Currency Reform and Redenomination of Iranian Rial

Currency reform and redenomination of Iranian Rial have long been at the center of policy discussions within the economic decision making institutions in Iran. The core of the issue is that in countries with high levels of inflation, or even with moderate inflation but over longer periods of time, the purchasing power of national currency and the currency’s value against other currencies falls so dramatically that makes the zero dropping of national currency and the introduction of a new currency unavoidable. The undesirable choice of zero dropping and redenomination of currency stems from the fact that persistence inflation usually drops the value of currency to an extent that the lower units of the national currency as 1/100 of the major unit become absolutely irrelevant in market transactions. Moreover, in some instances the deterioration of value of the currency is so acute that public select to ignore one, two, or even three zeros of national currency and round the values up or down in the day to day transactions. It also happens that the deterioration of national currency makes it economically profitable for speculators to collect and melt coins as the intrinsic value of coins exceed the nominal value and the purchasing power of coins. There is an added factor in some developing countries for which the enormous quantity of notes in circulation makes it highly costly, if not impossible, for the central banks to collect and destroy the obsolete notes and substitute them with newly issued currency. There are other accounting, book-keeping, price-labeling, and banks’ software and payment difficulties that make the zero dropping operation an urgent need in the country. The picture that was depicted has been actually experienced by so many countries over the post world-war II period. Since 1960 at least 50 countries have implemented redenomination plans, some of them involved in more than two or three redenomination experience, in total involving more than 80 cases of zero dropping and currency reform. To reestablish a stable national currency an articulate study needs to be carried out to address and resolve some major issues like the number of zeros that are to be dropped, the period of parallel circulation of the new and the old currency, the denominations and the amounts of each denomination of the new currency, and too many other accounting, software and hardware issues. Moreover, an information campaign and public relation program should be designed and put into operation to familiarize public with different aspects of currency substitution as well as to anchor inflation expectation as the plan may cause uncertainty among public.Experience has shown that successful implementations of currency reform require that this plan is integrated within an economic stabilization package by government. The experience of other countries indicates that economic supportive policy measures such as fiscal responsibility and targeted monetary policy are required to bring down inflation for a successful reform. In this context it is highly imperative that legal safeguards are legislated to abandon central bank financing of government budget deficit and put central bank in charge of currency reform. All these aspects of currency reform along with experience of other countries are studied in this paper.