Context: Recently, the Iranian Parliament has authorised the replacement of the rial with another basic unit of currency called the toman.
Background

• For many years, Iran’s government debated changing the national currency, the rial, by slashing four zeros off its face value.
• It is an acknowledgement of how American sanctions and economic mismanagement have contributed to inflation in the country.
• Since 2018, when the Trump administration repudiated the nuclear agreement and reimposed sanctions on Iran, the value of Iran’s currency has fallen by roughly 60%.
• The COVID-19 pandemic, that turned Iran into a regional epicentre of the disease, appears to have played a decisive role, contributing to a further devaluation of the rial since February 2020.

Key Points

• Iran’s national currency will be changed from the Rial to the Toman, which is equal to 10,000 rials, under the bill.
• Each toman, which has been cleared by Parliament will be worth 10,000 rials under the new system.
• The bill to remove four zeros from the national currency was approved by lawmakers.
• The bill needs to be approved by the clerical body that vets legislation before it takes effect.
• The Central Bank of Iran will have two years to pave the ground to change the currency to Toman.

Criticisms of this move

• Opponents argued that the plan was an added expense at a time when the government was already facing a budget deficit of between 30-50% for the coming fiscal year.
• The effect of the currency change, the critics opine, amounted to just cosmetic window dressing.
• Fereydoun Khavand, an Iranian economist in Paris, said governments typically arrived at changing the national currency as the last stage of an economic overhaul like European countries had done after the Second World War or Turkey in recent years.
• But Iran has done the opposite, partly because of the crippling effect of U.S. sanctions, which have severely limited the country’s ability to sell oil or to conduct international financial transactions.
• Under these circumstances, he said, other basic economic changes the Iranian government may want to undertake are difficult.
• It is opined that the Iranian government is in a financial bind with no prospect of financial aid coming from outside or from inside, so they are trying this.

About Redenomination

• It is the process whereby a country's currency is revalued due to significant inflation and currency devaluation, or when a country adopts a new currency and needs to exchange the old currency for a new one at a fixed rate.
• In simpler words, it is exchanging old currency for new currency, or changing the face value of existing notes in circulation.