Background Paper and Statistical Appendix

This Background Paper and Statistical Appendix for Turkmenistan examines the developments since November 1993, when the manat was introduced as the national currency. Developments in the real sector and systemic reforms are discussed. Fiscal policies, monetary and credit policies, external developments, and the exchange and trade system are described. The paper highlights that over the medium term, the path toward sustainable growth clearly includes the development of alternative routes for the shipment of gas outside the territory of the Former Soviet Union.


This Background Paper and Statistical Appendix for Turkmenistan examines the developments since November 1993, when the manat was introduced as the national currency. Developments in the real sector and systemic reforms are discussed. Fiscal policies, monetary and credit policies, external developments, and the exchange and trade system are described. The paper highlights that over the medium term, the path toward sustainable growth clearly includes the development of alternative routes for the shipment of gas outside the territory of the Former Soviet Union.

I. Introduction

Turkmenistan, a country of 4 million in the southernmost part of the former Soviet Union, is well endowed with natural mineral resources, primarily natural gas and oil. It is also a major producer and exporter of cotton. Prior to independence in 1991, Turkmenistan’s development was integrated with the economic goals of the Soviet Union, which emphasized specialization. Within that framework, Turkmenistan’s role was to supply energy and raw materials to other Soviet republics, with which it conducted 95 percent of its external trade. The trade flows reflected a narrow band of exports and a wide spectrum of imports. As a result, Turkmenistan developed a more trade-dependent economy than most other FSU countries.

The legacy of the Soviet era became evident in late 1993 when an earlier improvement in the country’s energy terms of trade was seriously eroded by the inability of some FSU countries to pay for their gas imports from Turkmenistan. This situation led to an increasingly acute problem of external arrears, which has dominated decision making and profoundly impacted economic developments in the country since the introduction of the national currency, the manat, in November 1993. This external constraint has substantially slowed the pace of systemic reforms and the adoption of market principles in economic policymaking.

A key policy aim has been to safeguard foreign exchange reserves, as a precautionary measure against future payment problems. The authorities’ approach, although successful, has been brought about mainly through controls and centralization. A heavy compression of imports has been achieved through restrictions on access to foreign exchange, while keeping the official exchange rate at a highly appreciated level. At the same time, the authorities have relied almost exclusively on short-term external debt to finance the widening current account cash deficit.

This approach has been necessitated by inadequate domestic macroeconomic policy adjustment. With the exception of strenuous, and largely successful, efforts to reduce budgetary spending in the face of sharply declining revenues, other policies have not been adequately supportive of the fiscal strategy. In particular, credit policy has been too expansionary—especially in regard to the agricultural sector—and state enterprises have not yet faced a hard budget constraint. In general, the authorities have followed a cautious approach in the modernization of the economy and in the move toward a market economy.

While Turkmenistan has been spared the ethnic tensions that have characterized some of the other FSU countries, its measured pace of reform has not been without costs: inflation averaged over 3,000 percent in 1993 and over 2,000 percent in 1994; the decline in GDP accelerated to 10 percent in 1993; the external debt has risen sharply in the past year; an overvalued exchange rate has led to hoarding and smuggling; and the lack of systemic reforms has created strong disincentives for the development of a private sector.

Over the medium-term, the path towards sustainable growth clearly includes the development of alternative routes for the shipment of gas outside the territory of the FSU, which will require expensive capital projects and the ability of the economy to generate resources for their financing. In the meantime, the authorities have shown willingness to participate in international efforts to support the adjustment programs of other FSU countries and to assist them in overcoming their current payments difficulties. The emphasis in this paper is on developments since November 1993, when the manat was introduced as the national currency. Developments in the real sector and systemic reforms are discussed in Chapter II. Fiscal policies, monetary and credit policies, external developments and the exchange and trade system are discussed in Chapters III-VI. A Statistical appendix and other appendices are also attached.

II. The Real Economy and Systemic Reforms

One legacy of Soviet-era planning is the highly specialized nature of Turkmenistan’s economy. Gas production alone accounts for nearly 60 percent of GDP. Three-quarters of gas produced is exported to other FSU countries and the remainder is used for local industry and household consumption. Economic performance during 1993 and 1994 was dominated by the effects of the accumulation of arrears on payments for gas by some FSU countries, which nullified the favorable terms-of-trade effect of the move to world energy prices within the FSU. Cotton is also an important commodity as 95 percent of production is exported outside the FSU thus avoiding payment difficulties.

1. Output and growth

The importance of energy exports to the Turkmen economy helped ameliorate the initial effects of the breakup of the U.S.S.R., as prices moved toward world market levels. The output decline of 4.7 percent recorded in 1991 was primarily due to a poor cotton harvest, with industrial output supported by the completion of the Chernev oil refinery and construction activity expanding.

The emergence of arrears on natural gas payments by other FSU countries led to reduction in industrial production of 16.3 percent in 1992, a further 12 percent in 1993, and by an estimated 28.7 percent in 1994. Poor harvests in 1992 and 1993 also led to declines in agricultural output. The total drop in GDP in 1992 was 5.3 percent, whereas the decline that occurred during 1993 created by the fall in gas output was mitigated by the construction boom and is estimated to have been 10.2 percent (Chart 1).

Chart 1
Chart 1

Turkmenistan: Real Sector Indicators, 1991-94

Citation: IMF Staff Country Reports 1995, 027; 10.5089/9781451837209.002.A001

Source: Data provided by the authorities; and staff estimates.1/ Nominal wages deflated by consumer prices.

Although weather conditions in 1994 permitted a good harvest of fruit and vegetables, cotton production is estimated to have fallen slightly, and real growth in agriculture in 1994 was thus negligible. Construction activity in 1994 also appears to have fallen slightly after a very high growth in 1992 and 1993. Transport has declined significantly, as sharply higher real tariffs took effect, but other activity is estimated to have risen particularly in the service sector.

As construction cooled off, agriculture remained steady, and gas output continued to fall, the decline in output is estimated to have accelerated to 19.5 percent in 1994.

2. Sectoral developments

a. Energy and industry

The substantial rise in producer prices of energy that has occurred since the breakup of the U.S.S.R. has been reflected in an increase in the measured importance of the energy sector in the overall economy and export performance. Current estimates suggest that the gas industry accounts for around 60 percent of total GDP (Table 1). Employment associated with the production of gas, however, accounts for only 2 percent of total employment or 18 percent of employment in all industries (Tables 30 and 31). Turkmenistan has chiefly sought new investment in its energy industries by way of intergovernmental deals, as private foreign investors have been less forthcoming.

Table 1.

Turkmenistan: Structure of National Income Produced and Utilized, 1988-94 1/

(In percent of NIP)

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Source: Data provided by the Turkmen authorities.

Data for 1992,1993 and 1994 are incomplete, because they do not include the trade balance.

Also known as net material product.

Understates value-added by the natural gas sector until 1992

Includes trade and distribution, other branches, and until 1992, special earnings of foreign trade.

Turkmen authorities do not routinely calculate total national income utilized, due to problems with obtaining information on the trade balance.

