Exchange Rate Regimes and Macroeconomic Performance: A Comparative Study of Turkmenistan and Indonesia

Introduction

Exchange rate regimes have a major impact on the performance of a country's economy through their effects on inflation, economic growth, competitiveness of trade, and financial stability. The type of exchange rate system faced by the governments depends on the economic structure and policy goals of the government. There are advantages to having fixed exchange rates, in that they can help ensure price stability and minimize exchange rate uncertainty, but they also tend to restrict monetary policy options. Floating and managed floating, on the other hand, allow the currencies to be allowed to move according to market forces and thus enable economies to react more effectively to shocks from outside the system, but with more volatility in exchange rates. This essay is comparing two countries which have very different exchange rate policies: Turkmenistan and Indonesia. Turkmenistan has a very restricted fixed exchange rate, while Indonesia is a managed floating exchange rate system. The essay traces the evolution and application of the different regimes, as well as their impact on inflation, economic growth, exchange rate stability, and macroeconomic performance, and discusses the benefits and drawbacks of each.

Turkmenistan: A Case Study of a Fixed Exchange Rate Regime

Turkmenistan is an upper middle income economy with rich natural gas resources, thus its growth is heavily reliant on it. The hydrocarbon industry is the country's main export earner, source of government revenues and economic growth. Consequently, changes in global energy demand and prices can impact the nation's macroeconomic performance to a great extent. The economy is very centralized and the government plays a significant role in industries, investment and the financial system. Public investment has been a major driver of economic activity, especially in large-scale infrastructure, industrial development and social projects and relies on long term national development strategies. While the official GDP growth remains fairly good, Turkmenistan still has to deal with certain issues for more sustainable long-term growth rates, which involve certain problems of underdeveloped economic diversification, underdeveloped private sector and a need to increase the efficiency of public investments, institutional capacity and economic competitiveness. (Turkmenistan: Economy | Asian Development Bank, n.d.)

Turkmenistan has adopted a fixed exchange rate since 2015, where the official exchange rate is 3.5 Turkmen manat (TMT) per U.S. dollar. The fixed exchange rate is maintained with a lot of active government involvement in the foreign exchange market and strict restrictions on access to foreign exchange. It is the policy to ration foreign exchange for essential imports and strategic industries and restrict access to foreign exchange for businesses and individuals. These restrictions, in turn, have helped to foster an important parallel foreign exchange market that operates at a rate much lower than the official exchange rate. The fixed exchange rate has helped to keep the nominal exchange rate stable, but the IMF states that foreign exchange shortages and market distortions remain a constraint on the efficiency of the economy and the development of the private sector. (IMF Staff Completes 2025 Article IV Mission to Turkmenistan, n.d.).

Because of the Government's strict foreign exchange controls, there has been a big difference established between the official exchange rate and parallel (black market) exchange rate.

Parallel or black market exchange is one currency to another not regulated by banks. These rates result from a government that sets an official rate, uses the local currency and finds that it is in short supply. Official banks are not able to supply foreign cash at the fixed rate, so to satisfy the huge demand, private dealers and citizens establish an unofficial market on which price is free to fall or rise to meet demand and supply.

The official exchange rate is 3.5 TMT per U.S. dollar, while the unofficial exchange rate is reported to be 24.3 TMT per U.S. dollar, which represents a significant depreciation. About 1 manat is worth 16 U.S. dollars in the unofficial market in November 2025. This huge imbalance arises due to the continued foreign currency shortage and the availability of limited foreign exchange in the official market, which introduces distortions such as parallel exchange rate and arbitrary rationing in the domestic market and investor confidence. (OFFICIAL AND “BLACK MARKET” RATE OF THE NATIONAL CURRENCY IN TURKMENISTAN • Aznews TV, n.d.).

