Iran Cuts Three Zeros from the Rial

Written by Adam Gonn

In order to fight a double-digit inflation Iran has decided to cut three zeros off the rial.

A plan by the Iranian Central Bank to contract the nominal size of the currency has been approved by parliament.

The Governor of the Iranian Central Bank Mahmoud Bahmani announced that a group working on fighting the double digit inflation has decided to cut three zeros from the national currency, the rial.

"From an economic perspective, the important thing is to cut the inflation rate from a 20% annual increase to a reasonable rate" Emad Honarparvar, an Iranian businessman, told The Media Line.

Bahmani declined to give a date when the plan would be implemented, but noted that the country’s economists had studied it and that these experts, as well as his predecessors at the Bank, had agreed to diminish the size of the national currency.

"For the last 80 years, Iranians have been using an unofficial currency called toman instead of rial, which is 10 times bigger than the rial," Honarparvar said.

"Beside this, price increases from decades of inflation, especially during the Iran – Iraq war, have led to most prices being marked in toman," he said

"When someone says 10 toman, it’s possible he means 100,000 rials. So the new currency can make confusions and complexities. Maybe it would have been more practical to cut four zeros," he said.

The inflation rate in September was reported to be 20.2% down from nearly 29% in September 2008.

Some observers say that Iranian President Mahmoud Ahmadinejad’s expensive economic policy during his previous term in office is behind the current crisis. The policy included lowering interest rates on loans to encourage more circulation of cash in the market, as well as huge spending on public infrastructure projects.

The Iranian economy revolves around the oil and gas sector which is the nation’s prime source of income but also one of its largest expenses. While Iran has some of the world’s largest oil and gas reserves in the world, there is a severe lack of refining capabilities.

Oil is therefore exported to other countries in the Gulf for refinement before being re-imported, in addition to the expense, the process also makes Iran dependent on foreign countries.

According to some estimations, due to the high market price, refined oil is heavily subsidized at the annual cost of some $50 billion, once back in Iran.

Other factors that are suspected of pushing up inflation include; increasing salaries for government employees; a rigid economic structure controlled heavily by government; and a private sector limited to small scale workshops, farming and services.

The United States is considering targeting Iran’s dependence on foreign refinement, as possible sanctions against Iran’s disputed nuclear program.

While Iran argues the program is strictly for energy production, the U.S. suspects Iran of developing nuclear weapons. The U.S. imposed economic sanctions against Iran during the Islamic revolution in 1979 but lately there have been suggestions President Obama might be considering increasing sanctions if Iran does not abort its nuclear program.