Includes outright loss of livestock, losses on unfinished construction projects and losses due to total brakdown or physical loss of any asset; it does not include depreciation.

Calculated as a residual from national income produced.

(i) Gas

In June 1994 an agreement was reached in principle on the construction of a 1,470 km gas pipeline from Turkmenistan through Iran to Turkey and Western Europe. This pipeline is intended to be capable of providing transportation for up to 15 billion m^ of gas per year after a four-and-a-half year construction phase, and to reduce the dependence on Russia and other FSU countries for export revenues. Clarification of Russia’s role in this project is being sought in order to secure private foreign investment. Initially, only 5 billion m3 will be sold, all of which is to be purchased by Turkey. The rest of the capacity is to be used to supply Western Europe when subsequent stages of the pipeline are completed.

(ii) Oil

Turkmenistan currently produces 5.2 million tons of oil per annum, and has two oil refineries to meet both domestic demand and annual average exports of 1.2 million tons. Proven extractable reserves total 698 million tons. 1/ In 1992 Iran signed contracts to assist in the construction of an oil refinery in Turkmenbashi (formerly Krasnovodsk). Plans also exist for development of offshore deposits in the Caspian Sea.

b. Agriculture

The agricultural sector accounted for 43.7 percent of total employment and for 12.2 percent of GDP in 1993 (Tables 1 and 30). 1/ Most agricultural output is driven by state orders and trade takes place at state determined procurement prices. Production and distribution of most agricultural products are still tightly controlled by the state. A portion of each year’s planned output is due to the state as payment for the use of land, the remaining planned output must be sold at state procurement prices, and only output exceeding the planned level may be directly sold by the producer.

Two main thrusts of policy are evident in agricultural production. The authorities are keen to diversify away from cotton monoculture and to increase Turkmenistan’s degree of self-sufficiency in wheat production. Additionally, attempts have been made to encourage a greater degree of downstream-processing within the food industry through the promotion of foreign investment. However, problems with the legal framework have discouraged many foreign companies from participating fully in tendering processes on recent reconstructions of flour mills, dairies and meat processors.

(i) Cotton

Although Turkmenistan is implementing a program of diversification, nearly half of all agricultural production is accounted for by cotton. 2/ The concentration of agricultural output on cotton was a result of Soviet planning and extensive irrigation provided free of charge to producers.

Until the summer of 1994, the Commercial Center in the Ministry of Agriculture was the primary exporter of cotton from Turkmenistan, but other enterprises could obtain an export license from the Presidential Commission for International Economic Affairs. All cotton sales must now be registered with the newly formed State Commodity Exchange (SCE). Any sales made in foreign currencies are arranged through the Central Bank of Turkmenistan (CBT); the foreign currency is deposited by the purchaser with the CBT, and the CBT pays the Ministry of Agriculture the manat equivalent at the commercial exchange rate. In the fourth quarter of 1994, the price to purchasers was around US$1,400 per ton. Goskomstat estimates suggest that over 90 percent of 1994 cotton exports, in volume terms, are destined for non-FSU countries, up from around 80 percent in 1993.

Although procurement prices for cotton differ greatly from the manat price received by the Ministry of Agriculture, not all of the difference is available to the Ministry for cross subsidization. In addition to provision of free inputs into cotton production, the Ministry also provides basic processing of the cotton after procurement, thus absorbing much of the difference in prices. Sales of cotton are, nonetheless, an important source of revenue for subsidization of agricultural consumer goods.

Cotton receives basic processing at local plants, but until 1993 only 5 percent of cotton received further processing. The opening of new mills in 1994 was estimated to have increased the amount processed to nearly 15 percent, and the authorities expect to see a further rise to 30 percent of total cotton production in 1995.

c. Construction, transportation and other services

Construction activity was strong as the new international air terminal in Ashgabat was completed in late 1994, and a new rail connection between Mashkhad in Iran to Sarakh’s in Turkmenistan was in progress during 1994.

The tight integration of the Soviet Union led to a transportation system geared toward links with Russia and other FSU states. Railway and highway construction in Turkmenistan is thus important not simply for replacing Soviet-built infrastructure, but also to facilitate the refocusing of Turkmenistan toward non-FSU countries, and Iran has agreed to assist in financing such improvements.

The service sector caters almost exclusively for industrial clients, with consumer services remaining very limited.

3. Aggregate demand

Disaggregation of national expenditure is highly imprecise due to methodological flaws in the procedures used by Goskomstat. Goskomstat estimates investment exceeded 50 percent of National Income Produced (NIP) since 1991, but much of what Goskomstat includes under investment is purely revaluation due to asset price inflation (Appendix I).1/

More than half of total true investment in 1993 was undertaken through the central government budget, with an additional 45 percent undertaken by state enterprises and collective farms.

4. Retail and wholesale prices and price controls

Prices of a large number of goods are either directly controlled by the authorities, or are subject to review based on markups over cost and the “current economic situation.” Reform has been piecemeal, and the continuation of the subsidization of staple items in a highly inflationary environment has created severe price distortions.

a. Price controls

Until 1992, all price and quantity decisions were taken at the producer level through a system of state orders (Goszakaz). Reforms since then have allowed around half of all retail sales to be transacted at flexible prices. 1/ Such a description may, however, overstate the relative importance of flexible-priced goods by focusing on the value of sales rather than the value of production. 2/

Goods sold in Turkmenistan now fall into four categories:

(i) Necessities

There are 24 products, primarily foodstuffs (bread, flour, dairy products and sugar) and utilities (gas and water to households), which have their prices set by Presidential Decree.

(ii) Goods under Presidential review

There are 40 items, including additional foodstuffs, petroleum products sold to households and intercity transportation, the prices of which can be altered only after a request has been presented to the President. The mechanism usually takes the form of the relevant ministry providing details of cost changes to the President.

(iii) Other consumer goods

There are 473 items, including higher quality foodstuffs, cotton fabrics and knitwear, the prices of which cannot be altered without agreement by the Ministry of Economy and Finance. An agreement must be reached with the Committee for Price Formation, which was previously known as the Anti-Monopoly Committee, and is chaired by the Minister of Economy and Finance. These goods are effectively priced at cost plus variable mark-up, where the mark-up is determined by current social and economic conditions.

(iv) Other goods

There are around 5,000 products, including televisions, refrigerators, carpets, cables and furniture produced domestically, in FSU countries and in non-FSU countries, the prices of which are freely determined by the relevant enterprises.

The imposition of fixed prices on necessities is based on the Presidential Decrees of October and November 1993. The identity of the goods concerned has not since been altered, but retail and procurement prices were raised by Presidential decrees in March and May 1994.

b. Retail prices in 1993 and 1994

Two spikes in inflation are evident in 1993. Prices increased by 141 percent in February (218 percent for the quarter) and 429 percent in November (752 percent for the quarter), with the end-period annual rate totalling 9,743 percent. The spike in inflation in November 1993 was caused by a significant adjustment in the prices of goods subject to controls coincident with the introduction of the manat. Retail prices have increased less in 1994 than in 1993, with average rises of 140 percent, 91 percent and 96 percent in the first three quarters, respectively, and increased by 852 percent by the end of the ten months to October 1994 (Table 2 and Chart 1).

