Turkmenistan
Recent Economic Developments
Author:
International Monetary Fund
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Publication Date:
25 Jul 1997
eISBN:
9781451837223
Language:
English
Keywords:
ISCR; CR; commercial bank; debt service; gas export; monetary policy; private sector; broad money; collection ratio; bank credit
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This paper reviews economic developments in Turkmenistan during 1994–97. To address the growing economic difficulties, the government announced an economic reform package for 1996, which aimed at achieving a recovery in output, sharply lowering inflation, maintaining a strong reserve position, and promoting private sector development. The reform package had mixed success. Monetary and credit policy was generally restrained until late 1996, contributing to a moderation in inflation. However, economy-wide public sector wages were doubled in October, against a background of continued payment difficulties in the gas sector and a decline in GDP.

Abstract

This paper reviews economic developments in Turkmenistan during 1994–97. To address the growing economic difficulties, the government announced an economic reform package for 1996, which aimed at achieving a recovery in output, sharply lowering inflation, maintaining a strong reserve position, and promoting private sector development. The reform package had mixed success. Monetary and credit policy was generally restrained until late 1996, contributing to a moderation in inflation. However, economy-wide public sector wages were doubled in October, against a background of continued payment difficulties in the gas sector and a decline in GDP.

I. Introduction

1. Turkmenistan is a landlocked desert country with a rapidly growing population of 4.7 million, and a highly specialized, trade dependent economy. The production and processing of gas, oil, and cotton account for over 70 percent of economic activity. More than 90 percent of exports are made up of these three products, while consumer and investment goods are mostly imported. Turkmenistan has opted for a gradual transformation from a planned to a market economy. Basic legislation for private sector development has been introduced, although economic activity continues to be dominated by the public sector, and there has been little effort to diversify away from energy and cotton. Real wages have declined sharply in recent years, and Turkmenistan’s social indicators remain among the least favorable in the region.

2. Turkmenistan’s gas reserves are, on a per capita basis, among the highest in the world, but production and exports have declined sharply since 1993. Gas exports are dependent on the use of the Russian-controlled regional pipeline system. In 1993, Turkmenistan lost access to European markets through this system, which limited its gas export markets to Ukraine and the Caucasian countries. Its trading partners, however, incurred large arrears on payments for gas imports due to their own difficult economic situations, aggravated by the increase in gas prices closer to international levels. As a result, Turkmenistan cut back on its gas exports and suffered a real GDP decline of more than 30 percent during 1993–95, while accumulating claims on these countries totaling US$1.2 billion. At the same time, Turkmenistan constrained imports by limiting access to foreign exchange and stepped up foreign borrowing. These moves helped sustain international reserves at the equivalent of 6–9 months of imports. The perpetuation of central controls and the associated distortions, coupled with an accommodating monetary policy, led to financial instability. Inflation rates exceeded 1,000 percent annually during 1993–95.

3. To address the growing economic difficulties, the government announced an economic reform package for 1996, which aimed at achieving a recovery in output, sharply lowering inflation, maintaining a strong reserve position, and promoting private sector development. The reform package had mixed success. Monetary and credit policy was generally restrained until late 1996, contributing to a moderation in inflation. However, economy-wide public sector wages were doubled in October, against a background of continued payments difficulties in the gas sector and a decline in GDP (estimated at 3 percent) on account of severe crop failures. Hence, large wage arrears were incurred and directed credits were resumed on a substantial scale by the end of the year. Price pressures were intensified by a growing shortage of goods in the domestic market as imports continued to be compressed. Thus, inflation averaged 11 percent per month in the fourth quarter, against a target of 3 percent. However, there was still a sharp reduction in the end-year rate of inflation, which declined to under 450 percent. Exchange rates were unified early in the year. However, the official rate was kept virtually fixed as of mid-year, despite growing pressures in the exchange market, particularly following the easing of monetary policy in December, and the spread between the official and commercial bank rates rose to over 20 percent in the final quarter. Net earnings from foreign trade were reduced by continued payments difficulties for gas exports, exceptionally poor grain and cotton harvests, and growing arrears on payments for Turkmenistan’s electricity exports. To maintain gross international reserves at US$1.2 million, imports were strictly curtailed (with import coverage of reserves reaching nine months) and Turkmenistan could not fully clear its external debt service arrears. While the budget was in approximate balance in 1996, its coverage remained limited. Moreover, given the large revenue shortfalls on account of low collections on gas exports and difficulties in selling the goods received in payment, the budget was balanced through further expenditure cuts and accumulation of sizable domestic payments arrears. Mainly linked to the gas payments problems and the crop failures, payments arrears within the state enterprise sector also rose sharply during 1996. Privatization progressed slowly.

4. At end-1996, the government announced a major reform program for the agricultural sector. Under this program, most agricultural land is to be privatized (with some restrictions) over the next two years, and the role of the government in this sector is to be significantly reduced. The program has the potential to greatly improve the living conditions of a large part of the population—more than half of which live in rural areas—and could become a major impetus for overall economic reform. In line with this new thrust in structural reform, in early 1997, the government turned its attention to the privatization of medium-sized industrial enterprises. Hence, stepped-up structural reform, coupled with continued efforts at stabilization, characterize the government’s economic program for 1997.

II. Real Sector Developments and Systemic Reforms

A. Overview

5. During 1993–95, real GDP declined cumulatively by about one third, mainly on account of a sharp contraction in gas and cotton production. In 1996, gas production increased for the first time since 1993, but this was more than offset by sharp declines in the production of the main agricultural products, cotton and wheat. Following rapid monetary expansion, adjustments in controlled prices, and exchange rate unification, monthly inflation increased to above 50 percent at the end of 1995 and early 1996, but declined rapidly thereafter to under 4 percent by July 1996. Although monthly inflation rebounded to an average of 11 percent toward the end of the year, the 12-month inflation rate (446 percent) remained at about a third of the levels recorded in each of the preceding two years. Reflecting government-led wage increases, real wages rose by 32 percent from the fourth quarter of 1995 to the fourth quarter of 1996, the first annual increase since 1993, although the annual average real wage was still almost 20 percent lower than in 1995. There was some further progress with structural reforms in 1996. The number of controlled prices was reduced and prices remaining regulated were adjusted more frequently. However, Turkmenistan made little progress with privatization and enterprise reform.

B. Structure of the Economy

6. The most important area of Turkmenistan’s economy is the energy sector. The country has one of the largest per capita endowments of proven energy resources—mainly natural gas—in the world. Proven and probable gas reserves amount to around 2.7 trillion cubic meters (tern) and indicative reserves may be as high as 14 tcm. In contrast to many other gas producing countries, most of Turkmenistan’s gas is exported. However, as noted earlier, exports are dependent on the use of the Russian-controlled regional pipeline system. Gas production peaked in 1989 at almost 90 billion cubic meters (bcm), but declined thereafter to 32 bcm by 1995 as Turkmenistan lost access to European markets in 1993. Furthermore, its remaining trading partners—Ukraine, Georgia, Azerbaijan and Armenia—incurred large payments arrears. The government is considering a number of alternative pipelines to diversify gas markets; however, only a 140 km pipeline to the northern part of the Islamic Republic of Iran is being built. This pipeline will have an eventual capacity of 8 bcm and is expected to be completed by end-1997 (Box 1).

Alternative Gas Pipelines Under Consideration

The following major routes are under consideration by the government of Turkmenistan as possible alternatives to the present gas pipeline running through Uzbekistan, Kazakstan, and Russia.

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The above projects would require considerable foreign financing from as yet largely unidentified sources. The present U.S. veto on the involvement of U.S. companies in the Islamic Republic of Iran rules out financing from this source for the first option via the Islamic Republic of Iran to Turkey (with possible later extension to Europe). The first segment of this pipeline to the northern Islamic Republic of Iran is financed by the latter. The second option through Georgia to Turkey is not likely to entail heavy costs and the construction of the extension to Turkey is expected to be financed partly by the Turkish oil company, Botas; however, no firm agreement has been reached. On the third option, the government of Turkmenistan signed an agreement on a U.S./Saudi Arabian joint-venture (Unocal-Delta) in 1996. The political turmoil in Afghanistan, however, is likely to make the financing of this project difficult. The fourth option through China is a longer-term project, which is not presently under active consideration. Turkmenistan is expected to meet its share of the financing of these pipelines (no more than one or two of which can reasonably be expected to materialize) through future deliveries of gas to the countries concerned.

7. Turkmenistan reorganized its energy sector in 1996. First, starting in January 1, 1996, gas exports were shifted from the Ministry of Oil and Gas to a new joint-venture, Turkmenrosgaz, in which the government of Turkmenistan (through Turkmengaz) holds a 51 percent share, Gazprom of Russia a 45 percent share, and a Russian-owned trading company, Itera, a 4 percent share. Second, the Ministry of Oil and Gas was reorganized in May 1996. The Ministry retained its administrative and regulatory responsibilities, but exploration, exploitation, and trading activities were organized into 5 separate entities.1 The surplus funds of the latter are channeled to a newly established Oil and Gas Development Fund, which reallocates the funds to promote the development of the oil and gas sector. Thus, the government sector continues to account for most of the production and trading activities related to oil and gas, although two production-sharing agreements have recently been signed with foreign companies. To help attract foreign investment to the energy sector, in March 1997, the government adopted a new Petroleum Law to standardize contracts in this sector.

8. Although much less important than gas, Turkmenistan also has considerable oil reserves, estimated at 2–4 billion barrels. Due to a shift in emphasis on oil production favoring Western Siberia during the 1980’s, oil production gradually declined from around 300,000 barrels per day in the 1970s to 85,000 barrels a day in the early 1990s. Of the total, 85 percent is from on-shore wells. All oil is processed domestically in two refineries (in Turkmenbashi and Chardzou), which have a combined production capacity of 12 million metric tons. These refineries supply fully the domestic demand for oil products, and the remainder is exported, mainly by barge across the Caspian Sea and further through Russia. In 1996, the government started a program to refurbish and expand the oil refinery in the Caspian city of Turkmenbashi.2

9. In 1996, the agricultural sector accounted for almost 18 percent of GDP, but for 44 percent of total employment. The country’s land is predominantly desert, with irrigated arable land constituting only about 4 percent of the total. Cotton is the key cash crop, followed by grains, livestock, fruits, and vegetables. While Turkmenistan is a net importer of food, the strategy of the government is to achieve self sufficiency in basic food items, notably grain. The agricultural sector remains largely under government control. Until end-1996, the main products (cotton, wheat, milk, and meat) were sold almost entirely to the government under state orders at prices well below world prices (Table 1),3 4 although the state orders on meat and milk were removed at the beginning of 1997. Inputs continue to be provided by the state at subsidized prices and water is free of charge. Although state and collective farms were reorganized in mid-1995 into peasant associations, the mostly retained the characteristics of collective farms. In a parallel move to the reorganization of the oil and gas sector, in May 1996, the six agricultural production associations were removed from the Ministry of Food and Agriculture, which was renamed the Ministry of Agriculture. The government set up an Agricultural Development Fund (ADF) to receive and redistribute the surplus funds of the associations.

10. To address the fall in yields in agriculture, the government announced a comprehensive reform program for the sector on December 20, 1996. The main elements of the program are:

  • Land reform. All land of peasant associations will be leased within the next two years to farmers (free of charge) for a period of 10–15 years. Initially, farmers will be required to grow, and attain target yields in, selected products. After two years, if the output performance is considered satisfactory, as judged by a local commission and ultimately approved by a national commission chaired by the President, the leased land will become the farmers’ property. Once they are given land ownership, farmers will be allowed to grow any type of product, use the land as collateral for obtaining credit, and lease it. However, they will not be allowed to sell the land.

  • State orders and procurement pricing. State orders are abolished (except for cotton and wheat), allowing farmers to make their own contractual sales arrangements. The state orders for cotton and wheat are to be gradually phased out with the implementation of land reform, as private producers are not subject to state orders. In the interim, procurement prices are to be adjusted closer to world levels.

In addition, the government announced a special financing package for the agricultural sector, including: (i) credit of manat 80 billion to be extended by the ADF and financed by contributions (3 percent) from public enterprise profits, with 65 percent of the total given to farmers’ associations and 35 percent to private individuals, (ii) a special credit to farmers producing cotton and wheat under state orders, which allows them to pay to the State Commodity Exchange only 50 percent of the cost of the input, with repayments later in the year from the sales of cotton and wheat to the government; (iii) a credit line of US$20 million by the CBT for the next 10 years to finance purchases of agro-processing equipment and stimulate development of small private enterprises in agriculture; and (iv) additional resources to be channeled to the development of the agro-industrial complex through the Ministry of Finance, the ADF, and the State Agency on Foreign Investment. Also, with the objective of simplifying taxation of the sector, the profits, income, and payroll taxes in agriculture were replaced by an 8 percent tax on the value of output produced; the impact of this move on the tax burden of the sector, however, is expected to be neutral.

11. The other sectors of the economy are closely related to energy and cotton sectors. More specifically, about a third of industrial production is oil and/or gas-based and about another third is cotton-based. Reflecting both foreign5 and domestic investment, the number of enterprises engaged in textile production has increased rapidly in recent years in line with the government’s policy of raising value added from cotton At end-1996, there were 74 medium-and large-scale textile enterprises (19 of which produce fabrics and 25 produce clothes), employing 18,000 persons. Further expansion is envisaged Except for textiles, there has been little investment in industrial diversification, while most other industries have suffered periodically from lack of imported raw materials and equipment due to restricted access to foreign exchange in recent years.

C. Recent Developments in GDP

12. The national accounts and other real sector statistics continue to show considerable weaknesses. With technical assistance from the IMF and the OECD, the government has made progress in replacing Net Material Product concepts with the System of National Accounts. However, the source data remain weak, and the methodology used leads to considerable underestimation of value added in the economy6 (Box 2). Although the national accounts data compiled by the authorities have been adjusted to correct for some of the problems, the estimates thus derived should still be interpreted with caution.

The Calculation of GDP

In 1996, both the State Statistical Institute of Turkmenistan, (Goskomstat—on a production basis) and the Ministry of Economy and Finance (MEF—on an income basis) prepared GDP estimates. However, both estimates contain considerable weaknesses due to:

  • weaknesses in the source data. Accounting practices in public sector enterprises are not geared toward providing economic data defined for use in a market economy, and much of the private sector’s activities remains in the informal sector and is not captured in the national accounts statistics. On the other hand, the continuation of a public sector enterprise system, where performance is measured by fulfillment of output targets, may result in the overestimation of output volume;

  • wide-spread use of barter trade, especially for gas and cotton exports. The contract price of goods received—and thus value added—often overstates the actual value, as illustrated by regular problems faced by government ministries in selling the barter goods at the contract price;

  • the use of the official exchange rate for the calculation of value added in the export sector (mainly gas and cotton), instead of the much more depreciated market rate.

The GDP estimate used by the IMF corrects for the latter problem.7 Value added from gas and cotton exports is recalculated using the market exchange rate8, and all gas exports are valued at the export price. The other biases are more difficult to correct for, but may partly offset each other.

13. Real GDP is estimated to have declined by approximately 8 percent in 1995 and by a further 3 percent in 1996 (Text Table 1, Figure 1).9 In 1995, due to continuing payments problems with gas exports and declining yields in cotton production, the two key sectors of the economy contracted, with adverse effects on other sectors of the economy. In 1996, gas production increased (by 9 percent), for the first time since 1993, rising from about 32 bcm to 35 bcm10 (Table 2). The revival in gas production was in anticipation of a strong growth in the volume of gas exports, following the establishment of a new joint-venture (Turkmenrosgaz) to undertake production and marketing activities. By contrast, due to a number of factors—notably a lack of inputs, low labor productivity, adverse weather, and insect infestation—but also a general lack of reform in the still largely collective agricultural sector, cotton production declined by 56 percent and wheat production by 39 percent in 1996. The output of fruits and vegetables also fell sharply. Production in the other sectors of the economy, taken together, declined by 2 percent. Following an almost 8 percent increase in 1995, crude oil production (included under other sectors) increased only marginally (0.7 percent) in 1996.

Text Table 1.

Turkmenistan: Gross Domestic Product (GDP) by Sector, 1993-96

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Sources: Data provided by the Turkmen authorities; and Fund staff estimates.

Data provided by the Turkmen authorities, with export prices adjusted to reflect the market exchange rate.

Figure 1.
Figure 1.

Turkmenistan: Selected Real Sector Indicators, 1993-97

Citation: IMF Staff Country Reports 1997, 058; 10.5089/9781451837223.002.A001

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

14. As noted above, the two key agricultural products performed very poorly in 1996. The production of raw cotton, which had reached about 1.3 million tons per year during 1992–94, declined from 1,000,000 tons in 1995 to 437,000 tons in 1996, reflecting a sharp deterioration in yields (Table 1).11 Wheat production fell from 896,000 metric tons in 1995 to 550,000 metric tons in 1996,12 despite a further increase in acreage. Under the government’s policy of attaining self-sufficiency in wheat, the acreage under wheat cultivation was raised from 197,000 hectares in 1992 to 596,000 hectares in 1996 (Table 2). The greater use of marginal lands, however, contributed to a reduction in yields from 1.9 tons/hectare in 1992 to 1.6 tons/hectare in 1995 and to 0.9 tons/hectare in 1996.

15. Performance in the rest of economy was mixed in 1996. Overall, output in the nongas, noncotton part of the economy is estimated to have declined by about 2 percent, following a decline of almost 7 percent in 1995. Metal processing increased rapidly, but production of chemicals and construction materials declined (Table 3). In light industry, textiles grew most rapidly, while, reflecting the poor harvest, output in food industries declined by 18 percent. Value added in the construction sector increased rapidly due to large projects in infrastructure, including a railroad to the Islamic Republic of Iran, a new presidential palace, a sports stadium, a new runway for the Ashgabat airport, and the refurbishing of the oil refinery in Turkmenbashi.

D. Money Incomes and Expenditures of the Population

16. The government of Turkmenistan does not compile national accounts on an income or expenditure basis, but collects information on money incomes and expenditure of the population (Table 4).13 Due to an increasing share of payments in kind in the agricultural sector, the share of wages in total incomes declined from almost 80 percent in 1995 to 70 percent in 1996. At the same time, the share of pensions in total money incomes increased from 17 percent to 21 percent.

17. On the expenditure side, the most striking features were the decrease in the share of spending on goods from 66 percent in 1994 to 27 percent in 1996, which was offset by a very sharp increase in the share of spending on purchases of foreign exchange from 8 percent in 1994 to almost 50 percent in 1996. The latter development reflected, for the most part, a decline in confidence in the manat. It is possible that part of the foreign exchange purchased was spent on acquisition of goods in the market (not reflected in Table 4), which may explain the sharp drop in the share of spending on goods from state stores. The share of spending on services also rose during this period.

E. Developments in Consumer Prices

18. Although most prices were liberalized during the past few years, a number of key goods and services remain under price control (Table 5). Controlled prices are set by the Cabinet of Ministers at irregular intervals. The main objective of the price controls is to subsidize basic necessities as part of the social safety net system (see paragraph 27 and Box 3). For most controlled goods, prices are set at very low levels compared to costs or free market prices. In the case of flour (and, until recently, meat), the cost of the associated subsidy is paid by the budget; in the case of other subsidized goods the cost of the subsidy is generally borne by off-budget ministries. The prices of butter and fodder were liberalized in September 1996, and the prices of domestic meat14 and milk in December 1996, reducing the number of food items under price control from ten to six.

