Iranian President Mahmoud Ahmadinejad has approved two key monetary measures for Iran: first, lopping off three zeros from the rial, and second, replacing the dollar with the euro in foreign exchange.
Lopping Off Three Zeros
At the time of 1979 Islamic Revolution 1979 in Iran, the dollar was worth 70 rials. Recently, the official rate of exchange of the dollar was 9,850 rials, with a lower rate of exchange at the parallel (black) market. By lopping off three zeros, the government seeks to recalibrate its currency as part of its economic reform plan. It may also signal an effort by the governor of the Iran's Central Bank, Mahmoud Bahmani (the third governor under Ahmadinejad's first four years as president) to reassert control over the country's monetary supply, in defiance of the president's expansionary policies. However, in the absence of macroeconomic measures to liberalize the economy and to put an end to the president's profligate spending, the lopping off of the zeroes will be strictly cosmetic.
Ahmadinejad could learn from his soul mate Venezuelan President Hugo Chavez, who in January 2008 also lopped off three zeroes from the bolivar, Venezuela's legal tender, to create what was dubbed the "Bolivar fuerte " or "strong Bolivar." According to IMF data, consumer prices in Venezuela are projected to increase by 36% in 2009 and 43.5% in 2010. It did not take much for the "strong Bolivar" to lose its potency.
Although inflation in Iran was reportedly reduced from about 30% in 2008 to about 15% in 2009, it is still high enough to undermine the currency recalibration.
In his statement about the new monetary policy, Governor Bahmani did not set a date for enforcing the measure. He said he wants to wait for the inflation to decline to a single digit before implementing the new policy. One cannot help but think of St. Augustine's musings in his Confessions: "Oh God! Make me chaste – but not yet."
Replacing the Dollar with the Euro in Foreign Exchange
On September 12, President Ahmadinejad ordered the U.S. dollar to be replaced with the euro in the country's foreign exchange accounts. Iran has also called on other OPEC members to avoid the falling dollar in favor of the more credible euro.
Oil is Iran's major source of foreign currency, but oil is pegged to the U.S. dollar, as are the currencies of the major oil-producing countries in the Gulf. These countries, particularly Saudi Arabia, have persistently declined to unpeg their currencies from the dollar [Kuwait did partially unpeg] and, hence, oil will continue to be priced in dollars. Since the dollar and the euro are broadly available convertible currencies, there is nothing preventing Iran from converting its dollars into euros whenever it chooses to do so.
One suspects, however, that Ahmadinejad's edict has to do more with fear than with economic wisdom. Iran is rightly afraid that new and more stringent sanctions due to its nuclear policies could lead to the freezing of its dollar assets in U.S. banks or even in major European banks who conduct major businesses in the U.S. This move, therefore, will help decouple Iran from the U.S. banking system.
It will be recalled that in the mid-1990s Iraqi president Saddam Hussein decreed that Iraqi oil should be paid for in euros to "punish" the United States. Iran did not say whether the new policy was designed to do the same thing.
Source: Fars news, September 17 and 20, 2009