Table 2.

Turkmenistan: Prices and Wages, 1990-94

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Source: Data provided by the Turkmen authorities.

Although food prices have previously risen faster than the Retail Price Index (RPI), 1/ in the ten months to October 1994 the opposite picture emerged (Table 23). Food prices rose by only 360 percent, while nonfood prices increased by 1,071 percent. This masks, however, considerable variation; vegetables and vegetable oil, fish products, eggs, paper products, clothing and cosmetics all recorded substantial rises, while sugar, confectionery, flour, bread, potatoes, tobacco and sporting goods recorded rises below average. The change in relative inflation rates seems to be due to the continuation of state subsidies for the basic consumption items, including meat, vegetable oil, butter, milk, tea, sugar, bread, and flour. 2/ Growth in the price of services outpaced prices rises in both food and nonfood goods in 1993, totalling more than 53,000 percent. A further increase of 345.9 percent was recorded in the first ten months of 1994 (Table 23).

Both price levels and inflation rates are geographically variant. Prices of basic items differ by up to 150 percent 1/ and the rate of increase in prices differed by up to 580 percentage points in 1993. 2/

c. Producer prices

Producer prices can diverge significantly from retail prices primarily because of subsidies, rationing, and the exclusion of some imports from the RPl. Producer price inflation, as measured by the Producer Price Index (PPI), had significantly outpaced the rise in the RPI between 1991 and 1993. At nearly 300 percent in 1991, PPI inflation was almost double RPI inflation; with the continued use of price controls on oil, gas and food processing the discrepancy grew even greater in 1992, as producer prices surged more than 8,800 percent (Table 2 and Chart 1). The rise in the PPI during 1993 was even larger than in 1992, but as RPI inflation also accelerated, the divergence between the two indices was somewhat reduced. To the extent that the gap has been caused by omission of imports and different weights associated with each type of good, the higher rise in the PPI need not imply a buildup of inflationary tensions. That part of the gap caused by subsidization and rationing of consumer goods, however, may be suggestive of increased subsidization and repressed RPI inflation.

In the ten months to October 1994, wood processing, chemicals, machine building and construction materials recorded the largest rises, with considerable jumps in chemicals and petrochemicals coming within the last month. The smallest price rises occurred in dairy products, flour, and fodder (Table 24).

5. Wages and employment

a. Minimum and average nominal wages

Turkmenistan imposes a minimum wage across all sectors of the economy. Although only around 10 percent of workers are paid at the minimum rate, the impact of adjustments in this rate are more widely dispersed. The link between the average and minimum money wage in Turkmenistan was formalized in January 1992, when the Unified Tariff Schedule for state enterprises, the private sector and joint ventures was adopted. This schedule set wages for positions differing by skill or danger level as particular multiples of the minimum wage.

The current situation is less clear; civil servants are still paid according to a fixed schedule, but as explained below, wages in the enterprise sector may be set by the individual enterprises themselves, subject to an excess wage tax.

Throughout 1990, the minimum wage was set at Rub 70, or manat 0.14. 1/ As shown in Table 2, the minimum wage increased by 13,614 percent in seven discrete adjustments in the period before the elimination of the ruble on November 1, 1993. 2/ The introduction of the new local currency, the manat, coincided with an increase in the minimum wage by 681 percent to manat 150. The only increase since then was to manat 250 on July 1, 1994.

The average wage across all sectors of the economy, as calculated by Goskomstat, has risen from the equivalent of manat 0.44 in the first quarter of 1990, to manat 1,979 as of December 14, 1994. The link between the minimum and average wage in the civil service is formalized through the specification of particular multiples of the minimum wage paid to different types of workers.

State enterprises are not subject to these constraints, but do face, however, an excess wage tax. Wages in state enterprises are determined by the individual enterprises, subject to an excess wage tax at a rate of 25 percent. Under this legislation, companies pay both a profits tax based on revenues less costs including a basic wage component and, in addition, they pay a 25 percent surcharge on the amount by which the wage bill exceeds a specified threshold. The basic threshold is three times the minimum wage, but is adjusted upward for particular industries favored by the authorities. 3/ As the profits tax is based on costs net of only basic wages, the share of profits paid out as bonus wages in excess of the threshold is thus taxed twice. The relationship between the minimum and average wages has, as a consequence of the limited freedom in wage setting available to enterprises, been far from constant (Table 2). The ratio increased slightly from around 3.5 to 5.6 between 1990 and 1992. The ratio rose to 5.7 by the third quarter of 1993, after which the new wage levels set simultaneously with the adoption of the new local currency led to a substantial fall to 3.2. The experience since the introduction of manat-denominated wages suggests that there is pressure for the wage gap between minimum and average wages to rise, at least when the ratio is below its current plateau of around 4.4. A priori it might be reasonable to expect that a rise in the minimum wage would not be fully reflected immediately in the average wage, thus lowering the ratio. The period after the discrete adjustment in the minimum wage might then be expected to witness general upward pressure on wages in the enterprise sector, and thus a rise in the ratio. There does not, however, appear to be any such stable relationship between adjustments in the minimum wage and the shifts in the ratio. Rather, the cash flow of state enterprises determines their ability to pay bonus wages to their workers, and thus the economy-wide average wage, somewhat independently of the minimum wage.

b. Real wage movements

Before the introduction of the manat, the real value of the minimum wage, as obtained by deflation of money wages by the Goskomstat RPI price index, fluctuated from a low of 49 percent of its end-1990 value in the second quarter of 1992, to a high of 135 percent in the fourth quarter of 1992. The maintenance of the nominal value of the minimum wage decreed on November 1, 1993 resulted in a decline in the real value to 16 percent of its end-1990 value at the end of the third quarter of 1994 (Table 2).

The average real wage more than doubled in the fourth quarter of 1992, but has slipped substantially since then. By the fourth quarter of 1993 it had fallen to 58 percent of its 1990 real value, at which time it represented 320 percent of the minimum wage. In the third quarter of 1994, even after the rise at the beginning of July, it was barely one fifth of its 1990 value (Table 2 and Chart 1).

It is important to note, however, that this measure of the real wage may overestimate the decline in living standards. Many goods are provided free of charge or at heavily subsidized prices. While the rise in prices of goods not subsidized by the state does indeed lower the real value of money wages, total remuneration clearly includes subsidized goods, and the ability of workers to consume such goods has not declined to the same degree. The rationing of some fixed-price goods, however, may imply that the exaggeration of the decline in consumption possibilities is less marked for the average wage earner than the minimum wage earner. 1/ Appendix IV shows that if subsidies are ignored, the real wage in 1994 would drop to only 14 percent of its end 1993 level, whereas if per capita subsidies are added to the simple measure of the nominal wage before deflation, the estimated decline would be to only 61 percent.

c. Sectoral average wages and employment

As of the third quarter of 1994, the highest wages were paid in industry (manat 1,416), transportation (manat 1,461), communication (manat 1,408) and construction (manat 1,632), while wages in forestry (manat 806), printing (manat 809), education (manat 804) and cultural activities (manat 812) were only around half as much (Table 27).

