Tehran Chamber of Commerce has warned that currency redenomination plans will not necessarily lead to desired results, stressing the need for proper strong infrastructure to help faciliate the plan.
Referring to the rial revaluation plan on the government agenda, a comparative study by the Economic Research Department of Tehran Chamber of Commerce, Industries, Mines and Agriculture (TCCIMA) points to similar decisions by other countries and says “the policy does not necessarily produce the desired results. Its success or failure is contingent upon the groundwork (before and after) for enforcing the plan”, Financial Triubune reports.
It said such plans have been successful in countries where governments have implemented comprehensive policies to overhaul the economy prior to embracing the redenomination strategy.
Moreover, in these countries corrective policies have been maintained by implementing a “stabilization program” years after enforcement of the redenomination plan.
This is while in countries saddled with a variety of economic crises like hyperinflation or huge budget deficits, the results have been largely negative.
Currency redenomination has been seen in approximately 50 countries so far.
TCCIM says currency revaluation has twin effects both domestically and internationally. Many countries adopt the policy because of its psychological effect on the people.
On the international stage, nominal value of the new currency and the accompanying facial prestige against foreign currencies is crucial.
The report underlined the correct timing and technical paradigms as key to the success of such policies.
Turkey is one example. It lopped six zeros from the lira in 2005 as a way to successfully escape decades of high inflation. It succeeded to get out of the crisis with the help of structural reforms and stabilization programs.
Another successful example is the case of Poland. It too lopped off four zeros from the zloty in 1995.
The country suffered 35.3% inflation two years prior to the currency redenomination before reducing it to the single digit (7%) in 1995, according to the report.
TCCIM also refers to negative outcomes of currency revaluation policy in Russia, Argentina and Brazil.
The idea of removing zeros from the rial has been floated several times in Iran over the past years. This may come true during the two years remaining in President Hassan Ruhani’s tenure. His government drafted a bill to this effect and sent it to the Majlis on Wednesday to be debated, FT writes.
As per the proposed bill, four zeros will be shaved off the national currency and the monetary unit will switch officially from the rial to the commonly used toman.
The head of TCCIM, Masoud Khansari, insists that the plan will not produce the desired results unless it is intertwined with structural reforms.