19. The prices of controlled goods were raised by 2–10 times effective January 1, 1996, and further adjustments (although by much smaller amounts for most goods) were made later in the year, especially in the fourth quarter. Most controlled prices of services remained unchanged until October 1996, when they were increased 4–10 times. Despite more regular adjustments compared to 1995, at end-1996, a loaf of bread was sold at the equivalent of only US$0.09, house rent cost US$0,002 per square meter, and utilities remained almost free of charge. At end-1996, a liter of gasoline was sold at the manat equivalent of US$0.08, and prices of other oil products also remained largely below world market levels (Table 6).

20. Although the overall increase in consumer prices remained high, monthly inflation rates declined significantly in 1996 compared to 1995 (Table 7). Strong monetary expansion, increases in administered prices (which constituted 27 percent of the consumer price basket in 1996), and a 12-fold increase in import prices due to the sharp devaluation of the official exchange rate, raised the monthly inflation rate to above 60 percent in January 1996. However, a tightening of monetary policy and a seasonal decline in food prices reduced monthly inflation to as low as 3.6 percent by July. In the final months of the year, the monthly inflation rate rebounded to an average of about 11 percent, as local production of foodstuff declined seasonally, some administered prices were raised, and wages were doubled in October. In addition, imports of goods from barter trade were low, especially in the first nine months of the year, while at the same time the government continued to restrict access to foreign exchange, thus compressing imports further. The low supply of imported goods aggravated supply shortages and added to price pressures. Given the very high monthly rates of inflation at the beginning of the year, the annual average inflation rate (992 percent) was only marginally lower than in 1995. However, much lower rates at the end of the year compared to 1995 resulted in a sharp decline in the December-December inflation rate from 1,262 percent in 1995 to 446 percent in 1996. In the initial months of 1997, monthly inflation declined steadily (to under 3 percent by February) as Turkmenistan received large amounts of barter goods from gas exports and informal sector imports rose following CBT sales of additional foreign exchange to help contain the impact of the strong monetary expansion in December.

F. Wages and Employment

21. Wages in the public sector are set in accordance with wage scales that differ by occupation, although off-budget ministries and public enterprises are allowed to pay additional bonuses and other nonwage benefits. Private enterprises are also free to set their wages, which are generally negotiated in contracts for a specified period. Until the end of 1995, the government expressed public sector wage scales as multiples of the minimum wage, which was set by Presidential decree. Since January 1, 1996 the government sets the official economy-wide average wage, to which the minimum wage15—which is the lowest step on the public sector wage scale—is linked. At the same time, and in order to contain wage increases in the off-budget public sector, the government reintroduced an excess wage tax for most economic sectors. The rate was set at 50 percent of wages in excess of 150 percent of the official average wage.16

22. The government continued to lead wage developments in 1996, although enterprises were, in principle, free to set their own wages. In January, the government set the official economy-wide average wage at manat 20,000 per month, almost double the actual average public sector wage of manat 10,770 per month in the fourth quarter of 1995 (Table 8). In May, the official average wage was increased by 50 percent and wages of budgetary organizations were doubled. In October, the official economy-wide average wage was more than doubled again to manat 80,000 per month.17 These increases were rapidly followed by the enterprise sector. Actual average wages doubled in the second quarter, and increased by a further 160 percent during the next two quarters, with the changes fairly evenly spread over most economic sectors (Table 9). Notwithstanding these adjustments, reflecting the high inflation rates at end-1995 and in early 1996, the annual average real wage declined by over 21 percent in 1996. However, in the fourth quarter of the year, real wages were 32 percent higher than in the same period of 1995. The wage increase in October exceeded the capacity of enterprises to pay, so that wage arrears emerged during the last few months of the year. In March 1997, to narrow the gap with nongovernment wages, wages for budgetary organizations were again doubled, without, however, any adjustment to the official average wage and thus to the threshold for the excess wage tax.

23. Despite the recent large wage adjustments, average wages in Turkmenistan remain very low compared to basic minimum needs and in U.S. dollar terms. At end-1996, the average nominal wage was almost 40 percent below the value of an officially defined minimum basket of goods (Table 10). Since 1993, real wages have declined by more than 75 percent, by far exceeding the decline in real GDP of some 30 percent. In dollar terms, the year-end average wage of US$24 per month was among the lowest of the CIS countries in 1996.18 However, the decline in real wages exaggerates the decline in real incomes due to high consumer subsidies, the value of which was officially estimated to be equivalent to the average wage in September 1996.19

24. Every Turkmen citizen is guaranteed employment, so that unemployment does not officially exist.20 Agriculture provides 44 percent of total employment, while industry—which includes the oil and gas sector—accounts for only 10 percent (Table 11). A number of indicators point to considerable problems in the labor market. First, in recent years the size of the working age population has grown faster than total employment. Nevertheless, although the private sector is still very small, employment in public enterprises has fallen (Table 12), implying that unemployment may not be adequately captured in the statistics and/or that there may be shifts in employment to the informal sector. Second, wage arrears emerged in the second half of 1996, indicating that wage costs are too high relative to the ability of enterprises to pay. Third, in the absence of public enterprise reform, there is considerable hidden unemployment in the form of overstaffing.

25. The rapid recent growth in the working age population reflects high levels of immigration from the region, especially in 1995, but also historically very high birth rates in rural areas. Between the last two population censuses in 1989 and 1995, the population grew at an annual rate of 4.1 percent.

G. Income Distribution and the Social Protection System

26. Turkmenistan’s income distribution (measured by wages) is relatively equal across sectors. The highest sectoral wages (in construction, geological prospecting for the oil and gas industry, and commercial activities) are generally close to three times the lowest wages (agriculture, education and health, and the arts (Table 9) This difference becomes much smaller when subsidies, which apply across sectors, are taken into account. Nevertheless, indications are that in recent years informal markets have increased, which may have given rise to some widening of income differentials.

27. Turkmenistan has an extensive formal social safety net system, consisting of subsidized prices for basic consumption items and utilities, pensions and family allowances, and guaranteed employment (Box 3). In November 1996, the government introduced an income limit on access to heavily subsidized rationed basic goods of manat 80,000 per month per family member. According to the Household Budget of November 1996, this generous limit allowed almost two-thirds of the population to benefit from the subsidies. However, the government intends to keep the limit constant at the present level, using future wage increases to gradually reduce access to the subsidies.21 Nevertheless, the social safety system lacks adequate targeting, which raises its overall costs. In addition, in recent years subsidies have increasingly been shifted off-budget, and are now mostly implicit in a complicated web of low producer and consumer prices, compensated by subsided inputs; low wages compensated by free access to basic utilities; and special tax exemptions.

Summary of the Social Safety Net

The social safety net consists of:

  • Price subsidies. Flour, bread, rice, cotton oil, and sugar are provided at highly subsidized prices and salt is free of charge.22 Subsidized bread and salt is available at unlimited quantities for every citizen; the other goods can only be bought at the subsidized price up to a limit, and these rations are only available to families with a total income of up to manat 80,000 per capita per month (manat 200,000 per capita per month for flour). In addition, electricity, water, and gas are provided free of charge up to a generous limit, and at highly subsidized prices thereafter. Housing and related communal utilities such as hot water, heating, and sanitation are also heavily subsidized.

  • Pensions. The pension system is regulated by the laws “On Pensions to Citizens” and “On Social Protection of Disabled Persons,” providing protection for old age, disability, and for the loss of a bread winner. In 1995, 425,000 people received a pension from the Pension and Social Security Fund, of which 310,250 received an old-age pension. The basic retirement age is 60 years for men (after 25 years of work) and 55 years for women (after 20 years of work). While the amount of pension depends on the length of work experience, type of employment, and salary, it is independent of recipients’ additional income. Pensions are provided through the budget on a “pay-as-you-go” basis, and are generally increased in line with general wage increases.

  • Family allowances. These allowances are also paid from the budget’s Pension and Social Security Fund and include payments to low income families and to families with children (irrespective of income), allowances for persons who take care of disabled people, and death, disability and veterans benefits.

  • Guaranteed employment. Every citizen of Turkmenistan is guaranteed employment. In case workers are laid off, the enterprise pays monthly wages for up to two months as a severance payment.

In addition, informal support by family members is another major aspect of the overall social safety net in Turkmenistan.

H. Private Sector Development

28. Although Turkmenistan has introduced basic laws to promote private sector development, including private property and bankruptcy laws,23 the formal private sector remains very small. There has not been a sufficient effort to reform the public enterprise sector, and privatization has been limited to small retail and service shops, a large number of which still remain government-owned. Foreign investment has been limited to a few joint-ventures in the oil and gas sector, textiles, and banking. Complicated registration requirements and tax regulations and the fear of government interference keep many small private enterprises operating in the informal market. As a result, the economy remains dominated by the public sector.

29. The privatization of state-owned enterprises is guided by the 1993 Law on Denationalization and Privatization of State Property and separate laws for the privatization of services, trade and catering, and industrial enterprises. In September 1994, parliament approved the “National Program for Privatization,” listing 4,343 enterprises to be privatized. The list consisted of all public enterprises, except for those operating in priority industries, such as electricity generation, oil and gas, and communications, which remain reserved for the state. The government set a cautious path for privatization in order to limit the loss of employment expected from privatization as companies became exposed to the efficiency constraints imposed by market forces.

30. By the end of 1996, 1,856 small enterprises (with less than 20 employees) in the trade and services sector were privatized. This was accomplished mostly in 1995, while only 204 small enterprises were privatized in 1996. Most of the enterprises privatized were sold to the employees,24 with the obligation to continue the existing activity. In addition, so far, ten medium-scale enterprises have been converted into joint-stock companies (the shares of which are managed by the MEF), although the government has retained majority ownership. In early 1996, the government announced a broadening of the privatization process, requiring all ministries to list 15 percent of eligible (medium-sized) enterprises for immediate privatization. About 60 enterprises were identified for privatization under this scheme, although only two were privatized.

31. In order to improve the performance of privatized companies, in November 1996, the government announced that small-scale enterprises in the trade and catering sector would henceforth be privatized exclusively by auction; a similar decree for industrial enterprises was issued in March 1997. As of March 14, 1997, foreigners will be allowed to participate in the auction process, but the share of foreign ownership remains limited to 49 percent, although exceptions to this rule are possible. At present, the privatization method for medium- and large- scale enterprises is determined for each enterprise individually. The government expects to initiate preparations for a mass privatization program for these enterprises in 1997.25 As mentioned earlier, under its agricultural reform program, the government will start privatizing agricultural land in the next two years. Little progress has been made in the privatization of housing.

I. Environment

32. Turkmenistan has adopted a number of laws to improve its environment. The laws specify an acceptable level of pollution and the fee that an enterprise must pay if it exceeds that level. However, effective implementation is lacking and the laws have had little impact as most enterprises choose to pay the fee, rather than change production processes or install cleaning devices.

33. In addition to severe industrial pollution in certain areas, Turkmenistan has serious environmental problems related to agriculture. First, heavy use of fertilizers contributes to serious soil deterioration and water pollution. Second, cotton production puts large demands on the quality and usage of water, which in the case of Turkmenistan is aggravated by the inefficient use of the water. Heavy demand for water in the entire region has contributed to the shrinking and salinization of the Aral Sea.26 Several desalinization plants were constructed at the Aral Sea, but these cover only about 10 percent of the damaged area. Turkmenistan participates with the other Central Asian states in the Aral Sea Basin Program in seeking basin-wide solutions for the problems of the Aral Sea.

34. A further important problem is the rising level of the Caspian Sea, which has caused flooding as well as pollution of fresh waters in the coastal region. At the same time, the Caspian Sea is still being polluted by the two oil refineries. In November 1996, Turkmenistan and Turkey signed an agreement to establish a joint Turkmen-Turkish Commission on environmental protection. The agreement includes joint action regarding the Caspian and Aral Seas in cooperation with the World Bank and the United Nations.

III. Public Finance

A. Overview

35. The consolidated government budget, encompassing the central and provincial governments and municipalities, was in approximate balance on a cash basis in 1996, after incurring a small deficit in 1995. Revenues and expenditures both increased by several percentage points of GDP, reflecting primarily the sharp devaluation of the official exchange rate, although low collections on gas exports and difficulties in selling clearing goods constrained revenues and expenditures below the levels anticipated. This led to significant expenditure arrears which, after a netting operation with revenue arrears, gave rise to a small deficit on a commitment basis. However, the coverage of the budget remains inadequate and a significant part of the central government’s fiscal operations remains outside the budget. The approved 1997 budget shows large revenue and expenditure increases due to a projected large increase in revenue from gas exports, and targets a deficit within 1 percent of GDP.

B. Revenue Developments

36. Total revenues and grants rose from 12.5 percent of GDP in 1995 to around 15 percent of GDP in 1996 (Text Table 2 and Figure 2). Nongas revenues fell for reasons common to transition economies, including a decline in production, lower real wages, flaws in tax design, and the emergence of a nonpayment culture due to lack of familiarity with new tax systems. However, unlike most countries at a comparable stage of transition, the ratio of total revenue to GDP in Turkmenistan has increased in recent years, primarily due to a recovery in tax revenue from the gas sector, following earlier sharp drops as gas exports contracted. Moreover, lower (cash) receipts from gas exports than planned and difficulties in selling goods received as payment for gas exports, resulted in lower revenue than anticipated.

Text Table 2.

Turkmenistan: Summary of General Government Operations, 1994-97

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Sources: Data provided by the Turkmen authorities; and Fund staff estimates

Budget approved by parliament, in constant fourth quarter 1996 prices.

Excludes the (revenue counterpart of) expenditure of the Oil and Gas Development Fund, certain construction expenditures from the FERF, and certain capital investments of public enterprises, that were included in the 1997 budget on a deficit neutral basis.

In 1997, this item includes spending from the Pension and Social Security Fund, which is mostly captured under Pension, Social, and Geological Funds in earlier years.

For the 1997 budget, this includes principal repayments.

Financing provided for repayment of EU loan, and manat 20 billion direct financing to the budget.

Figure 2.
Figure 2.

Turkmenistan: General Government Operations, 1993-96

Citation: IMF Staff Country Reports 1997, 058; 10.5089/9781451837223.002.A001

Sources: Data provided by Turkmen authorities; and Fund staff estimates.

37. Although earnings from gas exports remained about the same in U.S. dollar terms in 1996 as in 1995,27 tax revenue from the gas sector increased from 3 percent of GDP to 6 percent of GDP, which was the main factor behind the increase in the ratio of overall revenue to GDP. The gas sector contributes to budgetary revenues through the value-added, profits, natural resources, excise and property taxes28 The increase in revenues from these taxes in relation to GDP arose from the higher tax base due to the sharp devaluation of the official exchange rate in January 1996, in combination with the reduction in the spread between the official and commercial bank exchange rates (Box 4).

Exchange Rates and the Budget

Exchange rate movements had important effects on the ratios of budget aggregates to GDP.

  • First, the revenue and expenditure to GDP ratios increased with the decline in the spread between the official and the market rates. The taxable base of the gas sector is calculated by use of the official rate, whereas GDP is calculated by use of the much more depreciated market rate. Thus, a reduction in the spread between the two exchange rates due to a more rapid depreciation of the official rate increases the taxable base by more than nominal GDP, raising the tax revenues to GDP ratio. In terms of manat per U.S. dollar, the annual average official rate increased by a factor of 29, but the market rate by only a factor of 7, and the resulting narrowing of the spread between the two rates was a major factor behind the increase in the ratios of revenue and expenditure to GDP and of the increase in the share of the gas sector in overall revenue. Similarly, expenditure on imports increased in relation to GDP. These effects on revenue can be seen most clearly in the developments in revenues from the Natural Resources Tax (NRT). Such revenues accounted for more of total revenues in each quarter of 1996 in comparison to the corresponding quarter in 1995, and were almost twice 1994 levels. As more than 90 percent of the proceeds from the NRT accrue from the gas sector (and no changes have been made to the operation of the NRT), this suggests a substantial jump in the taxable base of the gas sector in relation to GDP.

  • Second, revenues are more affected by the exchange rate than expenditures. Revenues are to a large extent dependent on earnings from gas exports, while expenditure is more sensitive to domestic costs. As a result, due to the much steeper depreciation in the official exchange rate than the increase in domestic prices, the effect of the large devaluation of the manat was to lower the deficit in 1996.

38. The agricultural sector accounted for around 10 percent of total revenues, which is below its share in GDP. This sector benefits from many tax exemptions (including from VAT and profits tax)29 and subsidies on inputs (although it also faces procurement prices that are set by the government at very low levels). Much of agriculture was also subject to a severe slump in 1996 (see paragraph 14). Transportation accounted for a further 6 percent, the construction sector and the Ministry of Trade and Resources for 2 percent each, and the textile sector for 1 percent of budget revenues.

39. By type of tax, budget revenues are collected primarily as profits, value-added, natural resource and payroll (social insurance) taxes (Tables 13, 14 and 15). These four main taxes accounted for more than 80 percent of total revenues in 1996. Most revenue is generated from two indirect taxes, VAT and NRT. Revenues from VAT have risen from 29 percent of total revenues or 3.6 percent of GDP in 1995 to 34 percent of total revenues or 5.1 percent of GDP in 1996, and the NRT—which increased more than the other major taxes—from 10.3 percent of revenues in 1995 (1.3 percent of GDP) to 12.4 percent of revenues in 1996 (1.9 percent of GDP). Revenues from the profit tax remained at about 23 percent of total revenues (3 percent of GDP) in 1996. The only substantial decline, both in terms of GDP (from 2.4 percent in 1994 to 1.9 percent in 1995 and 1996) and in share in total revenues (from 23.4 percent in 1994 to 15 percent and 13 percent in 1995 and 1996), was in revenues of the Pension and Social Security Fund (primarily via the payroll tax), mainly due to the sharp fall in real wages between 1994 and 1996 (Box 5). As explained in Box 4, the increases in the profit tax, VAT, and NRT were primarily due to the devaluation of the official exchange rate.

40. Few significant policy changes to tax legislation were made during 1996.30 The allowable deduction for wage costs under the profit tax was adjusted to account for the introduction of the excess wage tax as of January 1, 1996; the revenue impact of this change, however, was negligible.