Over three quarters of workers are employed in what the Turkmen authorities term the “material sector” (Tables 3 and 30). 2/ More than 40 percent, of all workers are employed in agriculture, ten percent in industry and a further 10 percent in construction. The only other major employers are the education, trade and health sectors.

Table 3.

Turkmenistan: Population, Labor Force and Employment, 1988-93

(In thousands of persons, average)

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Source: Data provided by the Turkmen authorities.

Defined as men between the age of 16 and 59 years and women between the age of 16 and 54 years.

Includes students over the age of 16 and people of working age not officially employed.

Unemployment, inactive population and total labor force data are derived from different sources, and are not directly comparable.

d. The minimum consumption basket

The minimum wage is intended to be sufficient for the purchase of certain prescribed basic commodities and services, which are known as the “minimum consumption basket” (MCB). 3/ After rising 2,644 percent in 1993, the cost of the MCB rose 490 percent in the ten months to October 1994, whereas the RPI rose by 852 percent (Tables 23 and 29). The expenditure share of food in the basket halved from over 40 percent in 1992 to around 20 percent by October 1994. 4/ The largest components of the basket are now furniture and clothing.

The fixity of quantities per item specified in the MCB, in an environment of changing relative prices, implies that the expenditure weights within the basket are subject to change. These changes in weights of each component seem primarily to reflect discrete adjustments in controlled prices. A comparison of real wage measures using both retail prices and the MCB as deflators is contained in Appendix V.

6. Systemic reforms and privatization

Land reform has been tentative at best. In rural areas, individuals have an option to lease or own up to 50 hectares of land, but processing of applications has been slow and many prohibitive conditions are attached to grants. In urban areas, the situation is more confused. Privatization of apartments has been suspended, pending a solution to issues of joint maintenance of infrastructure servicing all tenants.

Privatization has generally moved slowly; some smaller retail outlets and restaurants have been sold off, but sales of enterprises employing more than 100 persons are yet to be implemented. The sales are made by way of one of three processes: (i) open auctions, with a floor price set up by a dedicated commission; (ii) buy-outs, in which existing workers pay an agreed price; and (iii) contests, in which closed bids include improvement and renovation plans. Small enterprise reform has moved ahead, with privatization of around 850 consumer service enterprises primarily by way of auction, and the emergence of around 3,000 completely new small businesses since independence. In the first ten months of 1994, manat 81 million was received as payment for privatized enterprises, with a further manat 120 million expected by the end of the year. 1/ Proceeds from consumer services (e.g., shoe repair) are split equally between local and central government, and proceeds from trading enterprises (e.g., restaurants) go entirely to the Central Government. Outright ownership is granted where a well-defined property is associated with the enterprise; where the property is shared with other enterprises, a long-term lease is granted.

There has, however, been no movement on reorganization of other enterprises. The program of privatization prepared by the Turkmen authorities called for creation of a voucher scheme for large enterprises and a variety of alternatives for medium-sized enterprises, but there is no evidence of any progress toward any of the initial conditions required for such privatization.

The Presidential Decree regarding the privatization of industrial enterprises in Turkmenistan released on May 13, 1994 provided for the opening of the privatization process for industrial enterprises on July 1, 1994. 1/ Shares in industrial enterprises with a work force of up to 100 persons may be bought by both citizens and nonstate entities of Turkmenistan and foreigners, albeit not on equal terms. Supplement No. 1 on “Privileges granted to labor collectives during privatization of state property” provides that all members of labor collectives of privatized enterprises shall receive registered and preferred shares up to 20 times the monthly minimum salary, and may purchase ordinary shares at a discount of 30 percent off face value up to 6 times the monthly minimum salary with payment due within one year. The total value of privileges granted to employees must not exceed 30 percent of the estimated value of the sale price, but it is not yet clear how this will be enforced within a highly inflationary environment. 2/

One alternative provided for medium-sized enterprises is self-privatization. Recent legislation permits a collective that declares its intention to purchase the enterprise from the relevant ministry to retain 50 percent of profits until sufficient proceeds are obtained for outright purchase. Control remains with the relevant ministry during this period, and it is not obvious why, with an excess wage tax of 25 percent, any enterprise would choose to set up a privatization fund in preference to paying out profits in the form of wages.

Enterprises employing over 100 people will become joint-stock companies, with control remaining in the hands of the state. Local authorities will be involved in the operation of privatized enterprises, and the nature of the business may not be altered after the enterprise leaves the state sector.

7. Environmental issues

The Government of Turkmenistan enacted a comprehensive environmental law in 1992, which covers land, air and water use. In addition, activities are presently under way to widen the powers of enforcement, and increase the specificity of particular aspects of this law. Detailed laws on air and fauna use are also under preparation.

Despite this broad concern, however, the Government does recognize that the alleviation of existing environmental problems and the prevention of future difficulties is still highly deficient. In part this reflects a shortage of financial resources in the relevant government agencies. It also reflects the need for technical assistance to address the needs for scientific environmental assessments and the compilation of specific regulations. Added to these constraints, there is insufficient monitoring and coordination between the Ministry of Nature Exploration and Protection, other government ministries and local authorities and development bodies. As a result, land use planning in both rural and urban areas is deficient.

A key environmental concern in Turkmenistan is water quality and usage. The shrinking of the Aral Sea is a major ecological problem, and the Government attaches great importance to solving this difficulty. An Interstate Committee was established in early 1993 to coordinate action between Uzbekistan, Kazakhstan and Turkmenistan, and a special fund established with support from the World Bank’s Environmental Facility. The problems of the Aral Sea and its associated rivers, causes water problems in the northern part of the country. The extensive use of untreated ground water for drinking causes intestinal health problems to a much higher extent than that experienced in other parts of the country. USAID is presently implementing a water purification project in the Tashauz Velayat. Untreated sewerage flows into the Amur-Darya from both Uzbekistan and Turkmenistan, creating further health dangers. There have been discussions between the two states, but little action has been taken to remedy the situation.

Turkmenistan has also experienced problems in the past from inappropriate herbicide and pesticide use, causing damage to underground and surface water. The use of DDT type pesticides is now banned and a switch has been made to more benign and safer chemical solutions. A difficulty remains, however, with the disposal of existing stocks of DDT based pesticides. Turkmenistan does not have the facilities to dispose of these chemicals, and funds have not been made available to build such a facility.

III. Budgetary Policies and Fiscal Developments

1. Overview

Fiscal developments in Turkmenistan have also been dominated by developments in the natural gas sector. In 1992 and most of 1993 this sector brought about a fundamental improvement in the Government’s fiscal position as a result of substantial amounts of hard currency from Turkmenistan’s exports to non-FSU countries. However, the gas exports arrears problem that arose late in 1993 has put serious pressure on the budget.

The main fiscal characteristic of the period under consideration is the sharp decline in both revenues and expenditures. Gas exports revenue, which accounted for slightly over 60 percent of total budgetary revenue in 1992 and 1993, fell drastically to 10 percent over the first nine months of 1994. As a result, the budget position deteriorated sharply during this period, registering a deficit of 2.5 percent of GDP (Table 4 and Chart 2).