The fixed exchange rate regime has also given rise to some macro-economic problems. The IMF predicted the inflation rate will drop from 4.6% in 2024 to 2.7% in 2025 due to diminishing growth in non-food prices and monetary policy tightening. But there are underlying inflationary pressures as the official exchange rate does not reflect the market. The fixed exchange rate, along with periodic wage increases in the public sector, and massive government intervention, also leads to price distortions, inefficiency in the allocation of resources, and foreign exchange market imbalances remain. These difficulties emphasize the difficulties in sustaining a fixed exchange rate in a currency nonconvertible economy under strong state control (Key Conditions and Challenges, n.d.)

Official government figures showed economic growth in Turkmenistan increased by 6.3% in 2025, mainly due to robust public investment, infrastructure investments, and private consumption. Likewise, the Asian Development Bank (ADB) expects real GDP to rise steadily by 6.5% in 2026 and 6.2% in 2027 driven by government investments, continued growth in investment in the energy sector and increased growth in domestic demand. Despite these fairly optimistic growth forecasts, there are some issues of sustainability to the economic performance. The structural shortcomings indicate that the fixed exchange rate has helped to achieve short-term macroeconomic stability, but has not sufficiently tackled the country's long-term economic weaknesses or facilitated widespread and lasting economic growth. (Index of Economic Freedom: Turkmenistan | The Heritage Foundation, n.d.; Building a Competitive Investment Landscape in Turkmenistan, 2025).

But, the economic dependence on hydrocarbon exports puts it at risk of global changes in energy prices. The fixed rate has caused several difficulties in economic stability, which are mainly shortages of foreign currencies and investment barriers. The IMF has always encouraged a big initial adjustment of the official exchange rate to correct the issues and to have a more stable economy. (IMF Staff Completes 2025 Article IV Mission to Turkmenistan, n.d.

Indonesia: Evolution Towards a Flexible Exchange Rate Regime

Indonesia is an emerging diversified economy which has undergone significant economic reform to encourage sustainable growth and macro-economic stability. Its growth is not dependent on resources, but has a wide economic base such as manufacturing, agriculture, mining and services. The introduction of a fixed exchange rate was the first change that Indonesia made after the Bretton Woods system was replaced by a managed floating exchange rate after the Asian Financial Crisis (1997-1998). Bank Indonesia's inflation-targeting policy gives market forces a free rein in determining the rupiah's value, intervening only as needed to eliminate excess exchange rate volatility. Bank Indonesia intends to achieve price stability, economic growth and financial stability through monetary policy, foreign exchange intervention and macroprudential actions. Overall macroeconomic stability enjoyed by Indonesia has been enhanced by this flexible exchange rate regime, which also has helped to create an environment in which the economy is better equipped to withstand external economic shocks. (Chapter 19. Indonesia: From Monetary Program to Inflation Targeting in: Building Monetary and Financial Systems, n.d.)

The flexible exchange rate policies have been significant in maintaining macroeconomic stability in Indonesia, as it allows the rupiah to change with external shocks while maintaining monetary policy flexibility. Bank Indonesia assumes that inflation will stay within the target range of 1.5-3.5% in 2025 and 2026, due to the success of monetary policy and the well-anchored inflation expectation. The managed float also provides Bank Indonesia with the flexibility to step in the foreign exchange market if needed, to dampen excessive volatility in the foreign exchange market, in order to maintain investor confidence and financial stability. Consequently, Indonesia has been able to cope with economic uncertainties abroad and to maintain low inflation and economic growth. (Indonesia: OECD Economic Outlook, Volume 2026 Issue 1 | OECD, n.d.)This demonstrates the effectiveness of a flexible regime in managing price stability.