41. Revenue arrears emerged as a significant problem during 1996. Official estimates of revenue arrears amount to manat 215 billion as of end-1996, equivalent to 2.6 percent of GDP and 17 percent of total revenues. This occurred despite the settlement of payments arrears in agriculture in December 1996, following the granting of large CBT-directed credits to this sector. Part of the arrears may, however, reflect changes in the calculation of the taxable base of the gas sector after the reorganization of the sector mid-1996 (see paragraph 7). Recent tax legislation has altered the definition of the taxable base retroactively, and part of these arrears may thus be removed automatically. Although the remaining arrears are spread among the Ministry of Oil and Gas, the Ministry of Energy, the Ministry of Trade and Resources, Turkmenneftegaz, and the Consumers Cooperative Union, they are primarily due to problems in the sale of goods received on clearing arrangements for gas exports.31

C. Expenditure Developments32

42. Expenditures rose from 11.9 percent of GDP in 1994 to 14 percent in 1995 and to 15.7 percent in 1996. Most of the increase in 1995 was due to the inclusion in the budget of spending financed from a special loan to the agricultural sector (1.4 percent of GDP). Excluding this item, expenditures increased by more than 3 percent of GDP in 1996. The substantial jump in the expenditure ratio in 1996 was primarily caused by the devaluation of the official exchange rate, and mirrors the rise in revenues.

43. The largest single expenditure category is capital expenditure, which (including arrears) increased from 2.1 percent of GDP in 1995 to 3.0 percent of GDP in 1996, and from 15 percent to 19 percent of total expenditure, mainly due to the sharp devaluation of the official exchange rate. Expenditure from the Pension and Social Security Fund and other social welfare payments, increased significantly (to 15 percent of total expenditure) as benefits were raised several times in 1996 (Box 5).33 Spending on education, which is mainly determined by domestic price developments, declined from 2.2 percent of GDP in 1994 to 2 percent in 1996. During the last three years, the share of expenditure on education in total expenditures has fallen sharply from 19 percent in 1994 to 13 percent in 1996. This reflected primarily the decline in real wages in recent years, and reduced construction and maintenance of educational facilities. On the other hand, expenditure on health, which has a large foreign exchange component (imported medicine and equipment), increased in terms of GDP and as a share of total expenditure. A drop in Russian assistance to Turkmenistan’s armed forces and imports of military equipment has led to a doubling of defense spending in 1996, but from a very low base of 0.5 percent of GDP in 1994. Reflecting the low levels of government domestic and external debt, interest payments amounted to only 1 percent of total expenditure in 1996.

44. The budgetary cost of subsidies has fallen slightly from around 1 percent of GDP to 0.7 percent of GDP between 1994 and 1996, and the share of subsidies in total expenditures has been halved from 8 percent to 4 percent. The decline in subsidy payments—which took place despite devaluations of the manat during this period, and thus increases in prices of imported food items—has been achieved mainly through increases in controlled prices. Although the budget accumulated arrears on subsidy payments during the last quarter of 1996, these were largely paid off through end-year netting arrangements.

45. After netting arrangements with revenue arrears, remaining expenditure arrears at end-1996 amounted to manat 47 billion, equivalent to 0.6 percent of GDP or 3.5 percent of total expenditures. The increase in the official average wage in October 1996 led to some short-term budgetary wage and stipend arrears, but these were cleared by end-1996. The remaining arrears are owed almost entirely on investment payments.

The Pension and Social Security Fund

The Pension and Social Security Fund (PSSF) was included in the budget in mid-1995. The revenues into the PSSF are derived primarily from a payroll tax. Employers pay a tax equivalent to 30 percent of the total wage bill to the Fund, with workers contributing an additional 1 percent of salary. Until 1997, agricultural collectives paid a reduced rate of 20 percent. On January 1, 1997, the payroll tax was, together with the profit and income tax, replaced by an 8 percent tax on the value of output. Expenditures from the Fund are on old age, disability, and other pensions, and a variety of family and social benefits (Box 3).

The PSSF moved from a surplus of 0.7 percent of GDP in 1994 to a deficit of 0.4 percent of GDP in 1996. Revenues into the PSSF declined in 1995, and expenditures out of the PSSF rose in 1996. Both revenues into the PSSF and expenditures from the fund are closely related to wage movements. The real wage decline since 1994 caused a fall in revenues to the PSSF by 29 percent in 1995 and a further 5 percent in 1996. Expenditure from the PSSF declined sharply in 1994, but the decline was more muted in 1995, while a significant increase occurred in 1996 due to rapid increases in benefits. As a result, the surplus recorded in 1994 changed into a deficit in 1996.

D. Financing

46. The small budget deficit in 1996 (0.2 percent of GDP) was financed by some net foreign borrowing and a contribution from the FERF, while the government accumulated net deposits with the banking system. Net foreign financing in 1996 amounted to about manat 13 billion.34 The FERF assumed and repaid the liability of the budget to the European Union, which had been in arrears since 1995, and in addition made a transfer of manat 20 billion to the budget for the import of wheat. In August and September 1996, the government borrowed manat 10 billion from the CBT, partly for financing of the budget proper (manat 4.5 billion), and partly for on-lending to the Ministry of Trade and Resources (manat 5.5 billion). However, the resulting increase in net bank financing was reversed into a net deposit with the CBT, following the large increase in revenue in December from the settling of revenue arrears.

E. Local Governments

47. The local governments may impose taxes, but revenue from these is very small. During 1996, the central government collected 97 percent of the profit tax, 99 percent of the VAT, all of the natural resources and excise taxes, and all of the contributions to the medical insurance fund and the PSSF. It thus accounted for 95 percent of total revenues. About 38 percent of total expenditures are, however, made by local governments, which are responsible for much of the spending on wages and salaries (but not pensions and benefits) and on construction. The necessary redistribution of revenues is determined by the central government on an ad hoc basis, and is achieved primarily through allocations of profit tax, VAT and NRT collections from “local” enterprises.35 In general, each province receives half of the profit tax and VAT collections from local enterprises. Two provinces, Ahal and Balkan, receive all of the NRT collections from local enterprises. During 1996, revenues from these sources would have led to a surplus in the Balkan region, and thus only 23 percent of VAT revenues were allocated to this province. Ashgabat province also would have generated surplus funds, and thus received only 32 percent of VAT collections from local enterprises. By contrast, the Ahal, Dashkhovuz, Lebap and Mary provinces required additional grants from the central government.

F. The Treasury System

48. Since 1996, all budgetary expenditures have been made through a well-organized treasury system established with technical assistance from the IMF, with the objective of recording and controlling expenditures at all levels of government. The system covers central, regional, and city budgets, and provides computerized budget execution statements on a timely basis. It allows pre-checking of expenditures, as well as a reduction in total government-held idle cash balances by consolidating budgetary accounts. Regional offices of the MEF are linked with the head office by computer, providing discipline and timely information. Expenditure is still reported only on a functional rather than an economic basis, although the authorities intend to introduce the latter for analysis of budgetary developments and projections in the first half of 1997.

49. While there has been considerable success in bringing all accounts of budgetary units within the ambit of the treasury, an important part of the government remains outside the coverage of the budget, and thus outside the control of the treasury system. The coverage of the budget is limited to certain capital investments and core government spending, such as on health, education, other social expenditures, defense, and the legal system. However, it excludes “self-financing” ministries—mainly ministries that control key public enterprises, including the ministries of Agriculture, Oil and Gas, and Trade and Resources—and other government activities, the most important of which are those falling under the Foreign Exchange Reserve Fund (FERF).36 Starting with the 1997 budget, the expenditures of the Oil and Gas Development Fund, certain construction expenditures by the FERF, and “noncentralized” capital expenditures of state enterprises, are included under budget expenditure, with a matching entry under revenues37 However, these revenues and expenditures remain outside the treasury system and thus outside the budget’s control.38

G. The 1997 Budget

50. The 1997 budget approved by parliament in December 1996 sets the deficit target within 1 percent of GDP.39 As in previous years, the budget is expressed in prices, wages, and the official exchange rate prevailing at the end of the preceding year (in this case, December 1996), which greatly reduces its function as a planning tool and complicates its analysis. The main assumptions underlying the 1997 budget are a gas export volume of 40 billion cubic meters and a collection ratio on gas exports of 50 percent. These assumptions lead to a more than doubling of revenues from the profits, value-added, and natural resources taxes. Even after excluding the Oil and Gas Development Fund, the FERF, and investment surpluses of public enterprises (which were not included in 1996), the budget implies a large increase in revenue collections. The 1997 budget also includes new excise taxes on a number of import and export goods. However, the expected revenue from this measure—with rates of up to 100 percent—is small, given the low volumes of the items concerned, and the measure serves mainly to protect domestic industries. In line with the revenue projections, expenditure—especially on health, capital, and defense—is also budgeted to increase significantly. The 1997 budget does not take into account the doubling of budgetary wages in March 1997, nor the channeling of half of the proceeds from restructured gas debt40 to the budget to finance the wage increase. For monitoring purposes, the authorities intend to continue the previous years’ practice of using quarterly budgets, approved by the President, which will incorporate new measures, such as the recent wage increase.

IV. Monetary Developments

A. Overview

51. The measures announced at end-1995 to increase CBT autonomy and liberalize interest rates contributed to greater monetary control and much lower monetary growth in 1996, which, in turn, helped lower inflation. The government abstained from issuing directed credits for most of the year and CBT credit auctions were initiated. By mid-year, the liberalization of interest rates allowed the CBT refinance rate to increase to levels that were, for the first time since the introduction of the manat, positive in real terms. As a result, broad money growth during the first eleven months of 1996 was only a fifth the growth in the comparable period of 1995. These positive policies were partly reversed in December 1996, when the government resumed large-scale directed credits and the money supply increased by almost 50 percent in one month. However, the CBT increased sales of foreign exchange in the first months of 1997 and greatly reduced the frequency of credit auctions, thus containing the growth in liquidity and contributing to a decline in inflation.

B. Monetary Developments and Policies41

Money and credit

52. As of the beginning of 1996, directed credits were discontinued and the 15 percent per annum ceiling on interest rates on bank credit to state enterprises was lifted. At the same time, the refinance rate was increased from 15 percent to 50 percent per year (non-compounded),42 reserve requirements were unified at 11 percent, and the government announced the introduction of credit auctions. These measures, notably the virtual absence of directed credits throughout most of the year, allowed the CBT to exercise control over domestic liquidity. Although monetary growth fluctuated considerably during 1996 (Text Table 3, Figure 3, Table 16), money supply growth was contained at 164 percent during the first 11 months of the year, compared to 769 percent during the same period in 1995.

Text Table 3.

Turkmenistan: Monetary Survey, 1995-97

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Source: Central Bank of Turkmenistan

Foreign exchange denominated assets and liabilities are valued at the constant exchange rate of manat 1,000 per U.S. dollar prevailing at end-March, 1996.

In this presentation of the monetary survey, a number of offsetting entries have been netted in order to better highlight the contribution to monetary growth from external and domestic sources. These entries concern the deposits of the FERF, which to a large extent offset changes in CBT foreign assets, and CBT and bank credit to state enterprises in foreign exchange, which almost entirely concerns on-lending of foreign borrowing and which is thus also reflected in foreign habilites. These entries have been deducted from net domestic assets and netted with net foreign assets.

Figure 3.
Figure 3.

Turkmenistan: Selected Monetary Indicators, 1993-97

Citation: IMF Staff Country Reports 1997, 058; 10.5089/9781451837223.002.A001

Source: Data provided by the Turkmen authorities.

53. Monetary expansion was particularly rapid in the first half of the year, especially in the second quarter, when M2 (broad money excluding foreign currency deposits) increased by 154 percent.43 This reflected a sharp growth in reserve money, following large foreign exchange receipts from the forward sales of cotton (Table 17), as well as a sizable expansion in manat denominated credit to the economy (Table 18),44 especially to the trade sector (Table 19). The increased demand for credit reflected a sharp increase in import prices following the devaluation of the manat in January, wage increases in January and May, and financing needs associated with the new cotton crop. In addition, in February, the government rescheduled by decree manat 51 billion in short-term CBT credit (37 percent of total outstanding manat denominated credit to the economy in that month) over 10 years at 5 percent annual interest.

54. Another factor contributing to monetary expansion in the first half of the year was the growth in CBT credit to the FERF. This credit results from the surrender requirement on export receipts to the FERF, the manat counterpart of which is credited to both the surrendering entity and the FERF, and is outside the CBT’s control.45 In the first quarter of 1996, such credit accounted for 51 percent of the increase in reserve money, which led the CBT to suspend the credit auctions, after the first one held in February. To address this problem, in March 1996, the government changed the 40 percent surrender requirement to the FERF on the oil and gas sector to a tax—eliminating the manat counterpart to the Ministry of Oil and Gas—and lifted the surrender requirement on private sector exports in June. These measures considerably dampened monetary growth through this mechanism, and allowed the CBT to resume credit auctions.46

55. Monetary growth slowed sharply in the third quarter of 1996. Following the resumption of credit auctions in June, the CBT refinance rate rose from 86 percent to 120 percent per annum (from 112 percent to 214 percent when compounded), becoming significantly positive in real terms (Figure 3). At the same time, there was a decline in the CBT’s net foreign assets and a sharp contractionary effect from the budget. As a result, the growth in reserve money ceased, bank liquidity declined, and the overall growth in M2 in the third quarter slowed to 4 percent. The tight liquidity situation continued in the next two months, with M2 declining by almost 6 percent. This contraction took place in a period when wages in the economy were doubled (as of October 1, 1996), triggering arrears in wage payments. The ensuing pressures to ease monetary policy resulted in a resumption of directed credits in December 1996. The CBT was authorized by Presidential decree to extend manat 184 billion (80 percent of end-November reserve money) to banks for on-lending to the agricultural sector, where financial difficulties were aggravated by severe crop failures.47 As a result, reserve money increased sharply and manat credit to state-enterprises almost doubled. Payments of wage arrears led to a 54 percent increase in currency in circulation, and a 48 percent increase in M2 in December.

56. During the first months of 1997, monetary policy was geared toward containing the impact on inflation of the strong monetary expansion in December. The CBT stepped up foreign exchange sales in January and February. This move reversed the earlier sharp depreciation of the parallel market exchange rate and allowed additional imports, which absorbed part of the increase in domestic demand.48 In addition, the CBT reduced the frequency of credit auctions. These measures considerably dampened monetary expansion and contributed to a decline in inflation to 7 percent in January and to under 3 percent in February 1997.

57. The annual average M2 velocity rose sharply (from 19 to 33) in 1996. Real money balances fell sharply in the last few months of 1995 and in January 1996 as inflation accelerated to 50–60 percent per month (Figure 3). There was a temporary reversal of this trend in the first half of 1996 as inflation moderated. Confidence in the manat continued to decline, reflecting perpetuation of inflationary expectations, negative real interest rates on deposits, and low confidence in the banking system, compounded by the requirement that banks may only provide cash from deposits for specified purposes (mainly for the payment of wages). The rapid increase in velocity complicated formulating of monetary policy and diminished its effectiveness.

Interest rates

58. Following the elimination of the 15 percent ceiling on interest rates on credit to state enterprises at end-December 1995, banks are, in principle, free to set their interest rates. However, interest rates on credit provided under Presidential decrees (including credit rescheduled by decree and directed credits) are set by the government, generally at very low levels.

59. The CBT refinance rate, which was 15 percent throughout most of 1995, increased rapidly in the first half of 1996, but declined toward the end of the year and in early 1997 (Table 20). In late December 1995, the CBT raised the refinance rate to 50 percent, and following the initiation of credit auctions in February 1996, set it at the level of the auction rate.49 Initially the CBT offered relatively small amounts of credit, and the refinance rate increased from 86 percent in June to 120 percent50 in July, when the monthly refinance rate of 10 percent exceeded monthly inflation by more than 6 percentage points. During October–November, a decline in the demand for funds in the credit auctions triggered a reduction in the refinance rate to 105 percent. Following the easing of monetary policy in December and the decline in inflation in the first months of 1997, the refinance rate was lowered to 68 percent (94 percent per year on a compounded basis) by March 1, 1997,51 although remaining positive in real terms. The movements in the refinance rate were generally reflected in the treasury bill rate, which increased from 60 percent at end-1995 to 120 percent in August 1996, but declined to 85 percent in early 1997.

60. Interest rates in the commercial banks followed the trends in the refinance rate, although they remained widely dispersed by sector and maturity (Tables 20 and 21) and generally largely negative in real terms. The interbank rate increased from 55 percent at end-December 1995 to around 90 percent in the first half of 1996 and, reflecting the increasingly tight liquidity situation, to 130 percent in October. The low average cost of funds allowed banks to provide credit at rates far below the CBT refinance rate, and generally far below inflation rates.52 Although lending (and deposit rates) remain widely dispersed, banks reported average lending rates of 45–75 percent and deposit rates of 20–50 percent per annum in 1996, only a fraction of the inflation rate.

C. Monetary Policy Instruments

61. The CBT’s main monetary policy instruments are reserve requirements and credit auctions. Although agreement was reached with the MEF in 1996 on regulations for the issuance of treasury bills through auctions, the latter have not materialized. Bi-weekly credit auctions were initiated in June 1996; at the same time, the CBT introduced a 7-day auxiliary credit facility to provide liquidity between auctions and to reduce the use of the automatic overdraft facility.

Reserve requirements

62. During most of 1993–96, reserve requirements differentiated between types of deposits, with lower rates on household and long-term deposits (Box 6). To reduce possible distortions, the rates were unified at 11 percent (close to the average rate of end-1995) as of January 1, 1996. The base of the requirement consists of total deposits with banks, including foreign currency deposits and deposits of non-residents and, as of January 1, 1996, accounts payable and receivable. The reserves are held in separate non-interest bearing reserve accounts with the CBT. In February 1996, the CBT allowed banks to hold reserves against foreign currency deposits in a separate dollar denominated reserve account, in order to guard against foreign exchange risk.53 In October 1996, in view of the tight liquidity situation, the CBT relaxed the reserve requirement by allowing banks to count 30 percent of cash holdings as reserve assets for the requirement and changed the measurement date from twice a month to once a week. In case of noncompliance, banks have to pay a penalty rate of 0.2 percent per day on the shortfall. However, banks have automatic access to the CBT’s overdraft facility and a two-day period to increase reserves up to the required level. Consequently, noncompliance has been exceptional and for small amounts only.

Developments in Reserve Requirements, 1993–96

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Central Bank refinance and credit facilities

63. The CBT extends credit in manat to the government and banks, and in manat and foreign currency to off-budget government ministries and state enterprises. CBT credit to the government takes the form of automatic, non-interest bearing current account overdrafts, and medium- and long-term loans (Table 17). In line with the policy of the MEF to closely match expenditure with revenue, the budget’s current account with the CBT remained in surplus throughout most of 1996. During August–September 1996, long-term loans increased by manat 10 billion, of which manat 4.5 billion (one-year maturity, at 5 percent interest) was for the budget proper. The remaining manat 5.5 billion (interest free) was for on-lending by the budget to the Ministry of Trade and Resources for the purchase of meat.54

64. The CBT provides credits to banks through an overdraft facility, credit auctions, and an auxiliary credit facility. Access to the overdraft facility is automatic, but carries a high interest rate. In June 1996, the CBT made the interest rate on overdrafts more automatic and market-related by changing it from 0.5 percent per day to 70 percent above the official refinance rate. After being applied for two months, this change was temporarily suspended and resumed in January 1997. Use of the overdraft facility was small in the first half of 1996, increased rapidly in the second half as bank liquidity tightened, but the balances were almost completely cleared after the extension of directed credits to banks in December.