Chart 2
Chart 2


Citation: IMF Staff Country Reports 1995, 027; 10.5089/9781451837209.002.A001

Source: Data provided by the authorities; and staff estimates.1/ Extrabudgetary funds, including Foreign Exchange Reserve Fund.2/ Includes Defense and State Administration expenditures.
Table 4.

Turkmenistan: Financial Operations of the General Government, 1990-94

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Source: Ministry of Economy and Finance; and staff calculations.

Due to the increasing payment arrears for natural gas exports, in 1994 the fiscal authorities began to implement quarterly “emergency” budgets aiming to limit expenditure to a minimum sustainable level, as close as possible to realized budget revenues. Although the quarterly budgets have been more realistic than the annual budget, the overestimation of revenues and underestimation of expenditures remained an issue throughout 1994.

2. Structure of the public sector

a. Budget coverage

The present budget coverage of the General Government does not give a clear picture of public sector activities in the economy. 1/ The two weakest areas are: (i) the exclusion of some subsidies from the budget; and (ii) the lack of a clear delineation between the budgetary and commercial activities of the branch ministries.

Appendix VI shows the government agencies and ministries that are either supported by the budget or are mainly self-supporting. The present organization of the budget of the General Government does not permit a clear distinction between budgetary organizations (dealing with budgetary and governmental activities, mainly public goods) and state enterprises (dealing with commercial and/or market-oriented activities). For example, transactions of entire ministries, such as the Ministry of Agriculture and Food, are not covered by the budget, although they continue to receive transfers from it.

The fiscal authorities have not yet succeeded in bringing the activities of these agencies and ministries into the budget. However, according to the 1995 Budget Law, all self-supported institutions must report their revenue and expenditure to the MEF. Although this requirement will increase the information available on government activities, it does not compel all government agencies to follow the budgetary procedures, which would allow for more control on budget execution.

The FERF has not yet been transferred to the Central Bank and its expenditures for imports and amortization still do not appear in the budget. Similarly, import expenditures paid for with foreign credits are not classified as budgetary transactions as they are not covered by the central or local budgets.

In 1994 the majority of subsidies were covered by ministries whose transactions are not included in the budget. This has been the case as regards price subsidies on gas, electricity, meat, dairy products, baby food, and sugar. The 1994 budget covered price subsidies on bread, flour, medicines, rent and utilities, and transportation.

b. Local budgets

The local government structure in Turkmenistan consists of three levels: regional budgets, or “velayat”; subregional budget, or “etrap”; and rural budgets. Each level of government prepares and approves its own budget.

The local authorities are allowed to levy their own revenues in terms of taxes and fees. The legislation specifies the areas where the taxes and fees can be levied and imposes upper limits on rates or amounts. The main local taxes and fees are: a tax on the construction of resorts, an advertising tax paid by legal entities and individuals, a tax on the resale of automobiles and equipment, resort fees, business operation fees, licensing fees for the sale of wine and vodka products, special fees to support the police, licensing fees for the right to hold local auctions and lotteries, and fees for parking motor vehicles.

c. Development of the Treasury

The most important institutional development in 1994 was the preparatory work done for the establishment of a Treasury within the MEF, which was introduced on January 1, 1995. The Treasury is to be in charge of expenditure control, including accounting for government operations, as well as of cash management.

(i) Structure of the treasury system

A three-tier treasury system structure was established: The central office, six regional offices (RTOs) at the “velayat” level, including Ashgabat City, and 55 subregional offices (STOs) at the “etrap” level. The three-tier treasury system offices have five main functions. First, all payment orders issued by the spending units shall be submitted to the RTOs. The RTOs check that (a) funds have been authorized, (b) documentation on goods and services received is correct, (c) payment requests have been authorized, and (d) funds are available in the treasury account. Second, they enter the approved payment orders in the treasury books of account, post them in the treasury ledger, and send the payment orders to the Central Bank for payment. Third, they reconcile all payments made by the Central Bank against payment orders issued each month by the RTOs. Fourth, they monitor the central bank treasury subaccounts to ensure that balances are sufficient to meet anticipated payments, reconcile payments and receipts with the treasury ledgers, and transfer revenues recorded by the State Tax Inspectorate daily to the treasury subaccount. Fifth, they prepare detailed reports on budget execution to the Central Treasury.

(ii) Computer system

A PC-based computer system has been developed for treasury operations and an instruction manual has been issued by the Treasury. All RTOs have been provided with PCs, which they are now using to record warrants and payment orders. The system automatically updates the balance available under each article of expenditure whenever changes are entered. To facilitate the rapid transmission of data from the RTOs to the central office, modems have been provided to all the RTOs and a few telephone lines have been earmarked for this purpose. The RTOs send budget execution reports every five days to the central office, which generates a consolidated report on budget execution for government as a whole.

(iii) Coverage and unified treasury account

Since October 1, 1994, local budgets of various velayats and etraps have been brought under the treasury system. The procedures used are those used by budgetary organizations. The treasury offices maintain separate books of accounts for central and local budgets. From January 1, 1995 onward, all the bank accounts of spending units under the centralized budget have been closed and a unified treasury account has been established with the Central Bank. These spending-unit bank accounts have been replaced by ledger accounts with the treasury system.

3. Fiscal developments in late 1993 and 1994

In 1992 the overall budget surplus was 13.2 percent of GDP. This outcome reflected a substantial increase in the price of gas exports to hard-currency areas and was accounted for in the budget as an increase in the deposits of the FERF. 1/ In 1993, however, the budgetary revenues fell drastically and resulted in a consolidated budget deficit of 0.4 percent of GDP. This trend continued and worsened in 1994; during the first nine months of the year the deficit amounted to manat 2.7 billion, or 2.5 percent of GDP (Table 4 and Chart 2).

a. Revenue

Revenues declined abruptly in 1993 from their level in 1992; for the year as a whole, revenues were 19.2 percent of GDP in 1993, compared to 42.2 percent of GDP in 1992. As the payment arrears situation for gas exports to the FSU countries became more extreme in 1994, revenues continued to decline in the course of the year, and dropped to 6.3 percent of GDP in the first nine months of 1994. Total taxes from gas declined from about 59 percent of total revenue in 1993 to 10 percent in the first nine months of 1994 (Table 4).

b. Expenditure

In 1993 total expenditure fell sharply to about 20 percent of GDP, or almost 10 percentage points lower than in 1992. As the authorities nearly succeeded in limiting expenditures to available revenues, the path of both revenues and expenditures in the first nine months of 1994 was similar. Expenditures declined to 8.8 percent of GDP in the first nine months of 1994.

Payments were authorized only for essential expenditures, such as salaries, pensions, medicine, food, and allowances for low-income families. Significant cuts in expenditure were targeted in items such as equipment purchases, major infrastructure repairs, and building maintenance (Table 4).

(i) Subsidies

Since 1993, budgetary subsidies have dropped sharply as a share of GDP; they declined successively from 9 percent of GDP in 1992 to 4.2 of GDP in 1993 and 0.8 percent of GDP in 1994 (Table 4).

