After the announcement on Sunday by Iran minister of economy that the government intends to redenominate the currency by removing three zeros, today the governor of the Central Bank of Iran (CBI) told reporters that the intention is to remove four zeros, and not three, making one rial approximately equal to one dollar. The CBI governor said the legislative framework for redenomination of the currency would be readied within six months. He said removing four zeros from the current unit would eliminate the need for CBI to print increasingly large denomination notes.
The reason given by CBI for the necessity of removing four zeros follow the logic offered by many of our commentators, including our own Amir Taheri, that the removal of zeros is for convenience. People would no longer need to carry large amounts of money with them, and that in practical terms there are already bank cheques in wide use that function as large denomination bills.
The critics point out that such drastic redenomination is usually a step taken after a period of high inflation is ended and there are no expectations for a period of renewed inflation, and Iran does not meet the criteria as the gradual removal of government subsidies are expected to create a long period of high inflation. Besides, the establishment of electronic money transfer system renders large paper bills or cheques unnecessary.
In Zimbabwe, there were several stages of removing zeros. It did nothing to halt the inflation.
How would removing subsidies increase the inflation? Wouldn't less money in circulation decrease inflation?
Removing zeros is not meant to decrease inflation. It was neither the case in Zimbabwe nor in Iran. Removing the subsidies however is a strong move towards decreasing the inflation (I disagree with the author in this regard). The removal of zeros is merely to ease the counting and transaction process.
Removing four zero will balance income and expenses as when goverment start paying to employees with new currency value and selling imported products with same new currency, plus it will bring down goverment annual budget and expenses in balance to new currency value, all product imported or produced in country will valued with new value. custmer spending get stronger as inflation ease due to less quanity of money in circulation if goverment balance the budget and not printing more money more than country asset.
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