Publication: Monitor Volume: 6 Issue: 88

For all these problems, Uzbekistan’s exchange rate system seems like a paragon of liberalism compared to Turkmenistan’s. The Turkmen authorities maintain a fixed exchange rate of US$1 = 5,200 manats, while the premium on black market transactions is estimated at three times the official rate. Although little data about Turkmenistan’s foreign exchange reserves are available, this premium suggests that the country is experiencing a severe shortage of hard currency. Moreover, 90 percent of Turkmenistan’s official foreign currency reserves are outside the control of the central bank, and are held in the Foreign Exchange Reserve Fund (FERF). Payments for exports and restructured gas debts owed to Turkmenistan are the main sources of FERF inflows. As with all other significant government decisions, allocations from the FERF are directly authorized by President Saparmurat Niazov.

After Turkmenistan hemorrhaged foreign exchange reserves in 1998 to support the manat, rising natural gas export revenues in 1999 and the first quarter of 2000 seem to have averted a currency crisis. Since the country remains isolated from international capital markets and maintains a labyrinthine set of exchange regulations, trade flows are the main cause of exchange rate pressures. Until late November 1998, Turkmen commercial banks were in principle free to set their buying and selling rates, and banks were allowed to transact in cash foreign exchange with individuals for amounts of up to US$1,000 per transaction, with no limits on the frequency of transactions. However, the commercial bank cash market for foreign exchange was closed in December 1998 due to increasing exchange rate pressures (IMF, “Turkmenistan: Recent Economic Developments,” December 1999).

Now that Turkmenistan appears set to receive increasing hard currency income from gas exports to Russia, Ashgabat may well be able to keep the official exchange rate fixed through the end of 2000. However, given the unstable nature of Turkmenistan’s gas revenues and the widening premium between the official and the free market rate, the manat is likely to be devalued sometime within the next two years. If gas export revenues decline and remain low for more than a year, the fixed manat/dollar exchange rate could well become unsustainable. As with Uzbekistan, a painful external adjustment may be only a matter of time for Turkmenistan.