As a proportion of expenditures, budgetary subsidies declined to around 9 percent during the first nine months of 1994 (manat 852 million), down from around 21 percent in 1993. The final budgetary subsidies in 1994 could be slightly higher due to a major increase in grain subsidies expected in the fourth quarter of 1994, as most grain procurement transactions are made in the latter part of the year (Table 32).

During the first nine months of 1994, the grain subsidy accounted for more than 90 percent of budgetary subsidies (manat 585 million). Prior to April 1994, subsidies were incurred only on the differential between the retail and wholesale prices of the finished product (various baked goods, flour), while the wholesale prices were set roughly in line with the state purchasing prices. In April, however, the state purchasing price of imported grain rose five times in conjunction with the devaluation of the official exchange rate; wholesale prices, on the other hand, remained at their pre-April level. Thus, in addition to the retail-level subsidies, the difference between wholesale prices and the state purchasing price also required subsidization.

While the authorities have reduced budget subsidies in 1994, an evaluation of total subsidies in the economy is not yet available because some subsidies are also provided from the budgets of self-financed ministries. The authorities’ estimates for total subsidies (budgetary and nonbudgetary) in 1993 amounted to manat 788 million, or 7.1 percent of GDP, of which manat 461 million, or 59 percent of total subsidies, was covered by the budget. In the first nine months of 1994 total subsidies amounted to manat 2,594 million, or 2.4 percent of GDP. However, the subsidies paid outside the budget have increased from 41 percent of the total in 1993 to 67 percent of the total in 1994 (Table 4).

Although a Presidential decree dated November 2, 1994 transferred the meat subsidy of manat 450 million from the Ministry of Agriculture to the budget, the MEF had not decided by mid-November whether to include it in the budget. This indecision was based in part on complications in the financing of these expenditures. Specifically, the authorities initially planned to draw down balances of the FERF, but later reconsidered on grounds that this means of financing would increase the measured deficit. This is an example of the complications arising from the ease of moving subsidies in and out of the budget depending on the relative fiscal strength of the agency concerned.

(ii) Capital expenditure

Significant cuts in expenditure were targeted for items such as equipment purchases, major infrastructure repairs, and building maintenance. Budgeted capital expenditure dropped from 3.6 percent of GDP in 1993 (it was 6.2 percent in 1992) to 1.7 percent in the first nine months of 1994 (Table 4).

(iii) Wages and salaries

In relation to GDP, the budgetary wage bill is estimated to have fallen to 3.5 percent in 1994, down from 4.8 percent in 1993 (Table 4). Except for the increase in wages decreed in July 1994, the budgetary wage bill has remained unchanged in the face of high inflation. As a proportion of total budgetary expenditures, however, wages increased from 25 percent in 1993 to 48 percent in the first nine months of 1994. This result was mainly due to a stable nominal wage bill in the presence of sharp cuts in other expenditures.

c. Local budgets

The local budgets’ tax share increased to 31 percent of total revenue in the first nine months of 1994, from around 20 percent in 1993 and slightly below 24 percent in 1992 (Table 5). Local budgets have two main sources of revenue. First, the local budgets share the taxes which are collected by the central government budget. This share increased in 1993 and 1994 due to the implementation of new taxes and the redistribution of revenue among the spheres of government. In the second half of 1994, the local budgets’ tax share was the following: 50 percent of the profit tax, 75 percent of VAT, and 100 percent of the mineral resources tax. Second, local authorities are allowed to levy their own taxes and fees.

Table 5.

Summary of Public Finances, Central and Local Governments, 1990-94

(In millions of manat)

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Source: Data provided by the Turkmen authorities; and staff calculations.

During the first nine months of 1994, the total revenue of local government amounted to manat 2,117 million, or 31.3 percent of general government total revenue. In the same period, local governments’ own revenue—that is, other revenue and taxes on natural resources—amounted to manat 232 million, or around 11 percent of the total local government revenues (Table 5).

The budget execution of local governments showed a deficit in 1993—manat 307 million, or 2.8 percent of GDP—and during the first nine months of 1994—manat 1,058 million, or 1 percent of GDP. Although there is no legal prohibition of the local government borrowing from the banking system or issuing securities, this procedure has not yet been used, and the deficit is financed by the central government.

d. Extrabudgetary funds

In 1994 the Pension Fund, the Social Insurance Fund, and the Geological Prospecting Fund were consolidated into the general government budget. Although their revenues and expenditures are shown in the budget, they are separated from general revenues and expenditures.

During the first nine months of 1994, the extrabudgetary funds revenue (taking into account only those funds that have been consolidated and reported into the budget) amounted to manat 1,510 million, or 22.3 percent of total revenue; the Pension Fund revenue amounted to manat 1,182 million, or 78 percent of the total extrabudgetary funds revenue. In the same period, the Pension Fund and the Social Insurance Fund have generated a small surplus of manat 106 million. Employers and employees’ contributions to these funds have increased as the wage bill has grown as a result of increasing nominal economy-wide salaries. On the other hand, on the expenditure side, the pension payments, which represent the main item of expenditure in the Pension Fund and the Social Security Fund, have increased more slowly than revenues because the amount paid for individual pensions has been kept constant since July 1994. During the first nine months of 1994, pension payments amounted to manat 997 million, or 73 percent of total expenditure of the Pension Fund and the Social Insurance Fund (Table 33).

e. Budgetary arrears

The drop in expenditures without a corresponding downward revision of the commitment figures in the budget has led to an emergence of budgetary arrears. As quarterly budget revenues have been consistently overestimated, expenditure commitments based on these budgets were in excess of the cash payments that were subsequently approved as part of the emergency expenditure control process. As a result, the Government incurred a substantial amount of arrears in late 1993 and throughout 1994.

While figures are imprecise because of the absence of a formal commitment stage under the budget execution process (where budgetary appropriations are authorized, contracts are signed, and procurement begins), arrears as of the second quarter of 1994 were estimated at manat 550 million, or 15 percent of total expenditures for the second quarter. By the time the arrears were acknowledged, that is, in the second quarter of 1994, the Central Bank provided a credit line to clear them in full. According to the authorities, by the end of 1994, the outstanding budgetary arrears would amount to manat 322 million.

f. Deficit financing

The consolidated budget deficit, on a cash basis, amounted to 0.4 percent of GDP in 1993, and to 2.5 percent in the first nine months of 1994 (Table 4). Domestic banking financing amounted to manat 1.8 billion, or 1.7 percent of GDP in the first nine months of 1994. The remainder was covered by foreign loans net of the accumulation of deposits in the FERF. In the second and third quarters of 1994, the Government began to sell three-month securities, amounting to manat 142 million at a rate of 150 percent, to commercial (state-owned) banks. The authorities planned to sell an additional manat 310 million worth of securities in the fourth quarter of 1994.

g. Tax changes

The main changes in the fiscal legislation that were implemented in 1993 took effect in 1994. A major development was the elimination of export taxes and their replacement with VAT and profit taxes’ based on the domestic currency value of the proceeds. In 1993 the VAT rate was unified at 20 percent, and a preferential rate of 10 percent was introduced on food and children’s clothing. As a consequence, profit taxes as a proportion of direct and indirect taxes have risen from 8 percent in 1992 to around 17 percent in 1993 and 1994. Similarly, VAT has risen from 11 percent of direct and indirect taxes in 1992 to roughly 19 percent in 1993 and 1994.

