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Mr. Harry Snoek and Ron van Rooden


Following independence in 1991, the states of the former Soviet Union continued to operate essentially within the framework of the monetary and financial system inherited from the Soviet era.1 The Central Bank of Russia took over the role of the now defunct Gosbank as the bank of emission, and the newly independent states continued to use the ruble as their currency. To many of the countries, the main attraction of being a part of the ruble area was the possibility of continued access to Central Bank of Russia credit to finance trade deficits with Russia. In January 1992, the Central Bank of Russia established correspondent accounts with the central banks of the individual states through which it provided credit, thus supplying rubles to settle interstate payments. The individual central banks also established correspondent accounts bilaterally.

Mr. Luis Valdivieso


Financial and foreign exchange markets in a number of the countries comprising this group have been significantly affected by the Asian crisis.16 The impact has differed widely, however, across individual countries, depending on such factors as the development and degree of international integration of domestic financial markets, preexisting economic weaknesses and policy problems, and the importance of economic links with the countries in crisis. Spillover effects from the Asian crisis have been felt in the financial and foreign exchange markets of a number of these countries, but most clearly in Estonia, Russia, and Ukraine. It was clear that in some cases, the short-term growth and inflation outlook may be adversely affected by the crisis. The extent of the deterioration, however, was expected to be contained, leaving growth in the group on a rising trend.

Jimmy McHugh and Emine Gürgen


Under the centralized planning system, the Central Asian states developed highly specialized and closely integrated economic relationships with the rest of the Soviet Union, notably characterized by a strong dependency on imports of energy, food, and consumer goods. During 1987–89, the region incurred trade deficits with the rest of the Soviet Union, averaging about 12 percent of GDP annually. The region’s production structure was heavily oriented toward agriculture and mineral extraction, which left little room for growth of import-substituting industries. The export bases of the Central Asian states, therefore, lacked diversification, and import dependency was high, making these countries particularly vulnerable to adverse trade shocks. During the Soviet era, prices for energy and raw materials were far below world prices, so that the net importer countries in the region benefited from sizable trade subsidies. Turkmenistan—the only net exporter, whose primary export is natural gas—was an exception. Following independence, the Central Asian states (with the exception of Turkmenistan until 1997) continued to incur sizable and persistent external current account deficits (Table 6.1). Three main factors accounted for this. First, the agricultural, industrial, and household sectors inherited from the Soviet era were highly energy intensive. Second, the demand for investment goods to replace obsolete capital was high. Third, after years of repressed consumption, import demand for western consumer goods surged. Hence, imports from non-traditional markets grew rapidly, despite strenuous attempts (notably by Turkmenistan and Uzbekistan) to restrain imports, mostly through foreign exchange restrictions.

Jimmy McHugh


Total external debt of the Central Asian states grew almost sevenfold during 1992–98, reaching $10.5 billion by end-1998 (Table 7.1 and Figure 7.1). The growth in debt started from a nonexistent base; all of the Central Asian states had effectively accepted the “zero option” following independence, under which Russia took over both the foreign assets and liabilities of the countries of the former Soviet Union (Box 7.1). The subsequent accumulation of external debt in the region occurred in two distinct phases. During 1992–94, the breakdown of the traditional trade and payments systems within the BRO countries, the collapse of the ruble zone, and large current account deficits financed by credits from Russia all led to the rapid accumulation of intra-BRO countries claims. From 1994 onward, the Central Asian states increasingly experienced more conventional forms of capital inflows. In order to promote economic growth—especially in export-oriented industries such as oil, natural gas, agriculture, and metal extraction—all five states resorted to foreign borrowing. Initially, most of the loans received were from official bilateral and multilateral sources. More recently, private sector flows—primarily in the form of FDI and commercial bank loans—have gained importance in a number of the Central Asian states (notably in Kazakhstan).

Jon Craig, Ivailo Izvorski, Mr. Harry Snoek, and Ron van Rooden


Achieving macroeconomic stabilization has been a key element of economic reform programs in transition countries, and many agree that sustained stabilization is essential for the resumption of economic growth. While stabilization appears to be a necessary condition for achieving growth, it is not a sufficient one. Another important condition for restoring sustained growth is structural reforms. In this regard, recent studies have shown that there is no shortcut to reforms; a comprehensive package combining progress in all areas, ranging from price and exchange liberalization to creating a market-oriented legal framework, is required.1 Some of these reforms can be undertaken virtually overnight, such as price liberalization, but others take more time to develop and implement by their very nature, including securing property rights and establishing a rule of law. Still, developing institutions that create a market-friendly environment cannot be delayed for too long, as the institutional vacuum that may appear will create opportunities for rent seeking and corruption. This will foster the development of strong vested interests, which, in turn, will oppose free competition, undermine the application of a rule of law, and may bring the transition process to a halt.


The transition economies in Europe and the former Soviet Union between 1991 and 1999 differed widely in terms of total capital flows and the share and composition of private flows. With some exceptions (notably Russia), the main source of private inflows was foreign direct investment. Portfolio investment was volatile, and concentrated in a handful of countries. Regressions show that direct investment can be well explained in terms of economic fundamentals, whereas the presence of a financial market infrastructure and a property rights indicator are the only explanatory variables that seem to have a robust effect on portfolio investment.