Need for Caution in Currency Exchange-Rate Unification Drive in Turkmenistan

nCa Commentary

Ashgabat, 22 April 2008 (nCa) --- Turkmenistan is trying to bridge the gap between the bank and open market exchange rates of Manat versus US Dollar.

For a long period, the bank remained fixed at 5200 Manats for a US dollar while the open market, also known as black market, operated in the vicinity of 23000 Manats to a dollar.

In fact, not two but several exchange rates have been in force till now. In addition to the official bank rate and open market, there have been separate rates for computing telephone bills, conversion of deposits Manats to dollars, and buying and selling of goods, commodities, technology and services.

Berdymuhamedov acknowledged early on in his presidency that a single exchange rate for all kinds of transactions was absolutely important for creation of favourable environment for foreign investment.

The first step was taken on 1 January 2008 when the government formally acknowledged the presence of the black market and allowed the scheduled banks to open foreign exchange points. Exchange rate was fixed at 19800 for buying and 20000 for selling of US dollars, nearly killing the black market.

Simultaneously, the official bank rate was raised to 6250 Manats against dollar.

The second push toward unification of exchange rates came on 19 April 2008 when the open market rate was lowered to 17400 for buying and 17600 for selling dollar.

A few days before the announcement of new exchange rates, the president disclosed during a cabinet meeting that re-dominated currency would come into circulation on 1 January 2009. While the highest-value currency note currently in circulation is 10000 Manats, the top bill in the new range would be 500 Manats.

The old currency notes would remain in circulation together with the new throughout 2009. Consequently, three zeros (000) would be removed to equate the old currency with the new.

The government is obviously trying to strengthen Manat. There are indications that two or three more steps will see further reduction in open market rates and at least one step would see increase in the bank rates before both rates meet at some point. Where exactly would both rates meet is a matter of speculation but the grapevine suggests several possibilities.

There are some benefits in strengthening the currency against dollar:

• GDP, per capital income, and all other indicators would suddenly become more impressive in dollar terms
• Average salaries in Turkmenistan would compare positively against the norms in the region. For instance, the average salary, equivalent to $ 120 at the old rates, already equals $ 175 because of slash in exchange rates.
• In a strong-currency environment, the foreign investors and businessmen would yield more benefits to the local population, directly and indirectly.
• Superior talent can be attracted to the government jobs.

However, there are certain risks in pushing the currency too hard:

• If the currency is unduly strong, it may induce foreign exchange flight under the natural law of arbitrage.
• Imports will become feasible, posing serious threat to the fledgling local industry. For instance, hardly four months have passed since the introduction of reduced exchange rates and the imported chicken, eggs and sugar are already giving stiff competition to the traditional sources of supply.
• Foreign investors may deem it necessary to repatriate as much profits as possible.
• Artificial adjustment of exchange rates may ultimately encourage rebirth of black market, defeating the purpose of the whole exercise. It would be of some educational value to recall the reasons for crash of Manat in August 1998 and the factors that led to a stable black market for a long time.