing a monetary starting point in “this” government.

    • Djavad said, on August 29, 2011 at 10:08 pm

      I agree with your general point about not messing with currency re-denomination at this time of high inflation. I think the government has tabled the idea too. I do not hear about it anymore. As to the “festival” –an interesting choice of word–I am not sure if there is any fun in currency exchange when you are not making any money. Sooner or later, the government has to take the jobs issue seriously. It is unfortunate that everyone in Iran is focused on inflation. It is as if everyone if on fixed income, like retired people. Maybe that is how life on oil revenues feels!

  3. Smith said, on August 16, 2011 at 2:58 pm

    I agree with you here completely. But as has already been in the news, it seems Iranian government fully understands what it is doing since they had said the currency re-denomination will only begin 3 years down the road and not now. Currently as they said they are doing just a preliminary research on the subject. Besides this whole action is to be taken after subsidy program in place and after overhaul of Iran’s banking and economic system. So it is probably going to happen even later than 3 years, they are just preparing people for it. Though Parsi is not a proper name for a currency. It is too common place being the name of a language and also a nation. Currency name should be neutral, historical and with easy articulation. I have come to know Iran has never had any indigenous currency name during its long history except perhaps for Deric. But this problem should be solved since I believe Iran should rename the currency as well. The mere name of Rial must have lost its appeal and charm with people of Iran and most probably Iranians will never trust it once again. The currency idea is based on trust, and if this critical is not going to be there, the re-denomination will fail. Anyways, from what I have seen Iranian currencies (current Rials) are of very poor quality and in all probability there must even be a large counterfeit amount of currency in circulation too. Already there has been news about currency manipulations by a super power in order to undermine Iran’s economy. So Iran must also improve its currency technology as well, probably switching to polymer bank notes and comprehensive electronic banking system.
    I have now a question for you here. Do you think Iran would be better of to dispose alongside its currency its whole economic system and move to something more “exotic” and non-conventional considering Iran’s problems being also very unique. For example completely changing the monetary system from MMT to something else?

    • Djavad said, on August 29, 2011 at 10:00 pm

      Thank you for your comments. I have no particular problem with the name of the currency. Iran has much more serious problems it needs to tackle, such as unemployment. As to throwing away its economic system, I don’t know how it can. Economic systems evolve, and have their own dynamics, so governments can’t just decide to change them. I think there is a lot to be said about identifying bottlenecks and dealing with them. Right now, I think the problem is persuading the private sector to invest, a problem which has to do with imports competition (read oil revenues) and a poor investment climate.

  4. mahdi said, on August 15, 2011 at 6:02 am

    من دانشجوي اقتصاد نظري مقطع كارشناسي دانشگاه اصفهان هستم.
    به رشته ام هم خيلي علاقه دارم.هر چند كه ازدانشگاهم خيلي راضي نيستم.
    خيلي دوست دارم مثل شما يه اقتصاد دان بزرگ بشم
    ميشه من را راهنمايي كنيد

  5. کافی said, on August 5, 2011 at 7:13 am

    Dear Dr. Salehi,

    I agree with your main point here, but only I want to challenge your idea that “Taking the zeros out makes sense because of…”. I think that it is difficult to justify re-denomination based on the purchasing power of the money unit in terms of chewing gum or the appearing of #’s in Excel. These are not sound enough to justify such a vast revision in monetary and accounting system of a country with all the costs that you can imagine.
    It does not bother me too much that I have to pay 10^5 units of money to buy a chewing gum, because I pay in one piece of note anyway! As for Excel, you can easily resort to using scientific notation and the problem is gone!

    But, more seriously, I agree with you that it is not the proper time that we re-denominated, but neither I think it would be if we had really low and steady inflation figures. Re-denomination is like a luxury good, it is costly and does not pay back much in terms of economic performance. May be we should take into account its opportunity cost as well and do it only after we have dealt with much more serious problems and after we are wealthy enough to pay for such an extravaganza!

    • Djavad said, on August 8, 2011 at 10:30 pm

      Thank you for your comment. Taking zeros out will probably have to happen at some point. People have already do that on their own when they say 10 tooman and mean 10 million tooman. So, taking zeros out officially is only a matter of time.

  6. William said, on July 29, 2011 at 12:00 pm

    What’s the main concern of inflation during a re-denomination of currency? Wouldn’t it be easier like you propose for accounting principles to work with #s that are manageable, and would this bear any improvements in the money market? I’m wondering how long you propose they wait, because one issue is the “get to it later mentality” can often be a deterrent later on. Also, could this be a step in the right direction to managing the economy and debt more effectively, and hence getting inflation under control?

    • Djavad said, on July 31, 2011 at 3:23 pm

      Thanks, William, for your question. There is no reason why re-denomination should cause inflation, unless it is done badly and more currency gets into circulation. As to how long they should wait, the answer is as long as it takes to get out of the current inflationary phase. To the extent that the higher rate of inflation — 20-25% — that is raging now is the result of the subsidy reform program, it should be over within a year or so. But the aggressive redistribution that has accompanied the reform of energy prices may have its own dynamic and may keep inflation high for a while longer. It appears that the government is losing money in the bargain, that the money it takes (when it sells energy at higher prices plus what it saves by not paying the bread subsidy) is less than what it pays in cash to individuals. How exactly it is financing this deficit –by printing money or cutting on other expenditures, such as on investment — I do not know. If it is printing money, then it is causing inflation, and if it tries to protect the gains of the lower income people by paying more next year — more deficit financing –then inflation will last longer.

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