During 1994 there was no significant structural change in the tax system; minor modifications took effect in rates, brackets and exemptions. Appendix III presents a summary of major taxes as of December 1, 1994. VAT exemptions for the agricultural sector were removed in the third quarter. In July 1994, the excise tax became more comprehensive since new goods were added to the list of existing taxes, such as on dessert wines, and rates in some goods, such as vodka, were increased from 20 percent, to 60 percent. The personal income tax was simplified in June 1994; its brackets were reduced to three, down from eight, while rates range from 3 percent to 10 percent of personal income. Royalty proceeds are now taxed at marginal rates ranging from 60 to 90 percent. The profit tax deduction for the cost of re-equipment, enlargement construction, and reconstruction of facilities has been canceled. On the other hand, exemptions have been established for new agro-product enterprises and for consumer goods and building materials production. Enterprises in free economic areas are exempt from profit tax (a) during the first three years of activity, (b) if the enterprise has foreign investment, which makes up more than 30 percent of share, and (c) the profits are reinvested in export projects or other activities. The bank profit tax and insurance tax were canceled and have been replaced by the enterprise profit tax which is common for the legal entities engaged in production and other commercial operations in the territory of Turkmenistan. The land tax on ownership and use of both urban and rural areas has been suspended temporarily. A new law on land taxation is under consideration, awaiting decision of the Cabinet of Ministers. A new decree on custom duties is under consideration; according to the existing provision on tariffs, a custom duty for cargo inspection—0.3 percent of contractual value of goods—should be paid on cargo entering or exiting the country.

4. The 1995 budget

The budgetary outlook in 1995 will continue to be extremely sensitive to: (i) the ability of some FSU countries to pay for Turkmenistan’s gas exports; (ii) the prospects of price reform and the level of transfers and subsidies that would need to be financed by the budget; and (iii) the wage policy, which is still geared toward across-the-board wage increases, instead of a targeted social safety net recommended by the staff.

The authorities have prepared a preliminary budget for 1995, the basic approach of which has been similar to the quarterly budgets during 1994: expenditures are basically determined on the basis of projected revenues, with wages and entitlements highly inelastic, and purchases of goods and services serving as the residual for a given deficit objective.

Revenues for the 1995 budget are projected at 9.5 percent of GDP while expenditures are projected at 9.4 percent of GDP; therefore, the 1995 budget calls for a surplus of manat 670 million, or 0.1 percent of GDP. These projections were prepared on the basis of the volumes of production envisaged in the three-year plan for economic and social development. Furthermore, projections for gas tax revenues for the 1995 budget are based on the expectation of significantly higher revenue payments for natural gas exports to FSU countries, especially from Ukraine and Georgia. The 1995 budget projects that total sales of gas will amount to manat 84,696 million, of which manat 84,600 million are on exports. This total sale should generate manat 12,777 million in VAT revenue, manat 5,909 million in profit tax revenue, and manat 15,210 million in natural resource tax revenue.

The budget projections for 1995 expenditures are also higher than in 1994, in reflection of a higher revenue path. Some items were dramatically increased compared to the 1994 outcome; for example, domestic purchases of goods and services are projected to be manat 16,119 million, compared with only manat 52 million during the first nine months of 1994.

Regarding subsidies, it is not yet clear which items will be included in the 1995 budget. The budget has allocated only manat 10.1 billion for all subsidies, although the bread and flour subsidy alone will amount to roughly manat 9 billion.

IV. Monetary and Credit Policy Developments

1. Overview

Prior to the introduction of the manat, the monetary authorities introduced a number of policy measures directed at eliminating what was perceived as excess liquidity in the economy. A substantial portion of the balances in enterprise settlement accounts was converted into negotiable bonds, a number of administrative measures were taken to stem the flow of the “old” rubles into Turkmenistan, a new Central Bank Law was enacted, and a bank licensing moratorium was put in effect until January 1, 1994. With these moves, the Central Bank intended to assume a prominent role in the conduct of monetary and credit policy and to develop a set of instruments for effective monetary control. However, and perhaps related to developments in the external payments arrears, monetary policy has been less autonomous than envisaged. Policy developments in 1994 also suggest that the Central Bank continues to be subject to extensive and powerful political constraints- that undermine its authority over the conduct of monetary policy.

2. Central bank policy instruments

a. Reserve requirements

As of October 1993, the Central Bank of Turkmenistan was following a system of differentiated reserve requirements. The rates were 15 percent on demand deposits and 10 percent on long term deposits (deposits with maturity of 1 year or longer); also, a 20 percent rate was assessed on deposits of those banks whose resources came primarily from central bank credit (40 percent or more of total credit issued). The Savings Bank (Sberbank) and the Foreign Economic Affairs Bank (Vneshekonombank), which were not subject to reserve requirements prior to August 1993, were at that time subject to a uniform rate of 5 percent on all deposit liabilities. On October 19, 1993, in preparation for the introduction of the manat, and in order to control total liquidity in the economy, reserve requirements were raised to 35 percent on demand deposits, to 20 percent on long-term deposits, to 30 percent for all deposits at the Vneshekonombank, and to 20 percent for deposits at the Sberbank. However, on November 1, 1993, and under pressure from commercial banks, the CBT changed reserve requirement regulations and introduced a uniform rate of 20 percent for all banks.

Against renewed pressure from commercial banks that were still unable to meet reserve requirements, in February of 1994 the CBT decided to revert to the old system of differentiated reserve requirements and effectively reduce the rates. The new regulations called for reserve requirements of: 10 percent on household and enterprise deposits with up to one year maturity, 5 percent on deposits with more than one year of maturity, and 15 percent on all other liabilities subject to reserve requirements. On July 1, 1994, reserve requirements were again lowered and compliance on new deposits was temporarily suspended. Reserve requirements on household deposits were set to zero, while the rate on all enterprise deposits was set at 10 percent.

b. Interest rate policy

With the exception of the Sberbank, and excluding lending extended to State-Owned Enterprises (SOEs) based on Central Bank refinance credit, interest rates for all commercial bank transactions are freely determined. In the case of refinance credit, banks are allowed to charge a margin of only 0.3 percent over the respective refinance credit rate. There is a wide number of interest rates on deposits depending both on maturity and the type of depositor (Tables 6 and 36). Lending rates at commercial banks have been reported in the 300 percent range. However, with inflation running at close to 20 percent a month, interest rates continue to be negative in real terms.

Table 6.

Turkmenistan: Interest Rates on Bank Deposits and Loans, 1989-94

(In percent per annum, end-period)

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Source: Central Bank of Turkmenistan.

Deposit rates at the Sberbank are set administratively in consultation with the Government since the latter is the guarantor of all deposits at this institution. Therefore, although not explicitly fixed, adjustments in deposit rates at the Sberbank are sporadic and tend to lag behind changes in rates offered by other commercial banks.