65. All banks have access to the CBT credit auctions,55 provided that they do not have an overdraft position with the CBT and comply with CBT prudential regulations and reserve requirements. The amount of CBT credit requested may not exceed twice the bank’s capital and 30 percent of the total financing offered, and the total amount of CBT credit outstanding to a bank may not exceed 35 percent of that bank’s total credit portfolio. The particulars of the auction, including the amount offered and the auction method (mostly the American auction system, in which accepted bids carry the interest rate bid and not the cut-off or the average rate) are communicated to the banks one day in advance, and settlement is on the same or the next working day. The auction interest rate is quoted on an annual (noncompounded) basis, but interest has to be paid monthly at a rate of one-twelfth of the annual rate.

66. Initially, credit auctions were held bi-weekly, but the frequency was increased to weekly in October and November in view of the very tight liquidity situation. Following the resumption of directed credits, between mid-December 1996 and mid-April 1997, only two auctions were held. Credit auctioned generally carried a three-month maturity, although in December, the CBT also auctioned six-month credit to lengthen the maturity structure of banks’ liabilities. The net amounts of credit auctioned increased from manat 4 billion in June to manat 15 billion in October.56

67. In June, the CBT also introduced an auxiliary credit facility to limit the use of the CBT’s automatic overdraft facility by providing short-term (7-day) lending in between credit auctions. All banks eligible for the auctions are allowed access to the auxiliary credit facility, up to 75 percent of a bank’s required reserves (and limited to twice monthly). Initially, the interest rate was set at 20 percent above the refinance rate. However, citing the difficult liquidity situation of banks, in August the CBT lowered this margin to 5 percent, but raised it to 10 percent in October and to 15 percent in December 1996. However, despite the lower interest rate relative to overdrafts, use of the auxiliary credit facility remained limited, mainly due to the restriction that banks with CBT overdrafts were not eligible to use the facility.

68. Due to the low deposit base, banks remain highly dependent on CBT financing for the growth in their credit portfolio. CBT-financed bank credit declined from 26 percent in the second half of 1995 to 19 percent by June 1996. However, following the introduction of regular credit auctions and the overdraft facility, this share increased to 30 percent by October–November, and more than doubled to 70 percent in December, following the extension of directed credits.

69. The CBT’s policy is not to grant credit to state enterprises, except in special circumstances. As a result, the CBT’s manat denominated credit to state enterprises remained at manat 19 billion (most of which was included in the government-mandated long-term rescheduling of February 1996) throughout 1996. However, the CBT intermediated in two large foreign loans to enterprises of off-budget ministries. In January 1996, a four-year loan of US$24 million was on-lent to the Ministry of Agriculture for the import of grain, and in August, a 10-year loan of US$95 million for the purchase of two civil aircraft was on-lent to the Ministry of Civil Aviation. In addition, the CBT provided financing from its own resources for the purchase of two helicopters (US$15 million), also to the Ministry of Civil Aviation.

Treasury bills

70. With a view to strengthening monetary policy instruments, in mid-1996, the CBT and the MEF agreed on regulations for treasury bill auctions. Under the agreement, the CBT would conduct the auctions, based on the budget’s financing needs and on monetary policy objectives. However, due to inadequate technical preparation and a lack of coordination between the CBT and the MEF, the first auction held in August failed to achieve the intended results, and no subsequent attempts were made to resume the auctions. Consequently, treasury bills continued to be issued directly by the MEF, initially with a three-month maturity, but as of August 1996 also with a one-month maturity. The net amounts issued to banks, however, only amounted to manat 900 million by end-1996; some very small amounts were also bought by insurance companies.

D. The Financial System

Commercial banks

71. The financial system of Turkmenistan consists of the CBT and 15 commercial banks.57 The CBT licenses and supervises the banks. Of the commercial banks (which grew by one in 1996), seven are fully or mostly government-controlled; in addition, the government has a 50 percent share in a joint-venture with a foreign bank, and a minority share in another. Four banks are locally privately-owned, and two are branches of foreign banks. Ten banks have general licenses, allowing operations with non-residents and in foreign currencies, while five have domestic licenses only. The Vnesheconombank conducts virtually all foreign transactions of the public sector, including all foreign borrowing of public enterprises, and the Savings Bank holds most of the household deposits. Turkmenistan has no nonbank financial institutions.

72. Three (public sector) banks dominate the banking system, which remains heavily geared toward servicing public enterprises. As of end-November 1996, the three banks accounted for 83 percent of total bank credit and the banking system’s credit to state enterprises amounted to 83 percent of total manat-denominated bank credit (increasing to 90 percent in December due to the large directed credits). Private sector deposits—mainly held with the Savings Bank—account for only a fraction of total deposits. Most banks engage in financing a specific economic sector or selected public enterprises, competition among banks is minimal, and—partly due to large delays in settlements—the interbank market is very small. Lending is overwhelmingly (around 86 percent) short-term (less than one year).

Bank supervision

73. Under the Law on Commercial Banks and the Central Bank Law, the CBT is responsible for the supervision of commercial banks. In addition to its policy of strictly limiting the number of commercial banks, it continues to strengthen its prudential regulations. In 1996, the minimum capital requirement was increased from manat 100 million to manat 500 million for small banks and from manat 500 million to manat 1 billion for large banks. Branches of foreign banks have a minimum (assigned) capital requirement of US$1 million. In April, stringent regulations on loan classification and provisioning became operational, mandating provisions according to the prescribed classification, based on the duration for which the loan repayment is overdue. In addition, the CBT imposes (i) a capital adequacy requirement of 8 percent of risk-weighed assets, defined in line with internationally accepted standards; (ii) a liquidity ratio of 30 percent of liabilities (in 1996, the CBT recommended that banks raise this ratio to 50 percent), to be held in cash deposits with the CBT, loans receivable within 30 days, or treasury bills for liabilities with a remaining maturity of less than one month, banks have to hold assets of less than one month maturity; and (iii) a concentration risk ratio, limiting loans to one borrower to 20 percent of paid-up capital. In 1996, the CBT extended this requirement to public enterprises. The penalty for exceeding the limit is equal to the interest earned by the bank on the excess. The CBT conducts off-site and on-site supervision. Turkmenistan does not have a deposit insurance scheme; however, deposits with the Savings Bank are statutorily guaranteed by the government, and deposits in the Vnesheconombank are considered to be government guaranteed. Banks generally comply with the prudential regulations and capital adequacy amounted at end-1996 to a very high level of 30 percent of risk-weighed assets. Overall, the CBT has observed a gradual improvement in banking habits in 1996, and banks have become more aware of the need to preserve solvency and liquidity.

74. However, the overall financial situation of the banks is not as strong as the prudential indicators would suggest. Capital adequacy requirements assign a zero rating to public enterprises, assuming that these loans are fully government-guaranteed. However, in view of the severe economic problems faced by state enterprises and the absence of enterprise reform, difficulties cannot be ruled out in servicing bank loans, which could put undue pressure on budgetary resources. In addition, the new loan classification and provisioning guidelines revealed a much higher amount of overdue loans than previously, amounting to 14 percent of manat-denominated credit in November 1996. Also, there were some liquidity problems during 1996. To assist banks during the transition period, the CBT is closely monitoring developments and is further strengthening bank supervision, including with technical assistance from the World Bank.58

Interenterprise arrears

75. Interenterprise arrears increased from 8 percent of GDP at end-1995 to 22 percent of GDP end-1996.59 Enterprises in the energy sector accounted for 40 percent of total arrears by end-1996. This was attributable mainly to the low collection ratio on gas exports throughout most of the year, and the impact of the introduction of a 40 percent exchange tax on cash receipts from gas exports in March. Arrears by agricultural enterprises also rose in 1996 (constituting 23 percent of the total), reflecting poor harvests in the key crops and inefficiencies in the sector. The government is monitoring the situation closely, and has discontinued, as of April 1, 1997, the 40 percent tax noted above, which should help ease payments difficulties of enterprises in the oil and gas sector. Although there have not been explicit buy-outs of arrears by the government in 1996, the directed credits of end-December resulted in a small decline in the outstanding stock of interenterprise arrears, indicating that the credits were at least partly used to reduce arrears.

V. External Sector Developments

A. Overview

76. Turkmenistan’s external position remained strong in 1996, and gross official reserves were maintained at US$1.2 billion, equivalent to 9 months of imports (Text Table 4, Figure 4). The current account surplus increased to 2 percent of GDP, as lower export revenues, especially from cotton, were more than offset by a sharp decline in imports—reflecting the government’s policy of restricting access to foreign exchange. The capital account moved into surplus. Turkmenistan continued to accumulate new arrears on payments for its gas exports, while foreign direct investment also declined. However, these developments were more than compensated for by much higher disbursements of foreign loans. Turkmenistan’s external debt increased to 32 percent of GDP, while its debt service ratio rose from 13 percent to 18 percent of exports. However, reflecting longer maturities for new loans, the maturity structure of the debt lengthened from about 4 years to 8 years. Turkmenistan’s outstanding external debt service arrears declined from US$125 million at end-1995 to US$59 million at end-1996; most outstanding arrears at the beginning of the year were paid or rescheduled, but some new arrears emerged.

Text Table 4.

Turkmenistan: Summary Balance of Payments, 1993-96

(In millions of U.S. dollars)

article image
Sources: Central Bank of Turkmenistan; and Fund staff estimates.

Gas exports are presented on an account basis. Nonpayments for gas exports are recorded as arrears in the capital account. Transit charges are included in gas exports and in services (transportation) until 1995; as of 1996, gas in exported f.o.b. Turkmenistan.

New arrears incurred to Turkmenistan.

Payments of previous arrears and debts to Turkmenistan.

New arrears incurred and previous arrears paid by Turkmenistan.

Current gas receipts are current year’s gas exports (net of transit charges) minus new arrears on those exports.

Includes both goods arrears and cash arrears on gas and electricity exports, and rescheduled gas arrears.

Exports less arrears incurred in that year plus repayments of arrears from previous year.

Figure 4.
Figure 4.

Turkmenistan: Selected External Indicators, 1993-96 1/

(In millions of U.S. dollars)

Citation: IMF Staff Country Reports 1997, 058; 10.5089/9781451837223.002.A001

Sources: Data provided by the Turkmen authorities; and Fund staff estimates.1/ Exports do not reflect payment arrears. The current account captures all exports, regardless of whether payment has been received or not, with arrears on gas export payments recorded in the capital account and hence reflected in the overall balance.2/ Transit charges are included in gas exports during 1993–95, but excluded in 1996.

B. Exports

77. Turkmenistan’s exports depend heavily upon three products. Natural gas accounted for about 60 percent of total exports,60 cotton for 19 percent, and oil products for 12 percent in 1996 (Table 22). The total share of these three products (over 90 percent)—after adjusting for the different treatment of transit charges in the two years—rose slightly in 1996. Total exports declined in 1996, as growth in exports of gas (net of transportation costs) and oil products was more than offset by a sizable contraction in cotton, electricity, and other exports.

Natural gas

78. For the first time since 1993, gas exports (net of transportation costs) increased in 1996. Under the new arrangement with Turkmenrosgaz, it was agreed that the latter would purchase up to 30 billion cubic meters of gas at a price of US$42 per 1,000 cubic meters (slightly lower than the net export price of US$42.83 in 1995).61 Payment would be made in goods (53 percent) and foreign exchange (47 percent). Turkmenistan would deliver the gas at the border and Turkmenrosgaz would assume all gas transit charges.62 The minority partner in the joint-venture, Itera, a Russian-owned gas trading company, would be responsible for the marketing of the gas, mainly to the traditional markets of Ukraine, Georgia, Armenia, and Azerbaijan.63

79. Gas exports totaled 24.3 bcm in 1996, 7.5 percent more than in 1995, but considerably below the target set under the contract agreed with Turkmenrosgaz (Table 23). Of this, 20 bcm was delivered under the terms stipulated by the contract signed with Turkmenrosgaz, and 4.3 bcm was delivered as “special programs,” a series of ad hoc deals whereby gas was delivered, primarily against grain shipments and construction services.64 The value of gas exports (net of transportation costs) increased 5.5 percent compared to 199565, reflecting a slightly lower average price.

80. The new export arrangement failed to improve the gas payments situation. While Turkmenistan delivered an amount of gas equivalent to US$1,022 million, it received payments of only US$591 million on the contracted deliveries, and US$89 million on special programs deliveries (Table 24). Thus, the collection ratio under the contract with Itera was 70 percent, and under the special programs 49 percent, yielding an overall ratio of 67 percent, considerably lower than the collection ratio of 74 percent on 1995 shipments of gas. Most of the overdue deliveries of goods under the special programs were made with some delay during the first months of 1997. Under the Itera contract, after considerable arrears in the beginning of 1996, about 96 percent of the payments due in goods were made, mostly in the final months of the year. However, only about 41 percent of total cash liabilities were met.66 Some of the payments received in goods were credited as cash by the authorities. Excluding these amounts, only about 9 percent of total gas shipments were paid for with hard currency, compared with 14 percent in 1995 (Table 25).

Cotton

81. Cotton fiber is the second most important export product, accounting for about half of nongas exports. The export price for cotton increased by 17 percent, at a time when the world market price for cotton was declining.67 However, due to the very poor cotton harvest, and despite a sharp drawdown in stocks, the volume of cotton fiber exports declined by 38 percent to 215,000 metric tons. Consequently, the value of exports declined by 25 percent in 1996. Despite a government decree banning barter trade in cotton in early-1996, about 57 percent (up from 40 percent in 1995) of cotton exports were paid for in cash, with the remainder paid for in goods and services (mainly construction).68

Oil

82. The value of oil exports increased by 2.5 percent in 1996,69 which reflected a low increase in crude oil production (0.7 percent), and possibly an increase in domestic demand.70 Most of the oil exports are to non-CIS markets. Despite the government’s policy of eliminating barter trade in oil, only 35 percent of oil exports were paid for in cash, although this constituted a significant improvement over 1995, when only 9 percent of oil exports were paid for in cash.

Electricity and other exports

83. Turkmenistan exports electricity to Kazakstan and Tajikistan. However, electricity exports also suffer from payments problems. In the first six months of 1996, Turkmenistan exported electricity to the value of US$54 million, almost 60 percent more than in the same period of the previous year. However, it received payments for only 43 percent of this amount. Due to the poor payments record, Turkmenistan has stopped all electricity exports since the summer of 1996.

84. Other exports amounted to US$77 million in 1996, 11 percent less than in 1995. The items included in this category are, for the most part, energy based products (white spirits, fertilizers), cotton-based products (cotton seeds), and carpets (Table 26). Much of these goods are exported to other CIS countries and the decline partly reflects the changing trade patterns of these countries.

C. Imports

85. Turkmenistan is heavily dependent on imported products, especially foodstuffs. Consumer goods account for about 35 percent of total imports, with the remainder comprising mostly industrial goods (Table 27). Approximately 53 percent of imports are goods bartered against gas exports. Due to the very low collection ratio for gas exports during the first nine months of 1996, imports were also very low. However, deliveries increased rapidly during the last quarter of the year. The government has tried to encourage food self-sufficiency, primarily by trying to expand the domestic production of grains. Nevertheless, imports of food have remained more or less constant in dollar value in recent years.

86. Imports declined by 7 percent in value terms in 1996, the second consecutive year of decline. However, excluding one-time purchases of aircrafts of US$125 million, imports declined by 14 percent in 1996. Despite a very low grain harvest and high international market prices for grain, imports of consumer goods declined by 19 percent. Imports of industrial goods (excluding aircraft) declined by 11 percent.

87. Import compression was achieved through restricting access to foreign exchange. While imports are free of license, tariff, and quota restrictions, pre-screening of bids in the foreign exchange auctions and restrictions on sales outside the auctions have limited the availability of foreign exchange for imports, especially consumer goods imports. In September 1996, the CBT issued a list of goods for which requests for foreign exchange would be acceptable for the auction market, excluding mainly consumer goods.

D. Trade Structure

88. Turkmenistan’s gas exports are currently entirely to the CIS countries. However, a significant part of the exports of cotton and oil products is directed toward other markets. In 1996, the main non-CIS export markets were Switzerland, Hong Kong, and Turkey (Table 28).

89. The suppliers of Turkmenistan’s imports shifted dramatically in 1996. In previous years, around 60 percent of imports were supplied by the CIS countries. However, in 1996, this figure fell to just under 35 percent. This shift reflects two factors. First, imports from the United States were unusually high, partly due to the purchase of aircraft. Second, low collections on goods under the special programs for gas exports depressed the share of CIS countries in total imports. After the United States, Turkey was the second largest import market for Turkmenistan, followed by Cyprus, Germany, and the Islamic Republic of Iran.

90. Turkmenistan is a member of the Economic Cooperation Organization (ECO), which promotes regional trade, investment, and economic cooperation among its members. Membership of ECO includes the five other Central Asian states, Afghanistan, the Islamic Republic of Iran, Pakistan, and Turkey. Although regional trade remains relatively small, Turkmenistan plays an increasing role as a transit country, especially in trade to and from the Persian Gulf, following completion of a railroad connection with the Islamic Republic of Iran in 1996.

E. Services and Transfers

91. The decline in the net outflows on services from US$428 million in 1995 to US$120 million in 1996 reflected the discontinuation of gas transit payments under the new arrangements for gas exports discussed earlier. Net of this factor, the deficit on the services account increased slightly. Reflecting the growth in external debt, interest payments rose during 1996, while interest income declined. Due to the increasing role of Turkmenistan as a regional transit country, especially after the completion of the railroad connecting the country with the Islamic Republic of Iran, earnings from transit fees increased, resulting in a growing positive balance on transportation.

F. Capital Account

92. The capital account moved into surplus in 1996 as much higher net foreign borrowing more than offset an increase in new arrears and a sharp decline in foreign investment (Table 29). Disbursements of new loans rose to US$429 million, almost double the amount in 1995. Part of the increase (US$58 million) reflected the rescheduling of the EU loan early in 1996, which is recorded as a new loan.71 The rest included a loan of US$95 million (through the CBT) to the Ministry of Aviation for the purchase of civil aircraft, and a loan of US$24 million to the Ministry of Agriculture for the purchase of grain. In addition, disbursements amounting to US$48 million—under credit lines totaling US$580 million—were made for the upgrading of the Turkmenbashi refinery. Total amortizations of loans during 1996 remained at US$245 million.

93. Reflecting low collections on gas exports and arrears incurred on payments for electricity exports, the total amount of debt and arrears owed to Turkmenistan rose to US$1.6 billion by end-1996 (Table 30). Following new rescheduling agreements with Armenia and Georgia72 in March 1996, the total amount of rescheduled debt—mainly relating to gas exports during 1993–94—was established at US$1,188 million as of end-December 1995. This amount was reduced to US$1,162 million by end-December 1996. Turkmenistan also reached agreement with its debtors on arrears incurred on payments for 1995 gas exports, which amounted to US$47 million at end-December 1995. Although this amount should have been fully repaid in 1996, US$20 million was still outstanding at the end of the year. In addition, new arrears of US$360 million (of which US$18 million reflects penalty interest) were incurred on payments for 1996 exports.73 Furthermore, arrears were incurred on payments for Turkmenistan’s electricity exports. As a result, the flow of total new arrears owed to Turkmenistan increased by US$13 million from US$406 million in 1995 to US$419 million in 1996. Repayments of previous arrears increased by US$111 million in 1996. However, excluding US$159 million in debt forgiveness,74 repayments declined by US$42 million. Thus, the net outflow of foreign exchange due to new arrears and payments of previous arrears and debt increased by US$61 million compared to 1995.

