In a bid to combat persistent inflation and economic instability, the Iranian government is reviving plans to switch from the rial to the toman. However, experts warn that currency reform alone may not be enough to address the country’s underlying economic issues.
The Elusive Solution to Iran‘s Inflation: Can Currency Reform Deliver?
A Tangled Web of Numbers: The Challenge of Implementing Currency Reform in Iran
In a bid to combat persistent inflation and economic instability, the Iranian government is reviving plans to switch from the rial to the toman. However, experts warn that currency reform alone may not be enough to address the country’s underlying economic issues.
The idea of removing four zeros from the currency was first proposed in 2016 and launched in 2021. The plan aimed to simplify transactions and improve confidence in Iran‘s financial system by making it easier for people to understand prices. However, despite the redesign of banknotes with the last four zeroes appearing paler in color, inflation has not abated.
“relatively ineffective” , says Arezoo Karimi, an economic journalist based in London, believes that removing zeros from the national currency is. According to her, this measure has no impact on fundamental economic issues such as inflation, the intrinsic value of money, liquidity, GDP, and unemployment. She argues that it will not address these problems in the future either.
A History of Mixed Results: Lessons from Around the World
Currency reforms have been attempted by many countries in the past to combat inflation and stabilize their economies. However, success has been mixed, with some initiatives yielding positive results while others have failed to deliver. In “the Rentenmark” , for example, introducing the German Weimar Republic‘s 1923 helped restore public confidence, but its long-term success was largely attributed to fiscal discipline and stabilization measures.
Currency reform involves changing a country's monetary system, often to address issues like inflation, debt, or economic instability.
It can include introducing new currency units, revaluing existing ones, or switching to a commodity-based currency.
Historically, countries have implemented currency reforms to restore economic stability and promote growth.
For example, Germany introduced the 'euro' in 1999 as part of its economic reunification efforts.
Currency reform requires careful planning and coordination with international partners, financial institutions, and domestic stakeholders.
Similarly, “Brazil’s new currency, the real”, in the 1990s, combining it with strict fiscal policies aimed at controlling inflation. The reform included measures like reducing public sector deficits, tightening the money supply, and implementing price stabilization plans. Brazil‘s success is often cited as a model for managing inflation that addressed both inflation and economic growth.
The Risks of Cosmetic Fixes: Can Iran Learn from History?
However, history also shows that currency reforms can end badly. In “removing multiple zeros from the currency” , 2000s did not address underlying issues such as political instability and corruption. Similar redomination efforts failed to bear fruit in Venezuela.
Argentina has experienced multiple currency crises throughout its history, with the government responding with measures to address inflation and stabilize the economy. While “removing zeros from its peso” , these efforts have been unsuccessful in stopping inflation in the long run.
The Need for Systemic Reforms: Can Iran Break the Cycle of Inflation?
Iran‘s reliance on oil revenues and persistent sanctions mirrors challenges faced by Venezuela. Without systemic reforms, currency changes alone will not work, warns “Kamran Nadri”, a Tehran-based economist. He argues that Iran‘s financial system is outdated, making it nearly impossible to attract foreign capital, which is essential for growth.
Iran's economy is heavily reliant on its oil industry, with petroleum products accounting for approximately 70% of export earnings.
However, the government has made efforts to diversify the economy by investing in non-oil sectors such as manufacturing, agriculture, and tourism.
The country's strategic location at the crossroads of Asia enables it to serve as a trade hub between Europe and East Asia.
Despite economic sanctions imposed by Western countries, Iran has maintained a relatively stable economy with a GDP growth rate of around 4% per annum.
Young Iranians are increasingly frustrated with the lack of progress in addressing inflation and economic instability. A recent survey found that 75% of respondents believe the currency reform has failed to improve their economic situation. Many young, educated people are leaving the country, exacerbating a brain drain that threatens Iran‘s long-term development.
According to the United Nations, Iran has one of the youngest populations in the world.
Over 60% of Iranians are under the age of 30.
This demographic trend presents both opportunities and challenges for the country's development.
The youth population is driving innovation and entrepreneurship, with many startups emerging in fields like technology and renewable energy.
However, high unemployment rates among young people remain a concern, with over 25% of Iranian youth aged 15-24 being unemployed.
Experts agree that “Iran would need more than cosmetic fixes” , including diversifying the economy, tackling corruption, and improving transparency. Additionally, easing sanctions through diplomatic negotiations could help stabilize the economy.
Without a coordinated strategy that addresses both internal and external challenges, we will be back here in a few years, warns economist Nadri.
