The Iranian government is planning to cut four zeros from its currency and change its name from the rial to the toman, in the latest attempt to reset its struggling economy, which is being hammered by U.S. sanctions.
President Hassan Rouhani sent a bill to the Majlis (parliament) on August 21, seeking MPs’ approval for the plan to convert 10,000 rials into one toman. The cabinet had agreed to the proposal on August 4.
The idea is not a new one. The current plan was first floated by Abdonnaser Hemmati, governor of the Central Bank of Iran, in early January. There have been other similar suggestions in the past, including in July 2017 when the cabinet said it wanted to replace the rial with a new currency, also to be named the toman.
Toman was the official name for the country’s currency in the distant past and is still used colloquially to refer to 10 rials.
The rial has plunged in value in recent years, particularly since the U.S. reimposed sanctions on Iran last year. The exchange rate averaged close to IR30,000 to the U.S. dollar through much of 2015 and 2016, but it has since fallen on the open market to a value closer to IR120,000 to the dollar.
The government has made repeated attempts to control the market, but a previous aim of the Rouhani administration to close the gap between the official and unofficial exchange rates – something supported by the IMF among others – now looks well out of reach.
These days the government maintains a complex, three-tier system of exchange rates. This includes the official rate of IR42,000 to the dollar, which importers of essential goods are able to use. There is also the open market rate of around IR120,000 to the dollar. Between the two is a third rate, known as the Nima rate, which is used by banks buying foreign currency and also by businesses when they convert their export earnings. The Nima rate has been edging closer to the open market rate, and now stands at around IR110,000 to the dollar.
Hemmati has recently claimed the currency market was starting to stabilize. However, some significant problems remain.
The system is overly complex and wide open to abuse. A recent statement from the Iranian Chamber of Commerce, Industries, Mines and Agriculture said exchange rate policies needed to be reformed, as they were contributing to inflation, encouraging corruption and reducing public confidence in government policy making.
“The significant difference between the preferred exchange rate and the free and medium rates has led to the spread of rent and corruption in society and a decline in public confidence,” it said.
The authorities have struggled to bring greater order to bear on the market. In early August the Central Bank postponed the opening of a new regulated foreign exchange market, which had been due to start work on August 12. Local media reports indicated that not enough banks and exchange bureaus had signed up to take part.
Past efforts to control currency fluctuations have failed to lead to a sustained improvement, including the time the government forced exchange bureaus to shut down for several months last year.
Whether the switch from the rial to the toman will bring much improvement to the economy seems doubtful. The authorities say it will make daily life easier, but critics have suggested it could lead to higher inflation, as shops take advantage of the change to increase prices.
It is far from certain that the plan will even be approved, with parliament having up to two years to consider the bill. That timetable is further complicated by the fact that parliamentary elections are due to be held next year.
If it does go ahead, the revaluation of the currency is expected to cost the government some IR19.2 trillion (around $160 million at the current open market exchange rate). However, it may be able to claw back some of that cost by not having to print so many devalued notes.