94. Foreign direct investment declined sharply in 1996 from US$233 million to US$129 million. Most foreign investment in Turkmenistan has been in the oil and gas sector (Box 7). However, lack of transparency in procedures and regulations, and disputes that have arisen in existing joint-ventures, have led to a decline in new investment in the sector. The government expects that a recently enacted Petroleum Law will renew foreign interest in the energy sector. It has concluded production sharing agreements in the oil sector with two foreign firms (Monument and Petronas), and others are under consideration.

Foreign Investment in Turkmenistan

At the end of 1995, there were 163 joint-ventures in Turkmenistan, valued at US$61 million. Investment in subsidiaries of foreign firms totaled US$32 million. The largest single foreign investor was Bridas of Argentina, with investments of over US$300 million in two joint-ventures in the oil and gas industries. After Argentina, the main investors were Turkey, U.S., Italy, Russia, Islamic Republic of Iran, India, and Bulgaria.

Turkmenistan’s declared policy is to encourage foreign investment aimed at export promotion, including in the energy industry. Since 1992, four basic laws have been enacted, governing foreign investment in Turkmenistan:

  • Law on Investment Activity incorporates a number of guarantees and privileges for foreign investors, notably a 10-year protection period against changes in legislation and transferability of profits. Tax incentives include exemption from customs duties, and for foreign investors with more than 30 percent of authorized capital, exemption from profits and dividend taxes until the initially invested capital is recovered.

  • Law on Foreign Economic Activity allows individuals and companies in Turkmenistan, regardless of ownership, to carry out foreign economic activity, although with the provision of suspension of such rights in the event of non-fulfillment of export orders and/or provision of false information.

  • Law on Foreign Concessions stipulates the rights given to a foreign legal entity or physical person to use land, natural resources, and other assets, and requires that concessions be granted competitively and that the state be allowed to share in the profits generated, purchase the product, and monitor the overall performance of the concession agreement. The term for the latter is from 5 to 40 years, and its provisions may be modified by mutual agreement or court decision.

  • Law on Free Enterprise Economic Zones stipulates privileges granted to firms operating in free economic zones, such as the provision of guarantees against nationalization, the ruling out of discrimination against foreign investors, simplified customs procedures, tax and duty exemptions, free provision of land for three years, and independent pricing of output.

In addition to the above, to guard against unauthorized government guarantees, a Presidential Decree was issued in June 1996 prohibiting ministries and government agencies from issuing payment guarantees to foreign investors and suppliers without prior clearance with the Foreign Currency Committee and registration with the recently established State Agency on Foreign Investment. The initial formalities for foreign investors (which have to invest at least 20 percent of the total capital) include registration with the Ministry of Foreign Economic Relations, the municipality, and the police. While delays can occur in this process, the required procedures are normally completed within 20–30 days.

G. Foreign Debt and International Reserves

95. The primary responsibility for external debt management rests with the State Bank for Foreign Economic Affairs (Vnesheconombank). In the early post independence years, Turkmenistan tended to borrow funds with short-term maturities. More recent external borrowing has been contracted with longer maturities, primarily to finance infrastructure investment. Turkmenistan has also attempted to limit its exchange risk by diversifying into currencies other than the U.S. dollar in its borrowing. Turkmenistan’s external debt outstanding rose sharply from US$469 million at end-1995 to US$668 million at end-1996, or from 30 percent of GDP to 32 percent of GDP (Table 31). Virtually all external debt was taken up by public enterprises, mostly under government guarantee. Reflecting the increase in external debt, the debt service ratio rose from 13 percent in 1995 to 18 percent in 1996.

96. Turkmenistan made some progress in resolving the problems it experienced in 1995 with the servicing of its external debt. By the end of 1995, Turkmenistan had accumulated arrears of US$125 million, of which US$58 million were owed to the European Union (EU). Most of these arrears were paid (including on the EU loan), or rescheduled.75 However, some new arrears emerged, partly reflecting inadequate debt management, and by end-1996 Turkmenistan’s arrears amounted to US$59 million.

97. Although the overall balance of payments showed a surplus, gross official reserves remained virtually constant due to the payment of arrears owed by Turkmenistan. At the end of 1996, Turkmenistan held US$1.2 billion as foreign exchange reserves, equivalent to 9.2 months of imports. The reserves were held almost exclusively in the FERF, which is under the control of the President. The reserves under CBT control amounted to only US$28 million.

VI. Exchange and Trade System

A. Exchange Rate Developments

98. Following a sharp devaluation of the official exchange rate from manat 200 per U.S. dollar to manat 2,400 per U.S. dollar on January 1, 1996, the CBT started foreign exchange auctions in May. The manat depreciated further to manat 4,070 per U.S. dollar by end-1996. However, supply (a major part of foreign exchange receipts is kept outside the auctions and held in the FERF), demand (access to the auctions is limited by the CBT and the Foreign Currency Committee (FCC)),76 and the auction rate remained controlled. As the CBT kept the official exchange rate approximately stable as of mid-1996, the gap between the official rate and the more market determined commercial bank rate gradually increased to above 20 percent in late 1996 and to above 30 percent in early 1997. Reflecting the sharp devaluation early in the year to close the gap with the commercial bank rate, the official exchange rate depreciated by an average of 55 percent in real terms in 1996, while the commercial bank rate appreciated in real terms, on average, by 53 percent. The point-to-point (December) real movements of the two rates in 1996 were much more pronounced.

B. Exchange Arrangements

99. The manat was introduced as the national currency in November 1993 at a value of manat 2 per U.S. dollar. Initially, the CBT quoted a single official exchange rate, which applied to all foreign exchange transactions. In April 1994, two additional exchange rates were introduced: an official commercial rate and a gas transactions rate. All public sector foreign transactions continued to take place at the official rate, while the commercial rate applied to all other transactions. There emerged also a parallel market where the manat was traded at a rate that was much more depreciated than the other rates in the economy. In an effort to contain the gap between the official rates and the parallel market rate, the CBT devalued, in a number of steps, the official and commercial bank exchange rates to manat 200 per U.S. dollar and manat 500 per U.S. dollar, respectively, by September 1995 (Table 32).

100. In 1995, Turkmenistan began to modify the exchange system. In February, the gas transactions exchange rate was discontinued. In November, the official commercial rate was abolished, and commercial banks were permitted to transact in foreign exchange (with a limit of US$1,000 per sale transaction) at a market-related exchange rate. The latter, at the time, was almost manat 1,500 per U.S. dollar, which closely approximated the parallel market rate.

101. On January 1, 1996, the CBT unified the official and commercial bank exchange rates, by devaluing the official rate to manat 2,400 per U.S. dollar. In February, following problems with the sale of barter goods at the new exchange rate, the official rate was revalued to manat 1,000 per U.S. dollar, creating a margin of over 150 percent with the commercial bank rate (Figure 5). A second attempt to harmonize the rates was made in April 1996, when the official rate was depreciated to manat 3,000 per U.S. dollar. In May, the CBT introduced a weekly foreign exchange auction to promote the market determination of the exchange rate.77 However, amounts of foreign exchange available for the auctions were limited, since most foreign exchange receipts were used to replenish the FERF. Furthermore, as noted earlier, access to the auctions—particularly for imports of consumer goods—was constrained by the pre-screening of exchange requests.78 The CBT kept the official exchange rate virtually stable at around manat 4,050 in the second half of 1996. As a result, by December, a differential of 26 percent emerged between the official and commercial bank rates, increasing to over 30 percent in the initial months of 1997.

Figure 5.
Figure 5.

Turkmenistan: Exchange Rates, 1994-97

Citation: IMF Staff Country Reports 1997, 058; 10.5089/9781451837223.002.A001

Source: Data provided by the Turkmen authorities.1/ A decrease indicates a depreciation.

C. Prescription of Currency

102. Residents of Turkmenistan are required to use manat for their domestic transactions. However, foreign currency is used as a medium of exchange in some sectors, most notably the hotel and restaurant sectors. In early 1994, a presidential decree permitted the domestic circulation of foreign currency. However, the decree was withdrawn in December 1995, indicating the government’s intention to end the use of foreign currency for domestic transactions. Nevertheless, reflecting low confidence in the manat, the U.S. dollar continues to be widely used.

103. In January 1994, the CBT issued a directive allowing commercial banks to re-establish correspondent accounts with banks in CIS and non-CIS countries. Previously, all payments were centralized through the accounts of the CBT. During 1994–95, the vast majority of transactions with the CIS states were initially subject to bilateral payments agreements. Most of these transactions during that period, especially those associated with gas exports, were carried out as part of a barter or clearing agreement. In 1996, the trading arrangements for gas became subject to a commercial agreement with the joint-venture Turkmenrosgaz. However, the bulk of gas payments continue to be made through barter and clearing goods.

D. External Payments and Receipts

State Commodity Exchange

104. The State Commodity Exchange (SCE) was created in 1994 with the objective of regulating the country’s exports and imports and obtaining world prices for its exports. All items produced and exported by Turkmenistan, as well as all imports of public enterprises are channeled through the SCE. The only exception is gas exports, which are the responsibility of the Ministry of Oil and Gas. The SCE charges a commission of 0.2 percent on all transactions. The SCE trades in both barter and non-barter goods. Initially, trade was conducted only in manat, but subsequently trade shifted mostly to dollars. Transactions through the SCE are valued at the official rate.

Proceeds from exports and invisibles

105. In 1996, Turkmenistan introduced two different surrender requirements on foreign exchange earnings, one to the FERF and a second to the CBT79 At end-December 1995, the surrender requirement on cash receipts from oil and gas exports was increased from 60 percent to 70 percent, of which 40 percent was to be submitted to the FERF and 30 percent to the CBT. In order to reduce the large automatic credit creation resulting from the surrenders to the FERF,80 the 40 percent surrender to the FERF was changed into a foreign exchange tax in March 1996. In December 1995, the surrender requirement on export receipts of other public sector enterprises (excluding receipts from cotton export, which remained exempted) and on the private sector were increased from 30 percent to 50 percent, of which 30 percent was to the FERF and 20 percent to the CBT.81 In June 1996, the surrender requirement for the private sector (including joint-ventures) was eliminated. On April 1, 1997, the surrender requirements were unified at 50 percent, to be channeled entirely to the CBT. Thus, all surrenders to the FERF, including the 40 percent foreign exchange tax on cash receipts from gas exports, were eliminated.

Payments for imports and invisibles

106. Imports are free of all legal restrictions and import licenses are not required. However, noncash foreign exchange can, in principle, only be obtained through the auction market, where all bids are subject to approval by the CBT and the FCC. In September 1996, the CBT informed the banks that henceforth only bids in specified areas (mainly related to the production of industrial goods) would be considered eligible for the auctions.

D. Exchange Restrictions

107. When the manat was introduced in 1993, the government also passed the Foreign Exchange Regulation Law. This law guarantees freedom to make payments and transfers for all international transactions. Despite this legislation, several important restrictions are still in place. First, as noted before, all public sector import payments require the approval of the FCC. Second, access to foreign exchange for most current international transactions (such as travel, interest, dividend payments, profits) is limited to US$1,000 per transaction, without, however, a limit on the total number of transactions. Manat profits earned by foreign companies have to be converted into foreign exchange through the auction mechanism. While these transactions, therefore, must go through the pre-screening process, repatriation of profits is considered an acceptable use of foreign exchange and permission is usually granted without delay.

108. It is illegal for enterprises to buy cash dollars from banks with manat deposits, in order to rule out the circumvention of the auction market and its pre-screening process. However, enterprises are permitted to sell their foreign exchange deposits to banks at the latter’s cash exchange rate to meet manat expenditures.

E. Capital Account Restrictions

109. Both inward and outward capital transfers are subject to CBT approval. There are no exchange restrictions on foreign investors who wish to bring foreign exchange into the country. Both residents and nonresidents can hold foreign currency deposits. Commercial banks in Turkmenistan also offer anonymous deposits to nonresidents. The current legislative framework permits foreign investment in all sectors in Turkmenistan. Foreign investors may reinvest their profits in Turkmenistan, repatriate their profits, or place them in national or foreign currency bank deposits.

110. Regarding outward capital movements, the CBT makes a distinction between the commercial banks and all other resident institutions and individuals. The CBT allows commercial banks to hold foreign deposits, foreign financial instruments, and foreign equity. However, this is denied to all other residents, although commercial banks may undertake foreign operations on behalf of resident clients.

APPENDIX I Turkmenistan—Statistical Issues

National accounts

1. The State Statistical Committee (Goskomstat) started to compile GDP estimates in 1995 (retroactive to 1993). At present, only the current price estimates of GDP from the production approach are available.1 The national accounts of Turkmenistan are still at an early stage of development and suffer from several deficiencies due to weaknesses in the basic source statistics. The official statistics continue to underestimate the value added in export sectors, such as cotton and gas sectors, due to the use of the official exchange rate, which is overvalued in relation to the commercial and parallel market exchange rates. An additional underestimation of value added in the gas sector occurred during the third quarter of 1996, as the authorities used highly-subsidized domestic prices for calculating value added from gas exports. The GDP data estimated by the staff correct these deficiencies. The undercoverage of private sector activity and the inclusion of the revaluation of existing assets in the estimates of “accumulation” are other main weaknesses in the official data.

Price indices

2. Until May 1995, Goskomstat measured inflation by use of a retail price index (RPI) that was compiled using Sauerbeck formulae beginning 1993, and Paasche formulae in the earlier periods. Inflation is now measured by an annual chain-linked Laspeyres index. However, the weighting system for the producer price index is not adequately defined, which casts doubt on the accuracy of the index’s results. Turkmenistan has requested technical assistance from the Statistics Department of the IMF (STA) in compiling price indices for imports and exports.

Government finance

3. The official budget continues to show expenditures by function, although the Ministry of Economy and Finance (MEF) has made considerable recent progress in the compilation of an economic classification. The MEF intends to provide an economic classification for the 1996 budget when the data used in the functional classification are finalized (expected April 1997). The 1997 budget will continue to be officially released in functional form only, although the MEF has agreed to provide an economic classification (beginning April 1997) for policy discussion purposes. The MEF intends to release both an economic and functional classification of expenditures with the official budget legislation for 1998.

4. Although there has been some apparent extension of budget coverage, with the inclusion of the Oil and Gas Development Fund, certain construction activities financed from the Foreign Exchange Reserve Fund, and noncentralized state enterprise investments, none of the associated expenditures come under the control of the treasury system, nor are they subject to MEF approval. The extended coverage is thus useful only as a means of recording rather than controlling these revenues and expenditures.

Monetary accounts

5. Compilation of monetary accounts is based on a system developed by STA technical assistance, which is updated by missions from the European II Department of the IMF to reflect the ongoing changes in the charts of accounts. Availability and reliability of the monetary data has been enhanced, but further improvements are expected when the new charts of accounts for the Central Bank of Turkmenistan (CBT) and commercial banks are implemented. These new charts of accounts, now under preparation and with implementation planned for 1998/99, need to be revised to identify transactors by residency and to resolve several other sectoral classification issues. Further improvements in monetary statistics are expected from recently introduced new interest rate reporting requirements and improvements in bank inspections.

Balance of payments

6. Turkmenistan’s balance of payments compilation methodology does not yet fully conform to international standards. The CBT, which is responsible for preparing the balance of payments, started the compilation of data from 1992 under technical assistance from STA. At present, a regional IMF advisor in balance of payments statistics is assisting the Central Bank in improving its data collection and compilation methodology.

7. The main deficiencies in Turkmenistan’s balance of payments relate to undercoverage of data, inadequate data sources, and lack of proper recording of complex financial transactions pertaining to exports and imports of major commodities, as well as to credits and foreign debts. Specifically, not all border trade is captured in the current account. Estimates of freight and insurance needed to adjust the imports c.i.f data to an f.o.b. basis are not yet available and efforts are being made to collect the relevant data from the State Commodity Exchange. In the services and income sectors, some improvement has been achieved in the recording of transportation and investment income, while data deficiencies persist in travel expenditures, construction services, expenditures of foreign embassies in Turkmenistan, and technical assistance. Efforts are underway to improve coverage of such data through new questionnaires.

8. In the capital account, the main problem areas pertain to direct investment in Turkmenistan, foreign credits and debts and related transactions on arrears. The inadequate coverage of direct investment data arises mainly due to poor data collection, which the CBT is taking measures to improve. As regards foreign debt statistics, efforts are being made to improve the data recording—relating mainly to repayment of principal and emergence and payment of arrears—by providing the Vnesheconombank, which handles most government sector foreign debt, with new tables and instructions on the proper recording of data.

APPENDIX II Turkmenistan—IMF Technical Assistance

1. The IMF has provided substantial technical assistance and training to Turkmenistan in recent years. This assistance encompassed all major macroeconomic areas, and included technical as well as policy advice. Missions from the Monetary and Exchange Affairs Department (MAE), the Fiscal Affairs Department (FAD), and the Statistics Department (STA) of the IMF have assisted the government in strengthening monetary and fiscal institutions, enhancing the effectiveness of monetary, exchange, and fiscal management, and in building a modern statistical data base. The Fund has stationed a Resident Representative in Ashgabat since October 1993. FAD provided a resident advisor to the Ministry of Economy and Finance (MEF) during January 1994–February 1997, and MAE has provided an advisor to the Central Bank of Turkmenistan (CBT) since February 1994. Starting in October 1996, a regional STA advisor gives technical assistance to the CBT on the compilation of the balance of payments.

2. In 1996, Fund missions continued to provide technical assistance in several areas. Two missions from the European II Department (EU2) assisted the government in the formulation of macroeconomic policies, the preparation of a macroeconomic framework, and on financial programming, including through a short seminar for staff of the CBT and the MEF. An FAD follow-up mission in May assisted the authorities in the preparation of a better targeted social safety net system, elements of which are gradually being implemented. The new treasury system, developed with the assistance of the FAD Resident Advisor, has become operational in 1996, improving information on budgetary developments, and strengthening expenditure control and the cash management system. The system is also expected to allow the MEF to start reporting and planning on the basis of an economic classification of the budget.

3. Also in May 1996, an MAE mission advised the CBT on improvements in regulations and procedures of credit and foreign exchange auctions, which assisted the CBT’s initiation of weekly foreign exchange auctions in May and bi-weekly credit auctions in June. In December, an MAE consultant provided technical assistance to the Research Department of the CBT, notably in monetary analysis and monitoring of the financial program.

4. Government officials continue to participate in IMF Institute courses and seminars, held at the Joint Vienna Institute and IMF Headquarters. In 1996, 19 officials from Turkmenistan attended courses at the Joint Vienna Institute, covering a wide range of economic and statistical issues, and two officials attended courses at IMF headquarters on external sector policies and on financial programming.

IMF technical assistance and training

The following list summarizes technical assistance provided by the Fund to Turkmenistan.

