Iran mulling change in monetary structure

With inflation rising at 30 per cent, Mahmoud Ahmadinejad proposes reforms criticised as admission of the rial's devaluation.

An Iranian man exchanges new 800 rial coins, introduced to reduce the cost of printing paper money, from a currency trader in Tehran.

TEHRAN // The government and the Central Bank of Iran are considering a monetary reform package that would included denomination adjustments, or "cutting zeros", from the Iranian currency and possibly renaming the rial. The proposals are part of an economic plan by Mahmoud Ahmadinejad, Iran's president, to be implemented after the approval of the parliament. The plan to cut zeros from banknotes, a move often used by central banks in times of inflation, would take time to go into effect, said Hossein Ghazavi, the deputy governor of the Central Bank of Iran. He said the plan could be implemented only when the rate of inflation begins to decrease steadily and prices reach some level of stability or there would be no point in trimming off the zeros from notes. Iran's inflation rate has approached 30 per cent in recent months. The rise in inflation has greatly devaluated the Iranian currency. A 10,000 rial note now has the purchasing power equal to 200 rials, one 50th of its original value in 1973, when the note was introduced. "Inflation can be controlled by the government and the Central Bank through adoption of appropriate policies in macroeconomy and controlling the aggregate demand. It will take between two and three years, within the context of a five-year plan, to achieve this goal," Mr Ghazavi said. For the monetary reform plan to take effect, legislation by the parliament is required, but most of the members of the legislative body's economic committee have expressed support for reform. As for altering the currency, Gholamreza Mesbahi Moghaddam, chairman of parliament's economic committee, was quoted by Mehr News Agency as saying: "The experience of cutting zeros from the national currency in other countries in the past, such as Turkey and Germany that dropped off six and 14 zeros from their currencies, shows that this will not cause inflation and can even help to contain inflation." Some people, however, see the plan to cut zeros from the Iranian national currency as a sad admission of its devaluation. "Apparently, this has now become unavoidable as too many zeros create a lot of problems in transactions and accounting," said Ali Mozaffari, 40, an architect. Mr Ghazavi stressed that for a monetary reform plan to be effective in Iran the number of banknotes in circulation would have to be significantly reduced. Banknotes and travellers cheques are the most widely used means of payment in Iran as electronic banking in the country does not yet meet international standards. Due to legal problems related to over-drafting, cheques are less extensively used than in many other countries. Dinner for four at a fast-food restaurant in Tehran, for example, costs about 300,000 rials. Normally, a minimum of 15 banknotes is required to pay the bill in cash, but the number needed can rise up to 30, requiring people to carry large numbers of banknotes for everyday purchases. Debit cards can be used in some shops, and there are now about 450,000 point of sale (POS) machines in use, but payment by plastic card has yet not taken the place of cash payment in many places. To pay larger sums, many people use travellers cheques that come in much larger denominations than banknotes. Traveller's cheques worth 500,000 and one million rials that were introduced by the Central Bank in August are now in extensive use, and two million rial traveller's cheques are to be introduced soon. "With the introduction of the new traveller's cheques that can be used much like banknotes the problems associated with carrying large sums of banknotes in small denominations have somehow decreased, but this is not enough," said Hamid Haghdoust, 51-year-old businessman. "Traveller's cheques are no different than money. It is dangerous to carry them around. Electronic banking has yet to improve to allow for the transfer of large sums without having to carry them on one's person, whether the plans to change the currency unit are put into effect or not," he said. Some economic analysts believe changing the national currency unit or removing zeros from the notes is not going to create any significant improvement in the economic system of Iran other than facilitating small scale transactions. "We must rather move towards more extensive use of the fourth generation of money, ie, electronic money and electronic banking to make a real difference," said Saeed Laylaz, political and economic analyst and editor of the Sarmayeh newspaper. [e-mail]