In his last television interview, the Governor of the Banque du Liban, Riad Salameh, he briefly mentioned the possibility of eliminating the zeros from the currency (Lebanese Lira). A key instrument in this operation is raising the interest rate on the country’s currency to an all-time high, in an effort to encourage residents and businesses to hold and use the local currency and prevent dollarization.
To restore confidence in their currency, encourage and attract investors through bank deposits, or buy debt instruments like bonds and treasury bills, the deletion process may be a prelude to the going of a troubled and financially bankrupt state (such as Lebanon, which stumbled financially in March 2020) to the International Monetary Fund, international financial institutions, and others.
Perhaps Lebanon isn’t alone in considering a currency renaming (redenomination), as Germany, the eurozone’s most powerful economy, has done in the wake of a financial and economic crisis brought on by its war and the devastation of its infrastructure. More recently, Iran and Turkey applied such measures, and as a result, their citizens’ purchasing power plummeted, prices rose, and their currencies collapsed, causing inflation to soar to record highs (2005).
It is a policy measure that simplifies the use and management of the national currency by expressing it in a smaller comparable band. When inflation occurs, the same quantity of monetary units are used to gradually weaken buying power, which includes: the prices of goods and services sold in the country; wages and salaries; savings; pensions; loans; rents; and other committed payments; the exchange rate; and taxes.
It is possible for the government to alleviate this difficulty with a conversion ratio greater than 1 in most cases. There are several ways to describe “zero elimination,” but the most common is a multiple of ten, such 10, 100, 1000 and so on.
Financial and accounting issues will be affected, but the impact on the economy is indirect, since the value of money and purchasing power remain same. The true impact on the economy in partial and total terms will be nil, as demand and supply for goods do not alter. As a result of a global shift in net investment and government spending, and the net balance of payments of exports, the level of household consumption will not alter.
As inflation and government concerns about the currency’s reputation and its impact on national identity play a role, some countries have decided to rename their currency. Additionally, the renaming has been connected to other political variables, such as the government’s time horizons, the ruling party ideology, government and parliamentary fragmentation; together with the degree of inequity within society.
Inflation causes the value of money to depreciate at a rate dependent on its speed; this in turn causes goods and services that a previously purchased amount could purchase to appear more expensive than they actually were, and this is why the renaming occurs.
This decision to rename one’s currency is influenced by numerous factors, including one’s sense of national identity, as well as domestic and international political considerations. Inflationary pressures, psychological effects, currency exchange regulation, and internal politics are only a few of the possible causes, although this list is far from complete. Policy stability is essential to the currency’s rebranding, and the removal of zeros from its name will have a favourable physiological effect on the currency’s credibility, lowering inflationary expectations and improving transaction and computation ease.
This can also be seen as a way for governments to demonstrate their authority over the currency. People may begin to use other currencies, especially those of greater reputation, if they lose faith in the native currency, and this could have a psychological and economic impact on the government. After economic emergencies such as viruses and natural disasters (such as hurricanes and earthquakes), the central bank is unable to offer lending functions, therefore renaming processes are common. In some situations, this might help prevent high levels of inflation, if the renaming is scheduled right.
Removed zeros from the Turkish lira minimized technical and operational issues that emerge from the use of numbers with multiple zeros, therefore monetary expressions were simplified and thus it became easier to handle records and make transactions. On the whole, it was vital to switch to the new Turkish lira because it may have a favourable impact on the currency’s reputation and also because of technical considerations. The removal of six zeros from the Turkish lira, according to the Central Bank of Turkey, has helped the currency regain respect among Turkish citizens as well as on the international stage. People’s faith in the Turkish lira has been restored, resulting in huge investments in financial instruments and new Turkish lira being issued as a result of this process.
Hyperinflationary countries have an uphill battle to regain the trust of both domestic and foreign markets. Most directly, this can be achieved by a stabilization program that uses exchange rate-based monetary targeting, by improving operational independence of the central bank, and by repealing policies that skewed economics. In other words, if governments merely remove zeros from the national currency and don’t pursue complete economic changes, they won’t have any impact.