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APPENDIX III The Impact of the Excess Wage Tax During Transition1

Introduction

1. Following independence, the government of Turkmenistan adopted a program of gradual transition towards a market economy. The program aimed at eliminating inefficiencies resulting from dominant state ownership and centralized controls with a view to creating an environment conducive to economic growth. In Turkmenistan, as in other transition economies, the ensuing progress with price and wage liberalization contributed to open inflation and stabilization became a priority. To help contain a wage-price spiral, the government introduced an excess wage tax. The tax was intended to penalize enterprises whose average wages exceeded a given norm and thus aimed at preventing excessive wage increases.

2. This appendix examines the impact of the excess wage tax during transition with references to Turkmenistan and other transition economies. More specifically, it attempts to identify the effects of the excess wage tax on inflation, development of the private sector, restructuring of state enterprises, and liberalization of wages. In the literature on the excess wage tax in transition economies, it is generally suggested that the overall impact of the tax tends to be negative, in particular in view of the obstacles that it creates to structural reforms.

3. The sections below describe the application of the excess wage tax in Turkmenistan, summarize the literature on the effectiveness of the excess wage tax in containing inflation in selected transition economies, review briefly the evidence on Turkmenistan, and discuss the impact of the excess wage tax on progress with structural reforms.

Application of the excess wage tax in Turkmenistan

4. In Turkmenistan, the excess wage tax was first introduced in 1992, abolished for a few months in 1995, and reintroduced in January 1996 by Presidential Decree No.2436. At present, the tax is imposed at a rate of 50 percent on the wage bill of all enterprises (state and private), the average wages of which exceed a specified norm.2 The norm was set at manat 20,000 in January 1996, increased to manat 30,000 in May, and doubled to manat 60,000 in October. For each enterprise, the amount exempted from the tax depends on the number of employees and the above norm, adjusted by a coefficient based on changes in the value (in constant prices) of the enterprise’s output over the preceding month.3 The actual tax base of the enterprise is then calculated as the wage bill (i.e. number of employees multiplied by the average wage) net of the exempted amount.

5. To take an example, assume that an enterprise employs 2 persons at a monthly average wage of manat 100,000 (including bonuses), and that the threshold for the excess wage tax is manat 50,000. Assume also that the value of output measured in constant prices declined by 10 percent compared to the previous month, i.e. the output coefficient is 0.9. The amount exempted from the excess wage tax per person is 0.9*50,000=45,000. The tax base for the excess wage tax would amount to (100,000 - 45,000)*2 = manat 110,000. With 50 percent excess wage tax rate, the tax liability would total manat 55,000 in that month.

6. An important issue is the enforcement of the excess wage tax. It is unclear whether the excess wage tax is enforced equally on all enterprises. For example, enterprises whose output is difficult to express in constant prices could lower their tax burden by claiming increased output. In the second half of 1996, the revenue generated from this tax was less than 2 percent of aggregate revenue in this period. Comparable data are unavailable for the first half of 1996, when collections from the excess wage tax were reported under profit tax revenue.

The impact of the excess wage tax on inflation

7. As noted earlier, a main justification for introducing the excess wage tax is its possible role in moderating wage increases during price-wage liberalization to help to contain inflationary pressures.4 Wage increases in public enterprises that do not reflect corresponding changes in labor productivity can lead to inflation in essentially two ways. First, in transition economies, where state enterprises operate in noncompetitive markets, wage increases can be directly passed on to consumers through price increases. Second, if higher wages are not passed on to consumers, they would lower profits and therefore tax liabilities. This would increase the budget deficit which, in the absence of a tight monetary policy, could be inflationary. Moreover, in the absence of hard budget constraints on enterprises, the latter are likely to finance wage increases through recourse to bank resources, which would also fuel inflation.

8. In light of the above, transition economies have resorted to the excess wage tax to moderate wage increases. However, the evidence on the effectiveness of the excess wage tax in achieving this is inconclusive. While Blanchard and Layard (1992) find that the excess wage tax contributed to containing wage growth in Poland, Tait and Erbas (1995), who reviewed the experience of several transition countries during 1992–94, find that the excess wage tax did not play a major role in this regard. More specifically, they conclude that in countries where the growth of wages was relatively low (Estonia, Latvia, Kyrgyz Republic), tight credit and inability of the enterprises to pass higher costs on to consumers were the decisive factors in containing wage increases. In countries where tight credit control was not imposed, the excess wage tax alone did not prevent large wage increases (Belarus).

9. In Turkmenistan, the average nominal wage in the public sector increased by more than 800 percent during 1996. This followed the doubling of nominal wages by Presidential Decree in January, May and October 1996. The threshold for the excess wage tax was adjusted simultaneously and by the same amount.5 The ensuing increases in aggregate wage expenditures (with a 1–2 month lag) in the public sector were accommodated primarily through increased credit to state enterprises (Figure 1). In these circumstances, the excess wage tax played only a marginal role at best in containing inflationary pressures.

Figure 1.
Figure 1.

Turkmenistan: Public Sector Wages, Wage Expenditure, and Credit to State Enterprises, 1996-97

(Percent change)

Citation: IMF Staff Country Reports 1997, 058; 10.5089/9781451837223.002.A001

Sources: Data provided by Goskomstat and Central Bank of Turkmenistan; and Fund staff calculations.

The impact of the excess wage tax on structural reforms

Private sector development

10. The imposition of an excess wage tax on private firms—as is the case in Turkmenistan—may dampen the growth of the private sector, although other major and widely recognized obstacles to the pace of private sector development, such as an inadequate legal framework, absence of a mass privatization program, and limited access to credit by private firms, are undoubtedly also very important.

11. The excess wage tax can impede development of the private sector primarily through three channels. First, by lowering wages in the formal private sector, it may shift labor to the informal sector. Second, the higher taxation of private firms—which, in the case of the excess wage tax would fall more heavily on capital-intensive firms, where labor productivity and wages are higher—may cause financial difficulties.6 Third, the excess wage tax creates disincentives for workers to acquire high skills, as these skills would not be rewarded through higher wages. Lack of skilled workers may create additional obstacles to the creation of private firms.

Restructuring of state enterprises

12. Under the present excess wage tax regulations of Turkmenistan, the excess wage tax imposed on state owned enterprises could lead to labor hoarding and, therefore, block the restructuring of enterprises. Along the lines of Layard and Richter (1994), the discussion below focuses on the impact of the excess wage tax on labor costs of state enterprises.7

13. Building on the example in paragraph 5, assume that a firm employs n workers in period 0, pays them wage W and produces output Q(n). In period 1, an excess wage tax is imposed and the firm considers two options: (a) to dismiss a worker or (b) to keep the worker employed and cut his wage to Z (within the constraint of the minimum wage law), which is less than W. Comparing both options in terms of labor cost yields the following results: Case (a): By firing one worker in period 1, output decreases to Q(n-1)8 and the labor cost of firm becomes:

LC a = W ( n − 1 ) + τ E ( W − N Q ( n − 1 ) Q ⁡ ( n ) ) ( n − 1 ) ( 1 )

where τE denotes the excess wage tax rate and N denotes the threshold average wage. The total labor cost of this firm, therefore, consists of wage cost, W(n-1), and excess wage tax cost τE(W−NQ(n−1)Q⁡(n)(n−1)).

Case (b): Employment does not change and hence the output ratio is 1. The total labor cost now becomes:

LC b = W ( n − 1 ) + Z + τ E ( W ( n − 1 ) + Z − Nn ) ( 2 )

where W(n–1)+Z denotes wage cost, and τE(W(n–1)+Z–Nn) excess wage tax cost. Combining (1) and (2) so that LCa>LCb yields:

Z N < τ E 1 + τ E ( n − Q ( n − 1 ) Q ⁡ ( n ) ( n − 1 ) ) ( 3 )

If the above condition is met, it is cheaper for a firm to keep the worker employed and pay him wage Z. More specifically, by keeping the extra worker, the firm saves more in tax liabilities, τE[N(n−Q(n−1)Q⁡(n)(n−1))−Z], than it spend, Z, by employing the worker.

14. Consequently, by paying the worker a sufficiently low wage (so that condition (3) is satisfied), the firm can ensure that it saves more by lowering its excess wage tax liability, than it would save by firing the worker.9 Thus the excess wage tax is likely to promote labor hoarding. In Turkmenistan, the scope for labor hoarding due to the excess wage tax is further increased by the practice of modifying the tax obligation of the enterprise based on output performance.10 As the above exercise illustrates, the excess wage tax encourages state enterprises to keep workers employed in unproductive jobs and thus slows down progress with the restructuring of enterprises.

Wage liberalization

15. The imposition of the excess wage tax is a form of government intervention in wage setting, promoting lower average wages for the enterprises. It is, therefore, inconsistent with the goal of achieving wage liberalization. To the extent that the excess wage tax triggers deviation of wages from labor productivity, it results in an inefficient allocation of resources. The impact of lower wages is likely to be more adverse in the capital intensive sectors that are technologically more advanced and where higher wages would be warranted by higher labor productivity.

Conclusions

16. The main objective for introducing the excess wage tax in Turkmenistan was to curb large increases in wage costs in order to prevent a wage-price spiral. However, in the absence of hard budget constraints on enterprises, the excess wage tax alone is not sufficient to control sizable wage increases.

17. Regardless of its impact on inflation, the excess wage tax tends to be distortionary, since it encourages firms to use more unskilled workers than they would if the tax were not imposed. The retention of unproductive workers at low wages is likely to slow the restructuring of state enterprises. Moreover, the excess wage tax is likely to encourage growth of the informal sector (where, in the absence of the tax, skilled labor could receive higher remuneration) at the expense of the formal private sector.

18. Finally, the lack of higher relative wages for skilled workers creates little incentive for workers to acquire additional skills through schooling or on-the-job training, which creates additional obstacles to the development of the private sector and the restructuring of state enterprises, with adverse implications for the growth of the economy.

REFERENCES

  • Blanchard, Olivier and Layard, Richard (1992), “Post-Stabilization in Inflation in Poland,” in Corricelli and Revenga (Eds.), Wage Policy during the Transition to a Market Economy: An Overview, World Bank Discussion Papers, No. 158.

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  • Commander, Simon and Coricelli, Fabrizio (1991), “Price-Wage Dynamics and the Transmission of Inflation in Socialist Economies,” World Bank Working Paper, No. 613.

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  • Coricelli, Fabrizio and Lane, Timothy D. (1993), “Wage Controls during the Transition from Central Planning to a Market Economy,” The World Bank Research Observer, Vol. 8, No. 2, pp. 195 - 210.

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  • Grabowski, Maciej and Smith, Stephen (1995), “The Taxation of Entrepreneurial Income in a Transition Economy: Issues Raised by Experience of Poland,” Centre for Economic Policy Research Discussion Paper, No. 1166.

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  • International Monetary Fund (1995), “Turkmenistan - Background Paper and Statistical Appendix”, IMF Staff Country Report, No. 95/27.

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  • Kharas, Homi (1990), “Restructuring Socialist Industry: Poland Experience in 1990,” World Bank Discussion Paper, No. 142.

  • Layard, Richard and Richter, Andrea (1995), “How Much Unemployment is Needed for Restructuring: the Russian Experience”, Economics of Transition, Vol. 3, No. 5.

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  • Roxburgh, Ian and Shapiro, Judith (1996), “Russian Unemployment and the Excess Wages Tax”, Communist Economies & Economic Transformation, Vol. 8, pp. 5-27.

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  • Tait, Alan and Erbas, Nuri (1995), “Excess Wage Tax”, IMF Working Paper, WP/95/17.

  • Zee, Howell (1996), “Taxation and Unemployment”, IMF Working Paper, WP/96/45.

APPENDIX IV Turkmenistan: Summary of Major Taxes as of February 12, 1997

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APPENDIX V Turkmenistan—Government Ministries, Departments, Institutions, and Organizations1

Ministries

  • 1. Ministry of Motor Vehicle Transport

    • (urban passenger transport)*

  • 2. Ministry for Foreign Economic Relations

  • 3. Ministry of the Interior*

  • 4. Ministry of Public Health and the Medical Industry*

  • 5. Ministry of Foreign Affairs*

  • 6. Ministry of Culture*

  • 7. Ministry of Irrigation and Water Supplies*

  • 8. Ministry of the Oil and Gas Industry and Mineral Resources

  • 9. Ministry of Defense*

  • 10. Ministry of Education*

  • 11. Ministry for the Use and Protection of the Environment*

  • 12. Ministry of the Building Materials Industry

  • 13. Ministry of Communications (State Courier Service)*

  • 14. Ministry of Agriculture

  • 15. Ministry of Social Security*

  • 16. Ministry of the Textile Industry*

  • 17. Ministry of Commerce and Resources

  • 18. Ministry of Economy and Finance*

  • 19. Ministry of Energy and Industry

  • 20. Ministry of Justice*

  • 21. State Commodities and Raw Materials Exchange

State committees

  • 22. Committee for Land Use and the Conduct of Land Reform*

  • 23. Committee for National Security*

  • 24. State Border Service*

  • 25. Committee for the Fish Industry

  • 26. Committee for Statistics*

Administrative organs under the Cabinet of Ministers of Turkmenistan

  • 27. Monitoring Service of the President of Turkmenistan

  • 28. National Committee for Architectural and Construction Supervision*

  • 29. The “Turkmenetbugat” state manufacturing association*

  • 30. State Committee for Geodesy, Cartography, and Cadaster*

  • 31. Committee for Physical Fitness and Sport*

  • 32. Committee for the Protection of State Secrets in the Press and Other Mass Information Media*

  • 33. Gengeshi for religious affairs*

  • 34. Chief Archive Administration*

  • 35. State Inspectorate for the Quarantine of Plants*

  • 36. Institute of Economics*

Administrative organs under the President of Turkmenistan

  • 37. Scientific Research Institute for the Study of the Turkmen World*

  • 38. Turkmen National Institute for Democracy and Human Rights*

  • 39. Administration for the Support of Entrepreneurship*

Other organizations and institutions of the government of Turkmenistan

  • 40. State Tax Inspectorate*

  • 41. State Inspectorate for Standardization, Metrology, the Preservation of Underground Mineral Wealth, and the Safe Conduct of Work in the National Economy*

  • 42. State Seed Inspectorate*

  • 43. State Customs Inspectorate*

  • 44. The National Television and Radio Company*

  • 45. The Turkmen Press State Information Agency*

  • 46. State Motion Picture Video Company*

  • 47. Chamber of Commerce and Industry

  • 48. Office of the Procurator-General*

  • 49. Supreme Court*

  • 50. Higher Economic Tribunal*

  • 51. The “Turkmenkhovaellary” national administration

  • 52. The “Turkmendemirellary” administration

  • 53. Turkmenpotrbsoyuz (Turkmen Consumers’ Union)

  • 54. The Academy of Sciences*

  • 55. The Higher Council for Science and Technology under the President of Turkmenistan*

Associations

  • 56. Association for the Fruit and Vegetable Trade

  • 57. Association for the Food Industry

  • 58. Association of Joint-Stock Companies for the Production, Technical, and Agrochemical Servicing of “Turkmenobakhyzmat”

  • 59. The “Turkmenkhleboprodukty” grain products association

  • 60. Association for the Construction of Agricultural Facilities

  • 61. The “Turkmenmallary” association of joint-stock companies engaged in animal husbandry

Banks of Turkmenistan with government participation

  • 62. Central Bank of Turkmenistan (100 percent)

  • 63. State Bank for Foreign Economic Activity of Turkmenistan (100 percent)

  • 64. Central Bank of the Association of Daykhan banks

  • 65. The “Turkmenistan” joint-stock commercial bank

  • 66. The “Investbank” joint-stock commercial investment bank

  • 67. The Savings Bank of Turkmenistan (100 percent)

  • 68. The “Senagat” joint-stock commercial bank

  • 69. The International Joint-Stock Bank for Reconstruction, Development, and the Support of Entrepreneurship

  • 70. “Rossiiskii Kredit” bank

State corporations, concerns, associations, administrations, and other organizations

  • 71. The “Turkmengaz” state concern

  • 72. The “Turkmenavtoellary” state concern

  • 73. The “Turkmenpagta” state concern

  • 74. The “Turkmenneftegazstroy” state concern

  • 75. The “Turkmenneft” state concern

  • 76. The “Turkmenneftegaz” state trade corporation

  • 77. The “Turkmenrosgaz” TRAO

  • 78. The “Turkmengeologiya” state corporation

  • 79. The “Turkmensiyakhat” state tourist corporation of Turkmenistan

  • 80. The “Turkmenavtokhyzmatsovtsa” corporation

  • 81. The state republican association “Turkmen Atlary” *

  • 83. The state “Turkmenkhaly” association (Turkmenkhalybirleshik)

  • 84. The “Sepet” state association for professional training*

  • 85. The “Turkmenmebel” joint-stock company

  • 86. The State Insurance Organization

  • 87. The “Turkmenlift” specialized state manufacturing association

  • 88. The Turkmen Maritime Steamship Company (city of Turkmenbashi)

  • 89. The Turkmen River Steamship Company (city of Chardzhev)

  • 90. State Agency for Foreign Investment under the President of Turkmenistan

  • 91. State Fund for the Development of the Oil and Gas Industry and Mineral Resources

  • 92. State Fund for the Development of Agriculture

  • 93. State Fund for the Development of Transportation and Communications

APPENDIX VI Turkmenistan—The Foreign Exchange Reserve Fund

Background

1. As part of the development of a two-tiered banking system and in anticipation of the introduction of the manat, the government of Turkmenistan transferred its foreign exchange holdings from the Vnesheconombank to the Central Bank of Turkmenistan (CBT) in July 1993. However, the President of Turkmenistan retains control over the use of the reserves. The CBT manages the foreign exchange deposits held abroad, while the government’s claim on these is administered in the books of the CBT as a foreign currency denominated government deposit, called the State Foreign Exchange Reserve Fund (FERF).

2. Government policy in recent years has been to accumulate reserves. Notwithstanding a sharp drop in revenue from gas exports after 1992, gross official reserves increased from US$346 million (four months of imports) at end-1992 to US$1,172 million (9 months of imports) at end-1996 (Table 1), among the highest in CIS countries (Table 2). In line with this, the FERF almost quadrupled to US$1,143 million by end-1996, when it accounted for 98 percent of total gross official international reserves.

Table 1.

Gross Official Reserves

(In millions of U.S. dollars; end of period)

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Source: Central Bank of Turkmenistan.
Table 2.

Gross Official Reserves of Selected Countries 1996

(end of period)

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Source: International Monetary Fund, European II Department Data Base

3. Gas exports are the main source of revenue for the FERF. Before April 1994, an 80 percent tax on hard currency receipts from gas exports was directly disbursed into the FERF. Thereafter, the tax was replaced by a 60 percent gas export surrender requirement to the FERF, which was changed to 40 percent on January 1, 1996.1 In March 1996, the surrender requirement was changed once again to a 40 percent tax on cash receipts from gas exports, payable to the FERF. Other sources of income for the FERF include interest on foreign loans (rescheduled arrears on gas exports), interest on its balances, and surrender requirements on other export receipts.2

4. The government makes substantial payments from the FERF. In 1995, such payments, which were not included in the budget, reportedly amounted to around US$133 million, equivalent to about 13 percent of budgetary expenditure. Payments from the FERF have to be authorized by the President, and are made on an ad-hoc basis. Although a breakdown is not available, such expenditures reportedly include payments for government imports, including for food and large infrastructural projects, and the servicing of certain nonbudgetary foreign debt obligations. In 1996, the FERF also assumed the budget’s liability to the European Union.