Refinance credit interest rates are set at 50 and 10 percent per annum. The former had been 70 percent and was lowered to 50 percent on December 1, 1993. The latter “concessionary” rate is applied to directed credit authorized by the Cabinet of Ministers or the President. 1/

Most of the refinance credit is extended to four banks: Agroprombank, Turkmenistan Bank, Cooperatorbank, and Investbank. As of November 1, 1994, the total stock of refinance credit amounted to manat 2.2 billion, of which around manat 1.0 billion was issued at the concessionary rates (Table 36). The rest of the debt stock bears an interest rate of 50 percent per annum. The refinance credit issued at concessionary rates is long-term in nature since most of it has a maturity of 1-4 years. On the other hand, the credit issued at 50 percent rate should be paid before the end of the year.

Both the penalty rate on overdue refinance credit from the above-mentioned four banks and the overdraft penalty rate for commercial banks are 0.5 percent per day (simple interest). During the period from November 1993 through January 1994, when most banks were running overdrafts at the CBT, the overdraft penalty was not enforced because of what was perceived as a severe shortage of liquidity. However, penalties were enforced during September 1994, a period during which commercial banks were again running overdrafts at the CBT (Table 7).

Table 7.

Turkmenistan: Central Bank Summary Accounts, 1992-94

(End-of-period stocks, in millions of manat)

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Source: Central Bank of Turkmenistan.

CBT debt to Russia assumed by the Government of Turkmenistan on June 2, 1993.

Financing of budget deficit as reflected in fiscal accounts.

A positive magnitude implies an overdraft.

Credit to the Central Government to clear overdrafts, finance projected budget deficits, finance special projects and debt assumption operations.

Government foreign -currency deposits at the CBT since June 1993 valued at official exchange rate.

In short, refinance credit remains a major source of resources for the commercial banking sector’s lending activity, and in particular for the four banks dealing exclusively with the state sector (Table 36). In the last quarter of 1993, and the first quarter of 1994, the share of CBT refinance credit in the system’s total credit to the economy was around 50 percent. 1/ Although this share fell substantially after May 1994, availability of CBT refinance credit at negative real interest rates lowers the incentive for commercial banks to organize an economically viable interest rate structure that would help mobilize deposits. 2/

3. Credit auctions

Based on information provided by the CBT, interbank credit auctions were held on an almost weekly basis between August 1993 and September 1994. Rates have fluctuated widely from a low of 73 percent to a high of 290 percent. The maturity of these interbank loans is between 2 and 5 months (mostly five months). Volumes sold are very small, ranging between manat 2 million and 12 million (less than 1 percent of total credit to the economy as of October 1, 1994). The lack of activity, and the resulting low real interest rates, seems to emanate from the existence of low penalty rates for commercial banks overdrafts at the CBT, lack of compliance with reserve requirement obligations, and availability of central bank credit at concessionary rates. Except for a very small amount, all of the resources sold through this facility have come from the Savings Bank. Banks which are able to obtain refinance credit from the CBT are not eligible for participation in these interbank credit auctions.

4. Monetary and credit policy developments

a. Measures prior to the introduction of the manat

In order to minimize pressures on the new national currency, the monetary authorities introduced a number of policy measures in late 1993 directed at eliminating a perceived level of excess liquidity in the economy. Besides the already discussed increase in reserve requirements that took place in early October 1993, and the “forced” debiting of commercial banks’ correspondent accounts that occurred in November 1993, on October 27, 1993 the CBT established a procedure intended to reduce the purchasing power of enterprise deposits (settlement accounts). This procedure required that 75 percent of the portion of deposits exceeding manat 100,000 (Rub 50 million) was to be converted into negotiable bonds (to be used to settle outstanding loans due for repayment at the end of the year) and the remaining was converted into manat at the conversion rate of Rub 500 per manat.

The bond conversion procedure yielded approximately manat 447 million. Although the CBT expected that the whole amount was to be used to extinguish a large part of existing stock of concessionary loans (manat 1.3 billion as of November 1, 1993), only manat 108 million were used for this purpose. On December 1, 1993, the Cabinet of Ministers authorized the use of these bonds for the payment of tax liabilities, the clearing of interenterprise payments, and the value of those owned by agricultural enterprises was remitted back to their deposit accounts. As a result, by February 12, 1994 almost all of the proceeds from this conversion had been used up.

By Presidential Decree No. 1526 of October 19, 1993 the first Rub 10,000 (manat 20) of household deposit balances at the Sberbank were to be increased eight-fold. The transaction is estimated to have yielded a “compensation” of manat 70 million, whose counterpart funds are to be allocated from the budget during a two-year period. Currently, all amounts involved are off the Sberbank’s balance sheet pending the allocation of counterpart funds by the budget.

b. Developments in late 1993 and first nine months of 1994

The conduct of monetary policy since late 1993 has been primarily influenced by developments related to external payments arrears and has been characterized by a serious loss of policy autonomy on the part of the Central Bank of Turkmenistan. Lack of revenue for the gas company, and thus the budget, has been compensated by increased financing from the Central Bank to cover the Government’s operating deficit and, ex-post, its accumulation of domestic arrears. At the same time, and at least during the early part of 1994, there was also a rapid growth in refinance credit. Most of the credit issued was granted by means of presidential decrees and at highly concessionary interest rates. Despite the lowering of the nominal reserve requirement rate, as of end-November 1993 commercial banks’ correspondent accounts at the CBT turned negative (overdrafts). These overdrafts seem to have been the result not only of the increase in reserve requirements, but also of a change in policy stance whereby the CBT stepped up its policy of “forcing” the repayment of refinance credit falling due in November and December 1993. Commercial banks’ correspondent accounts were debited accordingly, and these banks were, in turn, expected to demand the repayment of funds onlent to their clients.

During the first nine months of 1994, gross central bank credit to the General Government amounted to manat 2.4 billion, or 45 percent of the monetary base as of end-September 1994 (Table 7). 1/ This amount of financing was granted to cover the budgetary deficit of the Government, and the repayment of a significant amount of domestic arrears that had accumulated during the last two months of 1993 and the first quarter of 1994. 1/

Net credit from the banking system to the General Government during the first nine months of 1994 amounted to manat 2.5 billion. An accumulation of deposits on the part of local governments and social security funds at commercial banks was not sufficient to offset the buildup of government overdrafts at the Central Bank (Table 8).

Table 8.

Turkmenistan: Monetary Survey, Summary Accounts, 1992-94

(End of period stocks; in millions of manats)

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Source: Central Bank of Turkmenistan.

CBT debt to Russia assumed by the Government of Turkmenistan on June 2, 1993.

Financing of budget deficit as reflected in fiscal accounts.

A positive magnitude implies an overdraft.

Credit to the Central Government to clear overdrafts, finance projected budget deficits, and debt assumption operations.

Government foreign-currency deposits at the CBT since June 1993 valued at official exchange rate.

Differs from the financing reflected in the fiscal accounts for reasons of timing and the absence of debt assumption operations in the budget.