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Source: www.asiaecon.org |

CURRENCY CHANGES IN TURKMENISTAN


The Turkmen manat has never been fully convertible since its introduction in November of 1993. Turkmen banks did not allow for individuals to exchange manats into foreign currency, which severely restricted the currency exchange market in the country. Limited access to the tightly state controlled currency exchange market was allowed to only a few large enterprises and foreign companies.


The Turkmen manat has never been fully convertible since its introduction in November of 1993. Turkmen banks did not allow for individuals to exchange manats into foreign currency, which severely restricted the currency exchange market in the country. Limited access to the tightly state controlled currency exchange market was allowed to only a few large enterprises and foreign companies.

 

The black market was the only alternative available for private individuals to obtain Euros, U.S. dollars or Russian rubles, where the exchange rates were determined by demand. The official exchange rate for the Turkmen currency had been fixed at around 5000 and 5500 manat per dollar for the past few years. Where as, the unofficial exchange rate in the black market fluctuated between 23000 and 25000 manat per US dollar between 2004-2007.

 

This situation has created an informal two-tier system, which helped establish a status quo and in a an unorthodox manner, a sense of predictability and financial stability. Moreover, this two-tier system has made the imported cheap Chinese products that invaded the world uncompetitive in Turkmenistan. Consequently, it has facilitated the protection of the domestic textile and garment industries for the Turkmen authorities.

 

Even though this two tier system has proven to be useful, yet at the same time it undermined the local export oriented small and medium-size enterprises. The main problem was that these enterprises suffered significant losses when they converted their profits from foreign currency into manats at the official rate, due to the gap between the official and unofficial rates. Thus, the situation gave local entrepreneurs little incentive to establish and run export oriented businesses when loss was inevitable. Economists argued that the Turkmen economy lacked diversification due to the development of this system and instead, relied on a single source of hard-currency income which is energy exports.

 

In order to address this problem, the Turkmen government decided to establish a single exchange rate for the manat, in an attempt to eliminate the black market exchange system. Thus, since January 2008, it has directed tens of millions of dollars to the currency exchange market to support the so called commercial exchange rate.

 

The manat’s commercial rate since then has stabilized at about 15000 per US dollar, both in the black market and in the state controlled exchange system By the summer of 2008. Thus, the denomination of the national currency has been seen as the next step toward abandoning the informal two-tier exchange system and strengthening the manat.

 

 

The decision to denominate the national currency and to establish a single exchange rate will help overcome some distortions in the national financial system and will strengthen the national banking system. It is undoubtedly a step in the right direction. However, these reforms occur amid a global financial and banking crisis that is creating a huge amount of pressure on the manat and on the general economic wellbeing of the country. With the fall of energy prices, the major single source of foreign reserves, further pressure is building on the country’s currency reserves. Therefore, it is very important for Turkmenistan’s government to understand the difficulties it faces, and in the mean time not to reserve the economic reforms and not to return to economic isolation.


Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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