TURKMENISTAN'S CURRENCY RE-DENOMINATION; EXCHANGE RATE

UNCLAS SECTION 01 OF 02 ASHGABAT 000485

SIPDIS

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB
PLEASE PASS TO USTDA DAN STEIN
COMMERCE FOR HUEPER
TREASURY FOR BAKER/LANIER

E.O. 12958: N/A
TAGS: ECON EFIN PGOV TX
SUBJECT: TURKMENISTAN'S CURRENCY RE-DENOMINATION; EXCHANGE RATE
UNEASE



1. (U) Sensitive but unclassified. Not for public Internet.


2. (U) SUMMARY: On April 14 President Berdimuhamedov signed a
decree that spells out more details about the forthcoming
re-denomination of Turkmenistan's currency -- the manat - first
announced on September 11, 2007. The re-denominated bills and the
old bills will be accepted concurrently as legal tender from January
1, 2009 through December 31, 2009. The transition to the new
currency progresses in parallel with activities on unifying the
exchange rate. However, the lack of information about the process
creates nervousness among the population, and the president's
announcement has set off a new run to exchange dollars for manats
before a rumored change in the exchange rate kicks in. END SUMMARY.


THE MECHANICS


3. (U) An April 14 presidential decree orders that the face value
of Turkmenistan's currency be re-denominated by a factor of 1,000.
After the re-denomination was first announced on September 11, 2007,
samples of the new currency were shown in the newspaper. The
highest denomination bill will be 500 new manats (about $25 at the
current commercial exchange rate),versus the existing 10,000 manat
bill (just under $0.50). Turkmenistan's government is making this
change in part because it believes that the re-denomination will
increase money circulation and simplify cash and electronic
transactions, accounting and statistical records.


4. (U) Throughout 2009 all price tags will have to list both old
and re-denominated prices. The Ministry of Economy and Development
has been instructed to adjust state-regulated prices based on the
re-denominated currency values. The State Tax Service has been
assigned to ensure that vendors use proper price tagging. The State
Tax Service jointly with the Ministry of Trade and Foreign Economic
Affairs will also inspect whether vendor cash registers print new
re-denominated prices.


5. (U) The decree instructs the Central Bank of Turkmenistan to
adjust the national payment system to the new currency values. All
Turkmenistani legal entities and private businessmen are to make
accounting adjustments in their books and revalue their assets and
prices by December 1, 2008.


6. (U) President Berdimuhamedov has given one month to the
Ministry of Justice, Central Bank, Ministry of Finance and Ministry
of Economy and Development to draft appropriate amendments to
Turkmenistan's by-laws pertaining to the denomination of the
national currency. He also decreed that the Ministry of Culture and
Broadcasting conduct in the national mass media a public information
campaign on re-denomination of domestic currency and related
government actions and orders.
THE EXCHANGE RATE LINK


7. (U) The 2009 re-denomination is the first since the manat's
introduction as the national currency on November 1, 1993. The
original exchange rate was set at $1 per 2 manats. However,
hyperinflation caused by dependence on imports and low foreign
exchange reserves drove the exchange rate up until 1998, when the
government set the official rate at 5,200 manat per dollar. This
rate remained unchanged until the Government officially announced on
January 1, 2008 its plan to unify the official and commercial rates
in 2009. The official rate is currently set at 6,250 manats per
dollar and the commercial rate at 19,800 manats.


8. (U) During the April 14 broadcast of the Cabinet of Ministers
meeting on economic reforms, President Berdimuhamedov stated that
Turkmenistan will start unifying the two existing exchange rates
(the official and the "commercial") beginning May 1. (This comment
was not reprinted in the newspapers that came out the next day.)

ASHGABAT 00000485 002 OF 002


The President was not clear how the rate would change and when the
new rate would be enforced. The broadcast resulted in an immediate
higher demand for manats at exchange points and banks in
anticipation of a possible manat appreciation on May 1. Embassy
staff have heard numerous unofficial reports that exchange is
limited to $100 per person per exchange transaction. Banking
officials are citing lack of adequate volume of manats as the reason
for the limit. It is not clear whether consumers are gradually
switching to the manat as the currency of savings in anticipation of
a possible appreciation of the commercial rate.


9. (U) Meanwhile, long lines are forming outside banks and official
exchange points as panicky citizens are rushing to exchange dollars
before a possible new adjustment. As of 1400 hours on April 17,
some exchange points reportedly have been closed, and manat are
being exchanged at non-official exchange points for 16,000 manat per
dollar.


9. (SBU) The government is doing a poor job in explaining to
citizens its currency and exchange rate plans. This uncertainty
paired with monopolistic consumer markets helps to fuel growing
inflation and keeps the population nervous.


10. (SBU) COMMENT: Turkmenistan lacks substantial local production
of goods and is still dependent on imports. The government has not
made any announcement about large scale-privatization or
private-sector development plans and still counts on hydrocarbon
revenue to support the exchange rate. The so far poor job the
government is doing in explaining to its citizens its currency and
exchange rate plans is creating an uncertainty that, when paired
with monopolistic consumer markets, helps to fuel growing inflation
and keeps the population nervous. END COMMENT.

HOAGLAND