Turkmenistan's Funny Money

Monday, 14 November, 2005

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IWPR staff

Despite claims that Turkmenistan is enjoying unprecedented economic success, the persistence of the unofficial exchange rate suggests deep malaise in the government’s economic policies. Although illicit currency dealing - an unwanted by-product of rigorous monetary controls - is strictly illegal, it is now so central to the way the economy works that the government itself is involved in it.

There is a thriving black market because even though the Turkmen currency, the manat, trades at four times its official value, people are still desperate to get rid of it and buy US dollars. It costs at least 22,000 manats to buy one dollar here, instead of the official rate of 5,200.

The black market exists here – as elsewhere – because the local money is not convertible into other currencies. The government uses a fixed exchange rate as one of the key mechanisms for maintaining control over a highly centralised economy.

Since the national currency is not seen as “real”, in the sense of being easily exchangeable, the public lacks confidence in it, and prefers to acquire stronger currencies such as the dollar both for savings and purchases. Small-time traders and anyone else buying goods abroad are obliged to get their dollars illicitly, as it is all but impossible to do so at a bank.

In Turkmenistan, very few people have legal rights to acquire foreign currency, making it hard to develop business links abroad. That only compounds the country’s economic problems, strangling private-sector development since the average businessman is unable to legally purchase imports.

The official exchange rate of the manat, which replaced Soviet rubles in 1993, has been the same since April 1998, at 5,200 to the dollar. That rate, fixed by the government, is unrealistically low, meaning that anyone who buys dollars is doing so at a very advantageous price.

There is a catch, of course: access to foreign currency is extremely restricted. Under a December 1998 ruling from the central bank, the only people allowed to buy cash are patients requiring medical treatment outside Turkmenistan, a limited number of students at universities abroad, and officials going on foreign trips. To this list it is safe to add powerful businessmen with good regime connections, and politicians with business interests on the side.

A slightly wider list of people and organisations are allowed to do non-cash transactions through the banking system. However, even here the only grounds on which permission is given are to pay off government and foreign loans, to repatriate foreign investment, and to import a limited list of items including medicine, raw materials and technology.

The commercial bank rate – a second, more realistic exchange rate used for banking transactions – was abolished in 1998.

A central bank employee interviewed by IWPR denied that an outright ban on trading in dollars was in place, saying it was just “tougher rules”. He said the exchange controls were designed “to stabilise the economic situation”, and augmented other government policies of “boosting state expenditures, and supporting an unvarying exchange rate for the national currency against the dollar”.

The result of restrictive rules is that dollars simply move out of the official system, to be bought and sold on the illicit market at a higher rate.

That has a direct impact on consumer prices, as Makhtum, a private trader involved in the import business, explained, “At the banks you can sell dollars only at the official rate, 5,200 manat to the dollar, but on the black market I can sell them at four times that price.

“That’s good when I’m selling foreign currency, but when I’m buying, it hits my pocket hard, as well as my customers. I import my goods from Russia and Kazakstan, so I’m forced to set my prices according to the rate at which I bought the currency [to buy imports], so the goods that I sell will cost four times more.”

The impression that large swathes of economic activity are conducted in dollars rather than manats is strengthened when one sees US currency being used to pay for goods in Turkmen shops and bazaars.

Even President Saparmurad Niyazov, better known as Turkmenbashi, can be seen showering dollars on the musicians and dancers who perform for him. That’s hardly a vote of confidence from the man who is not only the author of Turkmenistan’s economic policies, but has his portrait on every manat note.

The most curious feature of Turkmenistan’s black market is that although it is entirely prohibited, and is by definition subversive of rigid state controls, the government recognises its existence and even intervenes to modify the illicit exchange rate. There are suspicions that it even benefits.

Every day, the central bank sells 50,000 to 75,000 dollars on the black market. The immediate benefit is that the government is acquiring manats at a quarter of the price it would pay using its own rate. These cheaply-bought manats can then be re-circulated to pay public-sector wages and pensions.

According to a finance ministry official who asked to remain anonymous, “It is profitable for the government to have a black-market rate, as they can make money on the circulation of state funds.”

The dollars sold by the central bank quickly filter onto the black market.

A woman working at an Ashgabat bazaar, who asked not to be named, told IWPR how it works, “Central bank staff take the currency to major black-market trading points, and only sell it to money-changers – an ordinary person or minor trader cannot freely buy dollars from these people. I waited for almost two hours to buy dollars slightly cheaper, but I was refused. As a result, I had to buy from money changers, they bought dollars for 24,000 manats and sold them to me for 25,000 to the dollar – that’s how they make their money.”

A second reason for pursuing this unusual policy is to keep the illicit rate stable – if the manat depreciated further on the open market, the widening gap would make the officially-fixed rate even less realistic than it is now.

By injecting more dollars into the black market, the government makes them cheaper and thus stops the Turkmen currency losing more value.

Such interventions have even been discussed openly at government meetings.

In July this year, Turkmenbashi personally stepped in after the manat’s value plummeted to 24,500 to the dollar. Asking ministers, “Who is to blame?.. Who is trying to devalue the manat?”, the president ordered the finance ministry and central bank to redress the position. According to the News Central Asia website, the manat regained much of its former value by the next day, at less than 23,000 to the dollar.

Government intervention in a market whose existence runs counter to its ideology may be no more than a balancing act designed to keep official economic policies afloat.

Every year, official statistics show the Turkmen economy achieving massive rates of economic growth. For example, it is claimed that gross domestic product in January-October this year was 21 per cent higher than in the same period of 2003.

Most external analysts agree that these figures need to be taken with a big pinch of salt, and that the country’s economic structure is so lopsided that growth depends in large part on whether or not Turkmenistan is exporting gas at any given time.

While the state earns significant dollar revenues from sales of gas and cotton, this money does not feed through to the average person’s standard of living, although citizens do benefit from free gas, electricity and water supplies. A lot of the government’s income appears to go on building magnificent palaces, giant mosques and other white-elephant projects designed to showcase Turkmenbashi’s grandiose ambitions.

The fact that the monetary indicators are calculated at the unrealistic fixed rate does not help transparency, either. Official statistics state that per capita income was 2,400 dollars last year, a fairly respectable figure for post-Soviet states. But recalculate that figure against the dollar’s black-market value and you arrive at a figure of 500 or 600 dollars per capita, which places Turkmenistan among the poorest countries in the world.

As pensioner Maria Ivanovna put it, “According to the official exchange rate I get a pension of 270 dollars [a month] and I don’t have to pay for utilities, yet in reality it barely comes to 60 dollars. And market prices are steep.”

The lucky few who wield political and commercial power – the two are closely linked in Turkmenistan – have unique access to dollars, and it is believed that many of them make a killing by purchasing dollars cheap from the central bank and selling them dear on the black market, over and over.

“The existence of a black-market currency market is one of the reasons for the prevalence of corruption, inflation and large-scale theft in Turkmenistan,” said IWPR’s finance ministry source.

This official believes the only way to avoid financial meltdown is for the government to make the national currency fully convertible.

“Anti-crisis measures are urgently needed to stop a financial crisis from developing,” he said. “A large-scale intervention by the central bank is the optimum method for resolving a financial crisis which takes the shape of a sharp drop in the value of the national currency because of falling confidence among the public and companies. Free convertibility at a unified exchange rate will encourage an influx of investment.”

Such an intervention would not come cheap, especially for an administration that is apparently so hard up. On present showing, there are no signs that Turkmenbashi’s government is either able or willing to take such a step.