Earlier this month it was reported that the Central Bank of Iraq (CBI) might redenominate the Iraqi dinar after the new government is formed, exchanging one new dinar for 1,000 old. (For more on this story, see http://www.iraq-businessnews.com/2010/09/14/central-bank-wants-to-drop-zeros-from-iraqi-dinar/.) While such a redenomination would obviously help to simplify transactions and record keeping, it is not clear that these benefits would be sufficient to justify the costs, both to the government and the economy as a whole, of switching to a new currency.
It’s not even true that all transactions would be simplified. Consider the ISX, for example, where stocks have a ID 1 par value and most of the share prices tend to be in the ID 1 – 30 range. While the redenomination is usually presented as a matter of “knocking off three zeros,” in the case of a name like BCOI, which last traded at ID 1.38, you’d actually be “tacking on” three zeros as the price in the new currency would be 0.00138. Would the companies then have to consolidate their shares, replacing every 1,000 old shares with 1 new one?
In any event, it’s not really clear why the CBI would choose to redenominate the dinar at this time. Historically, redenomination has typically been done either as part of “heterodox” inflation-fighting programs or, more rarely, as a way of expropriating wealth. (Heterodox programs are designed to lower the public’s inflation expectations, mainly through administrative measures such as wage/price controls.) For example, episodes of hyperinflation led to the introduction of the Argentine peso, which replaced the austral at a rate of 1:10,000 in December, 1991 and the Brazilian real, which replaced the cruzeiro real at a rate of 1:2,750 in July, 1994. More recently, North Korea replaced existing won notes with new ones at a rate of 1:100 last November, capping exchanges at W 100,000 per family (about US$ 40 at black-market rates), with the evident intent of wiping out free-market traders.
With Iraqi inflation now in the low single digits and, as far as we know, the government not out to expropriate anyone’s cash holdings, it’s hard to see why redenomination would be a priority. And indeed the disadvantages of having three extra zeros to deal with aren’t all that clear either. Think of the South Korean won, which at 1,150 to one US dollar is worth about ID 1.03. Does anyone really think there would be big benefits to the Korean economy from “knocking off” three zeros from the currency?