Macroeconomic problems caused by the FERF

5. The policy of augmenting the FERF despite the sharp drop in export receipts, and maintaining strict control over this account, has had the following major adverse macroeconomic consequences:

  • Imports have been compressed through restrictions on access to foreign exchange, fueling the shortages of consumer goods, raw materials, and inputs in the economy, thereby adding to inflationary pressures;

  • Restrictions on access to foreign exchange, combined with domestic demand pressures, have sustained strong excess demand in the foreign exchange market, putting pressure on the manat and further intensifying inflationary pressures;

  • Servicing of the foreign debt has been delayed and external payments arrears accumulated, which were not related to Turkmenistan’s ability to service its debt; and

  • Finally, the existence of this arrangement has reduced transparency of government operations, and weakened fiscal discipline.

6. It is understandable that, given the strong uncertainties attached to Turkmenistan’s major export product (gas), the government would want to maintain a prudent level of reserves, above the level of around 3 months of import coverage that is generally considered comfortable by international standards. However, reserves could be allowed to decline moderately from their present level of US$1.2 billion (equivalent to 9 months of imports) to help address the above macroeconomic problems, and still allow for adequate import coverage.

Monetary implications of the FERF

7. The way in which the FERF has been treated in the accounts of the CBT has resulted in a rapidly increasing amount of credit from the CBT to this Fund. Surrender requirements normally mean an obligation to repatriate and surrender foreign exchange receipts from exports to the central bank, in exchange for the counter value in local currency. When the tax on hard currency receipts on gas exports was changed to a surrender requirement to the FERF (April 1994), the CBT started crediting the Ministry of Oil and Gas (MOG) for the manat counter value of the surrendered foreign exchange. However, it continued to credit the FERF also. As a result of this double crediting of the manat counter value, the payment to the FERF needed to be financed by CBT credit. Due to the rapid depreciation of the manat, this credit—administered in the CBT’s books under account number 683—has increased sharply from manat 12 million at end-1993 to manat 89 billion in February 1997.

8. Credit to the FERF has been a source of monetary expansion and has weakened the CBT’s monetary control capability. As long as the FERF only spends funds that have been obtained from other sources than the surrender requirements, from a monetary point of view, the increase in CBT credit to the FERF is offset by the increase in FERF deposits. However, whenever the FERF uses the credit to make payments,3 the effect is an increase in the CBT’s net domestic assets and hence monetary expansion. During 1996, the deposits in the FERF—excluding the effect of exchange rate changes—remained almost unchanged, while credit to the FERF increased by manat 55 billion, or about 21 percent of reserve money at end-December 1995. This resulted in monetary expansion, which was outside the CBT’s control.

Measures to address the problems associated with the FERF

9. In order to address the monetary control problem, in March 1996 the authorities changed the gas export surrender requirement to the FERF into a tax, eliminating the associated credit to the FERF.4 In June, the surrender requirement on private sector exports was also eliminated, leaving only surrender requirements on nongas, noncotton public sector exports. Nevertheless, FERF credit continued to increase, although at a lower pace.

10. In a significant move to find a comprehensive and sustainable solution to the problems associated with export surrenders to the FERF and to ease foreign exchange constraints in the economy, on April 1, 1997, the authorities unified export surrender requirements at 50 percent of foreign exchange earnings from eligible exports, eliminated the 40 percent tax on oil/gas export receipts, and discontinued surrenders to the FERF (all surrenders will henceforth be to the CBT).

11. For the first time in 1997, spending on ongoing government construction projects financed from the FERF was explicitly included in the general government budget, allowing for greater transparency in such spending.

APPENDIX VII Turkmenistan—The Exchange System

Introduction

1. During 1995–96 Turkmenistan made substantial progress toward the implementation of a unified market determined exchange rate. The most notable achievements were the abolition of the gas transactions rate, the introduction of a commercial bank cash transactions rate, and the introduction of a foreign exchange auction.

2. However, while the number of exchange rates in operation has been reduced, the exchange system is still a multiple currency system, with two officially recognized exchange rates. This appendix explains how exchange rates are determined in Turkmenistan, with emphasis on the operation of the auction system and on export surrender requirements, which supply foreign exchange to the auctions.

Exchange rate determination

3. The two officially recognized exchange rates are the official rate and the commercial bank cash rate. In addition, there is a parallel market rate. The official rate is the rate at which the CBT sells noncash U.S. dollars to the commercial banks (since May 1996) through weekly auctions. There is no buy-sell spread on the official rate which applies to all official transactions. However, the CBT charges a 0.2 percent commission on all transactions, which must be paid in hard currency. The commercial bank cash rate is the rate offered by commercial banks to private individuals on cash transactions. The parallel market rate is a cash rate at which individuals, mostly informal “shuttle” traders, transact with one another. Although parallel market exchange rate transactions are illegal, punishments are not strictly enforced, and the market operates relatively openly most of the time.

4. Commercial banks are, in principle, free to set their cash rates. In practice, the CBT provides an indicative cash selling rate to banks, which closely follows the parallel market rate. The CBT sells cash foreign exchange to banks at the cash selling rate less a 5 percent discount. Thus, the margin between the cash buying and cash selling rates of banks may not legally exceed 5 percent. While interbank foreign exchange transactions are legally allowed in Turkmenistan, in practice such transactions are extremely rare. This is primarily due to the lack of modern clearing arrangements between commercial banks.

5. The commercial bank cash rate also applies to the exchange of certain foreign exchange deposits for manat, provided that banks are sufficiently liquid. However, when there is a liquidity squeeze the CBT will exchange dollar deposits into manat at the more appreciated official rate. The CBT has recently restricted the ability of public enterprises to exchange foreign currency deposits at the commercial bank rate.1 Private individuals and enterprises may still exchange their deposits at the commercial bank rate. However, the CBT is considering the introduction of further regulations which would require all noncash transactions—both private and public—to be carried out at the official rate.

The auction market

6. The auction market was created in May 1996. It is the primary source of noncash foreign exchange for public and private enterprises. However, enterprises cannot participate directly in the market. They must deal through a commercial bank, which acts on their behalf. Commercial banks may make bids for their own purposes. Budgetary organizations buy foreign exchange from the CBT or from the Foreign Exchange Reserve Fund (FERF) at the official exchange rate.

7. Despite the introduction of the auction market, access to foreign exchange continues to be restricted. Foreign exchange may only be purchased if the final user can produce a letter of credit and show that the goods have arrived in Turkmenistan. Furthermore, all bids are subject to a three-stage screening process. Only imports of goods in specified areas (mainly industrial goods) are deemed to be an acceptable use of foreign exchange funds. It is extremely difficult to acquire funds to import consumer goods.

8. The first stage of the pre-screening process is undertaken by commercial banks. Banks often discourage bids which they know are unlikely to succeed. In the second stage, the CBT considers the requests that have been cleared by banks, and decides whether or not the requests represent appropriate use of foreign exchange resources. Finally, the request is submitted to the Foreign Currency Committee (FCC), which makes the final decision to accept or reject a bid, although at this stage a bid is rarely rejected. By contrast, the CBT estimates that it rejects between 20–30 percent of requests. The objective of the screening process is to limit “wasteful” spending by public enterprises; private sector enterprises have much easier access to the auctions, and are by far the larger purchasers of foreign exchange in the auctions. Initially, the criteria for acceptability of bids was unclear. However, in September 1996 the CBT issued a circular, giving a list of goods for which bids could be approved. This list excluded consumer goods.

9. Auctions are held once a week, usually on Fridays, and the auction rate becomes the official rate the following Monday. Any enterprise or individual that wishes to obtain foreign exchange must make its request through a bank at least two days in advance of the auction. Once a bid is approved, the commercial bank must transfer the manat funds to the commercial bank, and by Wednesday, the final user should receive the funds. Recently, the commercial banks have delayed the transfer of funds to the final user. The CBT is considering the introduction of penalties on the commercial banks to eliminate this practice.

10. The precise determination of the auction rate is left to the CBT. Once the bids have been screened, the CBT has a clear idea of demand and decides an appropriate exchange rate. The CBT makes an offer to exchange a quantity of foreign exchange at the chosen rate, which the commercial banks can then either accept or reject. However, the commercial banks have a good idea of what rate is likely to be offered by the CBT prior to the auction, and it is unusual for them to reject an offer. In most auctions, bids and offers closely match. The auctioned amounts were around US$1.2–1.5 million per auction initially, then declined to US$500–900 thousand per auction in the fourth quarter of 1996, but rose again to US$700–US$ 1,200 thousand per auction in February 1997.

11. The CBT follows up on auction market transactions with an extensive monitoring system. The primary purpose of this system is to ensure that all disbursed foreign exchange is used for the purpose described in the application to the auction market. The CBT requires purchasers to supply payment orders, invoices, and other relevant documents. This requirement is most stringently enforced in the case of public enterprises.

Surrender requirements

12. The supply of foreign exchange to the auctions comes from foreign exchange holdings of the CBT, as reserves that are held in the FERF (generally more than 95 percent of the total) are under the control of the President and not available for the auctions. The CBT’s receipts of foreign exchange are derived from surrenders on export earnings of the public sector (since June 1996, the private sector and joint-venture enterprises are exempt from surrender requirements). Until April 1, 1997, 50 percent of all foreign exchange earnings (other than oil and gas) had to be surrendered (at the official exchange rate) of which 20 percent would go to the CBT for use in the auction market, and the remaining 30 percent to the FERF. The oil and gas industry faced a higher surrender requirement—30 percent of cash receipts from exports were surrendered to the CBT (at the official exchange rate) for use in the auction and 40 percent to the FERF. As of March 1996, manat counterparts were not provided for the funds surrendered to the FERF, making the latter effectively a foreign exchange tax on the oil and gas industry. A limited number of enterprises are exempted from export surrender requirements. The most notable exceptions are the cotton sector, which has large foreign liabilities, and the Turkmenbashi oil refinery, which is undergoing a massive foreign-financed rehabilitation.

13. The Transit Fees Institute (the government agency which charges nonresident individuals and enterprises fees for moving goods across Turkmenistan’s territory) also faced a 50 percent surrender requirement in 1996. Like other public enterprises, 20 percent of foreign exchange earnings went to the CBT, and 30 percent to the FERF, with no manat counterparts issued for the latter surrenders. The same regulation applied to the Ministry of Foreign Affairs on all foreign exchange earned from the issuing of licenses.

14. Effective April 1, 1997, the surrender requirements were unified at 50 percent, and all surrenders to the FERF were eliminated, including the foreign exchange taxes on the oil and gas sector and on the Transit Fees Institute. This move resulted in a 20 percentage point reduction in the export surrender requirement for the oil and gas sector. The channeling of all surrenders to the CBT, moreover, is expected to considerably raise the amounts available for exchange auctions.

STATISTICAL APPENDIX

Table 1.

Turkmenistan: Procurement Prices, 1995-97

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Source: Data provided by the Turkmen authorities; the world market prices are taken from IMF, International Financial Statistics, selected issues.

State orders on meat and milk were abolished on January 1, 1997.

Manat price converted at the official exchange rate.

Table 2.

Turkmenistan: Production of Selected Commodities, 1992-96

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Source: Data provided by the Turkmen authorities.

Domestic consumption is calculated as production minus net exports.

Data for 1995 are estimated.

Table 3.

Turkmenistan: Index of Gross Output, by Sector, 1992-96

(In prices of the previous year)

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Source: Data provided by the Turkmen authorities.
Table 4.

Turkmenistan: Money Incomes and Expenditures of the Population, 1994-96 1/

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Source: Data provided by the Turkmen authorities.

Includes only transactions that are made through the banking system.

Table 5.

Turkmenistan: Goods and Services for which Retail Prices are Regulated by the State, 1995–97

(In manat per units indicated; end–of-period)

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Source: Data provided by the Turkmen authorities.

Salt is provided free of charge.

Free of charge, monthly; natural gas up to 50 cm; electricity up to 35Kwh; water up to 7 cm.

The price for January 1997 applies to imported meat only.

Table 6.

Turkmenistan: Prices of Oil Products, 1994-96

(End-of-period)

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Source: Data provided by the Turkmen authorities.
Table 7.

Turkmenistan: Consumer Price Index, 1994-97

(January 1993=100)

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Source: Data provided by Goskomstat Turkmenistan.

For the total index.

The increase in the average of the last twelve months over the average of the previous twelve months.

Due to rounding, components do not add up to 100.

Table 8.

Turkmenistan: Nominal and Real Wages and Pensions, 1993-97

(Period averages)

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Source: Data provided by the Turkmen authorities.

Average wage of the public sector (budgetary and off-budget ministries and organizations, and state enterprises).

Table 9.

Turkmenistan: Wages by Sector, 1994-96

(Period average)

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Source: Data provided by the Turkmen authorities.

Includes bonuses and premia.

Prior to 1996, excludes collective formers and those employed full-time on private plots.

Research and Development Institutes.

Local, Republican, and former all-Union government agencies.

Includes miscellaneous activities such as hunting, trapping and printing.

Table 10.

Turkmenistan: Minimum Consumption Basket, 1994-96 1/

(In manat; period average)

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Source: Data provided by the Turkmen authorities.

Minimum per capita income needed for purchases of essential items, as computed by the Turkmenistan authorities.

Table 11.

Turkmenistan: Employment by Sector, 1992-96

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Source: Data provided by the Turkmen authorities.

Includes those employed in state and private agriculture.

Retail and wholesale trade.

Research and Development Institutes.

Transportation and communication services for consumers and government (as opposed to industrial users).

Employment in the administration of Local, Republican, and former all-Union government agencies; excludes services such as education and health.

Includes miscellaneous activities such as hunting, trapping, and printing.

Table 12.

Turkmenistan: Population and Employment, 1992-96

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Source: Data provided by the Turkmen authorities.

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

Including consumer cooperatives.

Includes self-employed in agriculture and mixed-ownership enterprises.

Table 13.

Turkmenistan: General Government Operations, 1994-97

(In millions of manat)

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Sources: Data provided by the Turkmen authorities; and Fund staff estimates.

Budget approved by parliament, in constant fourth quarter 1996 prices.

Excludes the (revenue counterpart of) expenditure of the Oil and Gas Development Fund, certain construction expenditures from the FERF, and certain capital investments of public enterprises, that were included in the 1997 bucket on a deficit neutral basis.

In 1997, this item includes spending from the Pension and Social Security Fund, which is mostly captured under Pension, Social, and Geological Funds in earlier years.

For the 1997 budget, this includes principal repayments.

Financing provided for repayment of EU loan, and manat 20 billion direct financing to the budget.

Table 14.

Turkmenistan: General Government Operations in Percent of Revenues and Expenditures, 1994-97

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Sources: Data provided by the Turkmen authorities; and Fund staff estimates.

Budget approved by parliament, in constant fourth quarter 1996 prices.

Excludes the (revenue counterpart of) expenditure of the Oil and Gas Development Fund, certain construction expenditures from the FERF, and certain capital investments of public enterprises, that were included in the 1997 bucket on a deficit neutral basis.

In 1997, this item includes spending from the Pension and Social Security Fund, which is mostly captured under Pension, Social, and Geological Funds in earlier years.

For the 1997 budget, this includes principal repayments.

Financing provided for repayment of EU loan, and manat 20 billion direct financing to the budget.

Table 15.

Turkmenistan: General Government Operations in Percent of GDP, 1994-96

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Sources: Data provided by the Turkmen authorities; and Fund staff estimates.

Financing provided for repayment of EU loan, and manat 20 billion direct financing to the budget.

Table 16.

Turkmenistan: Monetary Survey, 1993-97

(In millions of manat; end-of-period)

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Source: Central Bank of Turkmenistan.
Table 17.

Turkmenistan: Balance Sheet of the Monetary Authorities, 1993-97

(In millions of manat; end-of-period)

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Source: Central Bank of Turkmenistan.

A positive magnitude reflects an overdraft.

Counterpart of Government controlled share in foreign exchange reserves.

Counterpart to export surrender requirements to the Foreign Exchange Reserve Fund.

Table 18.

Turkmenistan: Balance Sheet of the Commercial Banks, 1993-97

(In millions of manat; end-of-period)

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Source: Central Bank of Turkmenistan.

Including correspondent accounts with the CBT.

Table 19.

Turkmenistan: Banking System Credit to the Economy by Currency, Maturity, and Sector, 1993-97

(End-of-period)

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Source: Central Bank of Turkmenistan.

At current exchange rates.

Table 20.

Turkmenistan: Banking System Interest Rates, 1993-97 1/

(End-of-period, in percent per annum)

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Source: Central Bank of Turkmenistan.

Annual interest rates, non-compounded.

Interest is charged monthly. Effective March 1, 1997, the refinance rate was decreased to 68 percent per annum.

Interest is paid monthly.

Table 21.

Turkmenistan: Banking System Interest Rates by Maturity, 1994-96

(In percent per annum)

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Source: Central Bank of Turkmenistan.
Table 22.

Turkmenistan: Export Growth and Shares by Sector, 1993-96

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Source: Central Bank of Turkmenistan.
Table 23.

Turkmenistan: Balance of Payments - Current Account, 1993-96 1/

(In millions of US dollars)

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Sources: Central Bank of Turkmenistan; and Fund staff estimates.

Exports are presented on an accrual basis. Any arrears due to non payment of exports are recorded as arrears in the capital account.

Transit charges are included in gas exports through 1995. As of 1996, all gas is exported f.o.b. at the Turkmenistan border.

Through 1995, the price includes a component for transportation charges.

Compared to same period previous year.

Table 24.

Turkmenistan: Gas Debt Owed to Turkmenistan, 1996 1/

(In millions of U.S. dollars)

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Source: Data provided by the Turkmen authorities.

This presentation is on the basis of information provided by the Turkmen authorities, which may not necessarily fully conform with information provided by debtor countries.

Including rescheduling agreements in early 1996.

Including short-term trade credits.

The price of gas delivered at the Turkmen border to Turkmenrozgaz.

Table 25.

Turkmenistan: Trade by Type of Payment, 1995-96 1/

(In percent of total)

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Source: Central Bank of Turkmenistan.

In percent of total exports and total imports of the category concerned.

In the case of barter goods, Turkmenistan agrees before the transactions on the type of goods to be received. In the case of clearing goods, the exporter selects the goods to be sent to Turkmenistan in payment for imports.

Table 26.

Turkmenistan: Exports by Product, 1993-96

(In millions of U.S. dollars)

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Sources: State Customs of Turkmenistan; and Fund staff estimates.

Excluding furnace fuel.

Table 27.

Turkmenistan: Imports by Product, 1993-96

(In millions of U.S. dollars)

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Sources: Goskomstat, the State Customs of Turkmenistan; and Fund staff estimates.
Table 28.