Indonesia has maintained solid economic performance under its managed floating exchange rate regime. The economy grew by 5.1% in 2025, supported by strong domestic demand, low and stable inflation, and sound macroeconomic policies. Although the global economic environment remains uncertain, Indonesia is expected to continue growing, with real GDP projected to reach 4.7% in 2026 and 5.0% in 2027. Bank Indonesia has played an important role in supporting this performance by managing exchange rate fluctuations while allowing the rupiah to respond to market conditions. Through foreign exchange market intervention and adjustments to interest rates when necessary, the central bank helps reduce excessive currency volatility, maintain investor confidence, and preserve financial stability. These policies have enabled Indonesia to better absorb external economic shocks while supporting sustainable economic growth and maintaining the competitiveness of its exports. (Indonesia Monetary Policy June 2025 - FocusEconomics, n.d.; Development Bank, n.d.)

The flexible exchange rate regime plays a vital role in Indonesia's overall economic stability and its ability to manage capital flows. Bank Indonesia's proactive approach helps mitigate external shocks and maintain market confidence.

Indonesia's exchange rate is influenced by both domestic and global economic conditions. The value of the rupiah changes in response to factors such as global financial market developments, international commodity prices, capital inflows and outflows, investor confidence, and monetary policy decisions made by Bank Indonesia. As a country that exports commodities such as coal, palm oil, and nickel, Indonesia is also affected by changes in global commodity prices. To reduce excessive fluctuations in the rupiah, Bank Indonesia regularly intervenes in the foreign exchange market and adjusts interest rates when necessary. These measures help maintain exchange rate stability, control inflation, and support overall economic growth and financial stability.(Rusydi, 2006)

Comparative Analysis

Key Differences in Exchange Rate Regimes

Contrasting Macroeconomic Outcomes

The combination of a managed float policy with the implementation of inflation targeting has been more successful in achieving inflation within a targeted range in Indonesia. While Turkmenistan's fixed rate is intended to ensure stability, it has caused some price distortions and room for potential underlying inflationary pressures. Indonesia's flexible structure is conducive to a more diversified economy and continued growth, which offers the flexibility to adjust to external conditions. Turkmenistan's development continues to be predominantly hydrocarbon dependent and the fixed rate could stifle diversification and investment in non-hydrocarbon sectors.

The flexible exchange rate in Indonesia offers a cushion to external shocks, where the currency absorbs some of the shock. Turkmenistan's fixed rate renders the country more sensitive to external pressures, which is reflected, for instance, in the foreign currency shortage. Exchange rate policies that are relatively open and transparent create a more favourable investment climate in Indonesia that leads to the influx of foreign direct investment. The strict control measures and the price differences in the black market make it uncertain whether this will help to attract foreign investment to Turkmenistan. When the experience of Turkmenistan is taken into account, it becomes clear that the difficulties of keeping a price stable in spite of the market realities result in parallel markets, distortions, etc. Indonesia's experience shows that a gradual shift to a more flexible and market-driven exchange rate regime, with well-established and good monetary policy frameworks, can be effective. (Key Conditions and Challenges, n.d.)

Conclusion

This comparative analysis shows that Turkmenistan's fixed exchange rate policies have sought to ensure stability, but have led to considerable market distortion, foreign currency shortages and possible inflation. Conversely, the transition to a managed float and inflation targeting in Indonesia has resulted in increased macroeconomic stability, effective management of inflation and economic growth via diversification. The decision on the exchange rate regime has important policy consequences. Though nominal stability is provided by a fixed regime, it can also cause inefficiencies and vulnerabilities if not backed by adequate reserves and flexible fiscal policy.

A future scenario for Turkmenistan may be one of a gradual and well-managed move towards a more flexible exchange rate, as suggested by the IMF, to diversify the economy and facilitate investment. Indonesia is expected to adjust its managed float system to further ensure price stability and sustain economic growth in the face of uncertainties in the world. The current discussion on what the best exchange rate regime is for a developing or transition economy highlights the difficulty of economic policy formulation. The lessons learned from the experience of Turkmenistan and Indonesia highlight the importance of flexibility and good government in dealing with the global economy, given the trade-offs and implications of the various options.

References

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