Monetary Reform: a remedy for economy or a trouble for people?
Every monetary reform costs 200 million US Dollars on average.
Yet Turkmenistan seems to be ready to incur such costs in 2009 in order to conduct a denomination calculated at 1000 to 1 Turkmen Manat, the current monetary unit.
Is this a good news or a bad news? And what is the point of denomination?
Denomination is a way to augment a national currency - without changing its name - through exchanging the old bank notes into the new ones according to the ratio established by the Government. The aim of denomination is to regularize the currency circulation, to facilitate discount and settlements in country and, simultaneously, to convert prices, rates, salaries etc. at the same ratio. Denomination was done in many countries, for example, in France, Israel, Poland and others. In the USSR, old Roubles were exchanged into new ones at a 10:1 ratio in 1961, January the 1st. Denomination in Russia was implemented in 1998 when new Rouble was exchanged for one thousand old Roubles.
Denomination is a process of changing the scale of prices at a certain rate.
In practice, all monetary reforms have been introduced as a means to fight the growing inflation – the process of money depreciation, and devaluation – significant drop of national currency rate in relation to foreign currency or a change in metal (gold) content of the national monetary unit. That is, during the times of countries’ economic crisis.
When it comes to Turkmenistan the logic of the forthcoming reform is clear – 2009 will see completion of all major projects that aim to considerably increase export of Turkmen gas to Russia, China, and, possibly, to Europe through the Caspian Sea.
In doing so, the Turkmen Manat, having got rid of three noughts, will have acquired if not gold, then gas cover. This would ensure the new Turkmen Manat does not hastily slip into the inflation precipice like the Manat did back in 1993 when the initial exchange rate of 2 Turkmen Manats to 1 US Dollar dropped to 15 TMM to 1 USD dollar within one month.
Prices are a different question. Denomination will inevitably cause increase in prices for all types of commodities and services. If currently the price of one litre of petrol is 300 Turkmen Manat (0.0125 USD) then how much will it cost in 2009?
Simple math will not help here because the microscopic cost of fuel is a result of a five-fold difference between the official exchange rate of 5,200 TMM to 1 USD and the actual purchasing power of our national currency that stands at 24,000 TMM to 1 USD.
If, after denomination, one litre of petrol will cost 0.3 TMM, then its dollar equivalent will increase at least fivefold.
Such a significant increase in the cost of petrol will inevitably result in increased prices for nearly everything. Produce, social services, commodities and public transport is by far an incomplete list of what Turkmen people will have to pay for much more in 2009 than they do now.
Implacable laws of economics will shatter an illusion of building a Golden Age where gas, bread, salt, petrol and housing bills can cost almost nothing in a separately taken country which is isolated from the rest of the world.
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