Turkmenistan: Exports and Imports by Country, 1994-96

(In millions of U.S. dollars)

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Source: Central Bank of Turkmenistan

In 1996, gas exports are recorded against Russia rather than against the final importing countries (Ukraine, Georgia, Armenia and Azerbaijan) as in earlier years.

Table 29.

Turkmenistan: Balance of Payments - Capital Account 1993-96 1/

(In millions of U.S. dollars)

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Sources: Central Bank of Turkmenistan; and Fund staff estimates.

Exports are presented on an accrual basis. Any arrears due to non payment of exports are recorded as arrears in the capital account.

New arrears incurred to Turkmenistan.

Payments of previous arrears and debts to Turkmenistan.

Table 30.

Turkmenistan: Energy Debt and Arrears Owed to Turkmenistan as of December 31, 1996 1/

(In millions of U.S. Dollars)

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Source: Central Bank of Turkmenistan.

This presentation is on the basis of information provided by the Turkmen authorities, which may not necessarily fully conform with information provided by debtor countries.

On 1996 electricity exports.

On pre-1996 gas exports.

The interest arrears include interest penalties charged to ITERA for non payment of cash obligations.

Table 31.

Turkmenistan: Government and Government Guaranteed External Debt, December 31, 1996

(In millions of U.S. dollars)

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Source: Central Bank of Turkmenistan.

Excludes credit lines and/or loans contracted under which there have not been any disbursements.

Table 32.

Turkmenistan: Changes in the Exchange System, 1994-97

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Source: Central Bank of Turkmenistan.

Cotton is exempted.

Surrender requirements were used as taxes. Therefore, manats were not provided for the dollars surrendered.

Of which 40 percent and 30 percent, respectively, were transferred to the Foreign Exchange Reserve Fund and to the CBT.

Of which 30 percent and 20 percent, respectively, were transferred to the Foreign Exchange Reserve Fund and to the CBT.
1

Turkmenneftegaz (oil and gas marketing), Turkmenneft (oil production), Turkmengaz (gas production), Turkmenneftgaztroy (construction), and Turkmengeologia (exploration).

2

The construction involves several foreign companies and is financed by foreign loans totaling US$580 million.

3

The government sets the prices of goods under state orders mainly to reduce budgetary costs of the subsidies on rationed goods (e.g., flour, and until recently, milk and meat), or to increase revenue to off-budget government ministries and agencies (a large part of the revenue from the sale of cotton, for example, is used by the Ministry of Agriculture to service foreign debt). The government increased procurement prices several times during 1996. In March, the procurement prices for beef, milk, raw cotton, and wheat were increased by 1.5–4 times; in September the prices of beef and milk were again increased by 1.5–5 times, and the price of raw cotton was tripled in November from manat 338,000 per ton to manat 1,000,000 per ton, which remained, however, still at only about 15 percent of the world price.

4

Unless referenced otherwise, all table numbers refer to the Statistical Appendix.

5

One of the foreign investors is the European Bank For Reconstruction and Development (EBRD), which owns 20 percent of the shares (US$14 million) in a large textile complex, for which it also provided a US$17 million loan.

6

Statistical issues are discussed in Appendix I, and technical assistance to Turkmenistan in Appendix II.

7

And for the use of the domestic price instead of the export price to value gas exports in the third quarter of 1996.

8

For 1995 and previous years, the market rate is estimated based on the parallel market rate; for 1996, the commercial bank rate (which closely follows the parallel market rate) is used as the market rate.

9

Despite the lower decline in 1996, Turkmenistan’s growth performance was among the weakest of the CIS countries.

10

Gas exports rose from 22.6 bcm in 1995 to 24.3 bcm in 1996. Despite these favorable developments, the share of the gas sector in GDP declined from 48 percent in 1995 to 43 percent in 1996, as the nominal market exchange rate (which impacts gas sector’s contribution) depreciated by less than the rate of inflation (which impacts nonexport sectors’ contributions). In addition, since a large part of gas exports is not paid for, the actual contribution of the gas sector to the economy—in terms of income received—is estimated to be considerably lower (34 percent for 1996).

11

Cotton output is mostly exported, after being processed into cotton fiber. However, the domestic use of cotton fiber has increased rapidly in recent years, in line with the development of the textile industry.

12

Turkmenistan’s annual consumption of wheat is about 1,000,000 metric tons. Any shortfall is imported, mainly under gas barter deals with Ukraine.

13

Table 4 contains only money incomes and expenditures that go through the banking system. Expenditures are lower than incomes because some expenditures occur in the informal economy.

14

The price of imported meat remains set by the government.

15

The minimum wage essentially serves as a basis for calculating social benefits.

16

The effective rate differs by sector and enterprise depending on the preference assigned to the sector as well as on output performance. The excess wage tax and its implications are discussed in detail in Appendix III.

17

The threshold for the excess wage tax was increased to manat 60,000 per month. The minimum wage was more than tripled to manat 28,000 per month from manat 6,000 per month in January and manat 9,000 per month in May.

18

The annual average wage was only US$13 per month.

19

Moreover, in addition to holding regular jobs, many are active in the informal sector in order to supplement their income.

20

However, the 1995 Household Survey indicates an unemployment rate of about 3 percent of the labor force (defined as those actively seeking employment but not employed as a proportion of the labor force).

21

In addition, cumbersome registration procedures have reduced use of the facility.

22

A small amount of imported meat is still provided at subsidized prices.

23

However, the bankruptcy law has never been applied.

24

Approximately 80 percent were privatized though workers buy-outs, and 20 percent through auctions.

25

Until recently, the government received technical assistance for privatization from the European Union (TACIS); the World Bank is presently reviewing the privatization measures announced in March.

26

Turkmenistan’s irrigation system, from which water is provided free of charge, uses the waters of the Amudarya and Syrdarya rivers, which both drain into the Aral Sea. The heavy use of irrigation in the region has caused the volume of the Aral Sea to shrink by an estimated two-thirds and the surface area to decline by forty five percent between 1960 and 1990, contributing to an increase in salt levels.

27

After adjusting the 1995 export figures for the treatment of transportation fees to bring it to a comparable basis with 1996.

28

In addition, the gas sector paid (during March 1996–April 1997) a 40 percent foreign exchange tax to the FERF (which was not, however, revenue to the budget), and is taxed implicitly due to low government-set prices on certain goods received in barter for gas exports. A second implicit tax arises from the surrender of foreign exchange to the CBT at the official exchange rate instead of at the more depreciated commercial bank rate.

29

The only agricultural products subject to the profits tax are cotton, silk cocoon, and fur.

30

Appendix IV gives an overview of major taxes in Turkmenistan.

31

Clearing goods are goods received in payment for exports at the option of the importer, that is, Turkmenistan does not know beforehand which goods will be sent. In the case of barter goods, there is a prior understanding on the goods to be sent. In January 1997, a Presidential decree specified acceptable categories of clearing goods, ruled out unilateral price changes, and set some limits on such transactions.

32

Tracing the real movements in expenditures in Turkmenistan is complicated. The separate expenditure items are affected by inflation, wages and the exchange rate in different ways. However, in the high inflation environment of Turkmenistan, the annual changes in these deflators are vastly different as there are large swings in real exchange rates and wages, and there are also large differences in consumer price inflation and the GDP deflator. Although the least misleading indicator is the ratio to GDP, the large swings in both the real exchange rate and the spread between the official (used for budget purposes) and commercial bank (used in the calculation of GDP) exchange rates combined with the lack of a reliable economic classification of the budget, engender unusual uncertainty in analyzing such ratios.

33

On several occasions, benefits were increased by more than the official average wage.

34

The budget has foreign credit lines outstanding for a total amount of US$140 million, for the building of new runways at the Ashgabat airport (US$86 million), and for imports of medicines and medical equipment (US$44 million) and grain (US$10 million). US$81 million had been disbursed by end-1996.

35

An enterprise is considered “local” if most of its activity is within the particular province.

36

Appendix V provides a list of on- and off-budget government ministries, departments, institutions, and organizations.

37

The Agricultural Development Fund and a newly formed Transportation Fund remain outside the budget.

38

Decisions on investments of state enterprises are taken by the enterprises and the off-budget branch ministries, or by the Funds to which they report. The Funds, in turn, report directly to the Cabinet of Ministers, and the FERF is controlled by the President.

39

The budget does not indicate the source of financing of the deficit.

40

The remaining half is to flow directly to the FERF, and is not taxable.

41

The manat replaced the ruble as the national currency in November 1993.

42

The CBT quotes its interest rates on a noncompounded annual basis, although interest on refinance credit is paid monthly.

43

M2 is a more relevant indicator of domestic liquidity developments in Turkmenistan than M3, which includes the foreign currency deposits. Foreign currency deposits in Turkmenistan are mostly held by public enterprises and consist of export receipts that are being held to pay for imports and other foreign liabilities. The balances in these accounts are relatively stable in terms of U.S. dollars, and there are no indications that they are used as a substitute for manat balances. Their rapidly increasing share in M3 mainly reflects the sharp devaluation of the official exchange rate in January 1996.

44

The banks in Turkmenistan extend credit denominated in both manat and foreign currencies. The latter, however, consist virtually entirely of on-lending of foreign borrowing, which is almost entirely spent on imports. Hence, their monetary impact is negligible.

45

The FERF is discussed in more detail in Appendix VI.

46

The elimination of all export surrenders to the FERF, as of April 1, 1997 should terminate CBT credit to the FERF.

47

The Ministry of Textile Industry received manat 160 billion (one-year maturity) for the purchase of cotton and the Associations of the Food Industry and the Vegetables and Fruit Traders manat 10 billion (four-month maturity). All these loans carried 5 percent annual interest. Manat 14 billion was provided (four-month maturity) at 30 percent annual interest to a number of other agricultural associations.

48

This came in addition to large receipts of barter goods for gas exports at end-1996.

49

However, in many auctions, the offered amount was not taken up by the banks, indicating that the auction rate is not a market-clearing rate, but more a target set by the CBT.

50

Or to 214 percent on an annual compounded basis.

51

The latter rate was set by the CBT and did not result from an auction.

52

Banks depend for most of their financing on deposits, with CBT funds meeting on average 20–25 percent of their total needs in 1996. The largest share of their deposit base is in demand deposits, most of which carry no or very low interest rates, allowing them to offer low rates on credit.

53

At the same time, foreign currency deposits with the Vnesheconombank were exempted from the reserve requirement.

54

This loan was initially in the form of a credit line (authorized by Presidential decree) of manat 35 billion, which, however, was frozen after disbursements of manat 5.5 billion.

55

In practice, only the largest 4–5 banks are regular participants in the auctions.

56

In November, the CBT offered a total amount of manat 53 billion in five auctions, while the banks bid only for manat 11 billion, reflecting their unwillingness to pay the high refinance rate.

57

In January 1996, the government restructured the branches of the Agroprom Bank into 53 legally independent Daykhan (farmers) Banks, the shares of which are held by fanners cooperatives. However, the banks cooperate in the Association of Daykhan Banks, with central headquarters in Ashgabat, and in practice continue to operate as one entity.

58

The World Bank is also financing technical assistance with the reform of the accounting system of the CBT and the banks.

59

In Turkmenistan, payments orders are issued by the creditor to the bank of the debtor. When the debtor’s funds are inadequate, the bank reports the transaction as an interenterprise arrear to the CBT. Although the banks and the CBT conduct some netting of interenterprise claims and liabilities, a single non-payment can cascade through the economy, so that with full netting the actual size of the arrears might be considerably lower than indicated by the statistics. Interenterprise arrears carry interest of 0.4 percent per day, payable at the time of settlement of the arrear.

60

Gas exports are included in the trade account for the full export value. Payment arrears on these exports are included in the capital account.

61

Net exports calculated as total exports minus transportation costs.

62

In previous years, about 30 percent of gas shipments were used as payment for transportation costs and transit fees to Uzbekistan, Kazakstan, and Russia. Until 1996, gas exports were recorded in the balance of payments including the gas shipped for these costs; the latter were recorded separately as an outflow of foreign exchange in the services account under “transportation.” Following the new arrangement in 1996, exports are recorded f.o.b. at the contract price of US$42 per 1,000 bcm, excluding transportation costs and transit fees, which are also no longer included in the services account.

63

Turkmenistan’s gas exports remain dependent on the use of Russian-controlled regional pipelines. An alternative pipeline to the Islamic Republic of Iran is expected to be completed at end-1997 (paragraph 6 and Box 1).

64

The price of this gas was also set at US$42 per 1,000 cubic meters, regardless of the type of arrangement.

65

1995 gas exports minus transportation costs.

66

This includes a payment of US$70 million worth of grain, which was credited by Turkmenistan as a cash payment.

67

Turkmenistan’s realized cotton export prices increased from 67 percent of the world market price in December 1995 to 90 percent in December 1996. This was partly a reflection of the movement away from barter in cotton trade.

68

Unlike gas, the bulk of cotton exports is sold to non-transition economies, so that the scope for avoiding barter transactions is greater.

69

Turkmenistan refines all crude oil production and exports only refined products.

70

Turkmenistan does not publish separate volume and price data on oil exports. However, the average world market price for crude oil was 19 percent higher in 1996 than in 1995, and prices of oil products increased similarly. This would indicate a considerable drop in Turkmenistan’s oil export volumes, or, contrary to world market developments, a sharp drop in average export prices.

71

The counterpart of this transaction is a negative entry “net accumulation of arrears” under “financing” in the summary balance of payments (Text Table 4). Turkmenistan repaid this loan fully by the end of the year.

72

The stock of outstanding arrears of Armenia was established at US$34, to be repaid over six years. Georgia’s arrears were reduced to US$394 million and rescheduled over eight years with a grace period of three years (starting from March 1995).

73

However, since January 1996, payments for gas imports are no longer government guaranteed, so that the 1996 arrears are commercial debt and not official debt as in previous years.

74

Turkmenistan forgave a total amount of US$159 million, mainly to Georgia, which is reflected as a capital outflow in the capital account under “capital transfers,” and as a capital inflow for the same amount under “previous arrears and debt (paid).”

75

In one case, Turkmenistan was able to reduce some of its outstanding arrears through a tripartite arrangement whereby liabilities of the Ministry of Agriculture to Islamic Republic of Iran were swapped with gas arrears owed by Armenia to Turkmenistan, and the Islamic Republic of Iran was paid by Armenia in goods.

76

The FCC was established at end-December 1995 at the office of the President and given far-reaching powers in overseeing foreign exchange operations.

77

The auction market is discussed in greater detail in Appendix VII.

78

The main objective of the pre-screening process is to limit “unnecessary” imports by public enterprises. Bids by the (small) private sector are generally approved and access to foreign exchange of this sector has improved with the introduction of foreign exchange auctions. The auction is the main market for foreign exchange; an interbank market is virtually nonexistent.

79

Surrender requirements are discussed in greater detail in Appendix VII

81

Different arrangements applied to the Transit Fees Institute and the Ministry of Foreign Affairs. For details, see Appendix VII.

1

In addition to Goskomstat, the Ministry of Economy and Finance calculates its own GDP estimates using a combination of production and income approaches.

1

Prepared by Zuzana Brixiova (EU2 Department).

2

Beginning in Jury 1995, enterprises with 15 or fewer employees, regardless of ownership, were exempted from the excess wage tax.

3

The tax base is further modified by a coefficient reflecting the capital intensity of the industry in the economy.

4

A secondary argument for introducing the excess wage tax is the claim that it discourages managers from selling assets of the enterprises and awarding themselves large pay increases. Tait and Erbas (1995) find no evidence that the excess wage tax would actually fulfill this role.

5

In May 1996, the increase applied only to budgetary organizations. In October 1996, the targeted average wage was increased to manat 80,000, but the threshold for the excess wage tax was increased only to manat 60,000.

6

This is particularly important for newly created private firms (vs. privatized firms) which do not have access to credit because of lack of collaterizable assets.

7

The implicit assumption behind this approach is that enterprises act as profit maximizers. A competing model of state owned enterprises’ behavior is that they act as labor-managed firms, i.e. their objective is to maximize income per worker. Kharas (1990), however, shows that, in the short run, imposition of the excess wage tax also leads to increased demand for labor, in labor managed firms.

8

It is assumed that there is no technological progress. To remain focused on the issue of the excess wage tax, it is assumed that the payroll tax is set to zero, which does not change the implications of the model.

9

Given the assumptions on Q(n), condition (3) also implies that profits are higher when the firm retains the worker at sufficiently low wage.

10

If the amount exempted from the excess wage tax doesn’t depend on changes in output, the condition becomes equivalent to the condition derived in Layard and Richter (1994)

Z N < τ E 1 + τ E

Since (n−Q(n−1)Q⁡(n)(n−1))>1, the firm has to lower wages less when the tax liability depends on changes in output.

1*

= financed from the State Budget.

1

On January 1, 1996 the total surrender requirement on cash receipts from gas exports was increased from 60 percent to 70 percent, consisting of a 40 percent surrender requirement to the FERF and 30 percent to the CBT.

2

Prior to January 1, 1996, the surrender requirement on exports other than oil/gas and cotton (the latter are exempted) was 50 percent for public sector enterprises, while private sector exports were exempt. On January 1, 1996, the surrender requirement was set at 50 percent for both public and private sector exports, of which 30 percent was to the FERF and 20 percent to the CBT. In June 1996, private sector exports were again exempted.

3

That is, whenever FERF deposits net of credit to the FERF decline.

4

However, the loss of revenue to the oil and gas sector from this new tax led to liquidity problems and payment arrears in this sector.

1

This restriction was introduced by the CBT in February 1997.

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Cover IMF Staff Country Reports
Turkmenistan: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1997: Issue 058
Publisher:
International Monetary Fund
ISBN:
9781451837223
ISSN:
1934-7685
Pages:
134
DOI:
https://doi.org/10.5089/9781451837223.002
  • Figure 1.
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    Figure 1.

    Turkmenistan: Selected Real Sector Indicators, 1993-97

  • Figure 2.
    View in gallery
    Figure 2.

    Turkmenistan: General Government Operations, 1993-96

  • Figure 3.
    View in gallery
    Figure 3.

    Turkmenistan: Selected Monetary Indicators, 1993-97

  • Figure 4.
    View in gallery
    Figure 4.

    Turkmenistan: Selected External Indicators, 1993-96 1/

    (In millions of U.S. dollars)

  • Figure 5.
    View in gallery
    Figure 5.

    Turkmenistan: Exchange Rates, 1994-97

  • Figure 1.
    View in gallery
    Figure 1.

    Turkmenistan: Public Sector Wages, Wage Expenditure, and Credit to State Enterprises, 1996-97

    (Percent change)

Figure 1.

Turkmenistan: Selected Real Sector Indicators, 1993-97
Figure 2.

Turkmenistan: General Government Operations, 1993-96
Figure 3.

Turkmenistan: Selected Monetary Indicators, 1993-97
Figure 4.

Turkmenistan: Selected External Indicators, 1993-96 1/

(In millions of U.S. dollars)
Figure 5.

Turkmenistan: Exchange Rates, 1994-97
Figure 1.

Turkmenistan: Public Sector Wages, Wage Expenditure, and Credit to State Enterprises, 1996-97

(Percent change)