Turkmen Currency Reform Takes Step Forward

Turkmenistan’s first step along the road of monetary revaluation has had the curious effect of making the national currency suddenly look more attractive than the country’s unofficial favourite, the US dollar.

On April 14, President Gurbanguly Berdymuhammedov told cabinet ministers that a new official exchange rate for the manat would come into effect on May 1, in preparation for a re-denomination next year which will knock three zeros off the current face value.

Five days later the Central Bank increased the value of the manat by changing its “commercial bank” exchange rate from 20,000 to the dollar to 17,600 for sale and 17,430 to one for purchases.

The immediate reaction was long queues at currency exchanges as people tried to turn dollars into Turkmen banknotes at the new, more favourable rate.

The rush to dump American money was so intense that many exchange offices would only buy 100 dollars per customer.

“Foreign currency is available, but not manats. These queues are bizarre; we’re having to wait for two or three hours to exchange no more than 100 US dollars,” said one Ashgabat resident waiting in line.

The stir led to unprecedented scenes in places like Ashgabat’s Russian Bazaar, with dollars changing hands for ten or 12 thousand manats – much less than the banks were offering. Until the change, the dollar was worth around 20,000 manats on the black market.

In an inflationary environment where people are reluctant to put their money in the bank, the American dollar has long been used to preserve the value of cash savings, and it has generally in high demand in Turkmenistan.

As well as the commercial bank rate, there exists an “official exchange rate” – unchanged at only 6,250 to the dollar – which is unavailable to all but a lucky few. Both these exchange rates are believed to be artificially low compared with demand for the dollar, and this has created the thriving black market.

Monetary reform might have been expected to relax exchange rate controls so to allow the manat to move gradually towards a more realistic, lesser market value, and eventually to become a free-floating, fully convertible currency.

However, the authorities decision to boost the manat’s value appears to confound that logic.

The explanation came in the president’s April 14 speech, when he said a new exchange rate would be established from May 1. Without saying what it might be, he said it would take international factors into account, adding, “Turkmenistan will build its [currency] pricing policy based on an assumption of favourable conditions created by a consistent increase in world demand for Turkmen energy.”

Berdymuhammedov’s remarks clearly show he is anticipating a strengthening of the manat as his country exports more of its vast natural gas resources to a more diverse range of energy-hungry countries in coming years.

That forecast looks reasonable based on the experience of other countries – oil-rich Kazakstan, for example, underwent currency appreciation as the country benefited from investment and rising hard-currency export revenues.

Monetary reform has been one of Berdymuhammedov’s policies since he was elected last February. In November, he spoke of the “immense losses” the state was suffering by having such a huge spread between official and black-market rates. In the textile and oil and gas industries… we price products at the official rate… but use the black market rate to buy imported equipment,” he said.

Soon after that speech, the authorities made an attempt to close the gap, apparently by injecting additional dollars to strengthen the manat. However, this experiment quickly failed, and exchange rates went back to where they were before. (See Turkmen Economy Needs Real, Not Superficial Reform, RCA No. 526, 11-Jan-08.)

Berdymuhammedov is clearly unhappy with the financial authorities’ record on putting his reforms into practice. According to RFE/RL, at the April 14 cabinet meeting, he sacked the Central Bank chairman Geldymurat Abilov for general failure to institute changes, saying he “could not understand the job we gave him”.

Cynics say there has to be a catch, saying the change to a more advantageous exchange rate could just be a short-term ploy to trick people into selling their hard-earned dollars to the state.

“They’re looking for ways to fleece us,” said one civil society activist in Ashgabat.

However, one economist working with a non-government organisation in Turkmenistan believes the move shows the authorities are serious about monetary reform.

“As far back as January, Berdymuhammedov pledged to unify the black and ‘white’ [official] rates and to prepare for re-denomination, and now we’re waiting for it to happen,” he said.

The economist recalled that in February, the authorities started gradually adjusting the prices of goods that had been held at artificially low levels due to the monetary policies of Berdymuhammedov’s predecessor, Saparmurat Niazov .

As a first step, they raised the price of petrol from 400 manats to 3,100 manats per litre (from two to about 50 US cents) – ignoring public concern about the change. (For a report on this, see Petrol Price Shakeup Panics Turkmen Drivers, RCA No. 532, 15-Feb-08.)

A civil servant agreed that the government was right to take tough measures to adjust domestic prices and exchange rates, even it this would “hit ordinary people’s pockets”.

“The population will of course suffer, but the situation cannot continue as it is. For example, people from Russian, Kazakstan and many other places fly with our airlines because the tickets are so cheap. At a dollar and a half for a flight on a Boeing, it cannot be right,” he said.

Annadurdy Khadjiev, a Turkmen economist based in Bulgaria, warned that making these adjustments would not be easy because with its unreformed, state-controlled economy, Turkmenistan was in no shape to endure the shock of adjusting completely to global prices. Even at the new price, petrol prices are only a fifth of the world average.

He said trying to implement exchange-rate and price liberalisation as long as the government continued directing and interfering with pricing policy would lead to “imbalance and chaos in market mechanisms and in the economy itself, and will again create rising inflation, a weakening of the manat and a fall in its exchange rate.”

In particular, Khadjiev said, the government had yet to put proper arrangements in place to allow banks to trade foreign currency with each other.

He said that only if a broad package of monetary and economic reforms, including measures to limit their social impact, was implemented could the planned re-denomination take place safely.

“Otherwise the problems will automatically transfer to the new banknotes and it will turn out that after the re-denomination, the manat’s real rate will be artificially undervalued,” he said.

From January next year, Turkmenistan is to get new banknotes with a face value 1,000 times less than the current one. Thus, the biggest note now in circulation, 10,000 manats, will be replaced by one worth ten manats.

The old notes all carried portraits of Niazov, whose image was everywhere in Turkmenistan as part of a carefully fostered personality cult. His face will still appear on the biggest of the new notes, worth 500 manats, but others will depict a variety of Turkmen historical personalities.

(Some of the names in this story have been withheld out of concern for interviewees’ safety.)