Turkmenistan
Recent Economic Developments

This paper reviews economic developments in Turkmenistan during 1994–98. Turkmenistan reduced gas exports and suffered a decline in real GDP of close to 40 percent during 1993–95. At the same time, it stepped up foreign borrowing and constrained imports by limiting access to foreign exchange to sustain gross international reserves at the equivalent of 6–9 months of imports. The distortions associated with the perpetuation of central controls, coupled with an accommodating monetary policy, led to financial instability, raising annual average inflation rates to close to 1,500 percent during 1993–95.

Abstract

This paper reviews economic developments in Turkmenistan during 1994–98. Turkmenistan reduced gas exports and suffered a decline in real GDP of close to 40 percent during 1993–95. At the same time, it stepped up foreign borrowing and constrained imports by limiting access to foreign exchange to sustain gross international reserves at the equivalent of 6–9 months of imports. The distortions associated with the perpetuation of central controls, coupled with an accommodating monetary policy, led to financial instability, raising annual average inflation rates to close to 1,500 percent during 1993–95.

I. Introduction

1. Turkmenistan is a landlocked desert country with a rapidly growing population of 4.7 million. It has a highly specialized, trade-dependent economy, based largely on natural gas, oil, and cotton, which together account for about 85 percent of exports. Consumer and investment goods are mostly imported. Following independence in 1991, Turkmenistan has opted for a gradual transformation from a planned to a market economy. Although basic legislation for private sector development has been introduced and most prices liberalized, economic activity continues to be dominated by the public sector, and there has been little effort to diversify away from energy and cotton. Wages and social indicators remain among the lowest in the region.

2. Turkmenistan’s per capita gas reserves are among the highest in the world. However, the regional gas pipeline for the export of gas is controlled by the Russian Federation, which has the world’s largest gas reserves and considerable production capacity. The only alternative pipeline, which became operational at end-1997, is to the Islamic Republic of Iran (a country with the second largest gas reserves in the world) to meet local demand in the northern part of the country, with no onward connections to other markets. Since 1993, Turkmenistan has been denied access to European markets through the regional pipeline system, and its gas exports have been limited to Ukraine and countries of the Caucasus. Following the adjustment of gas export prices to international levels, given their own economic difficulties, these trading partners incurred large arrears on payments for gas imports. As a result, Turkmenistan reduced gas exports and suffered a decline in real GDP of close to 40 percent during 1993–95, while accumulating sizeable claims for unpaid gas. At the same time, it stepped up foreign borrowing and constrained imports by limiting access to foreign exchange in order to sustain gross international reserves at the equivalent of 6–9 months of imports. The distortions associated with the perpetuation of central controls, coupled with an accommodating monetary policy, led to financial instability, raising annual average inflation rates to close to 1,500 percent during 1993–95.

3. To address the growing economic difficulties, the government announced an economic reform package for 1996, which included measures to decontrol the economy and unify the exchange rate. However, the package was not fully adhered to and had mixed success. Public sector wages were doubled in October 1996, against a background of continued payments difficulties in the gas sector and a further decline in GDP 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 shortages as imports continued to be compressed. Although there was a sharp reduction in inflation to under 450 percent by year-end, reflecting monetary restraint earlier in the year, inflation picked up in the fourth quarter. Exchange rates were unified toward mid-year. However, the official rate was kept virtually fixed thereafter, despite growing pressures in the exchange market, triggering a growing spread between the official and commercial bank rates, which peaked at above 30 percent in the final quarter. Net earnings from foreign trade were reduced by arrears on payments for gas and electricity exports, as well as the exceptionally poor grain and cotton harvests. The level of gross reserves was maintained at US$1.2 million through import restraint, while external debt service arrears persisted. The budget was in approximate balance in 1996, although its coverage remained limited. Moreover, the balance was achieved through expenditure cuts and arrears to offset the large revenue shortfalls on account of low collections on gas exports and difficulties in selling the goods received in payment. Mainly linked to the gas payments problems and the crop failures, payments arrears within the state enterprise sector also rose sharply during 1996. Progress with structural reforms was limited and privatization was confined essentially to small enterprises.

4. Economic developments during 1997 were heavily influenced by the discontinuation of gas exports as of the second quarter in response to a weakening in payments performance. This development, combined with a sharp decline in production and exports of cotton fiber following the poor cotton harvest in 1996, resulted in a 26 percent decline in real GDP. Exports more than halved and, despite a partly offsetting decline in imports, an unprecedented current account deficit of 32 percent of GDP was incurred. However, sizable receipts from repayments on rescheduled gas debt, coupled with increased external borrowing, resulted in an overall balance of payments surplus and allowed a further build-up in gross international reserves to US$1.3 billion, equivalent to 15 months of imports. This was achieved, however, at the cost of increased external vulnerability, reflected in more than a doubling of Turkmenistan’s external debt and debt service ratio, with the share of short-term liabilities rising to about 30 percent. To ensure the timely servicing of foreign debt, enterprise earnings in three key foreign-exchange generating sectors (Oil/Gas, Agriculture, and Transportation) were centralized in state funds set up during 1996–97.

5. A major reduction in inflation (to 21 percent by end-1997) was, nonetheless, achieved against the backdrop of a sharp contraction in real GDP and emerging financial imbalances. The reduction in inflation was attributable mainly to stepped-up foreign exchange sales in the market, which absorbed excess liquidity, helped stabilize the exchange rate, and increased the availability of consumer goods obtained through informal trade. The doubling of budgetary wages early in the year, coupled with the resumption of preferential directed credits on a large scale, posed a serious threat to stabilization. These moves, however, were countered by the discontinuation of Central Bank (CBT) credit auctions and sequestration of government nonwage spending. The accumulation of sizeable wage arrears, notably in the nongovernment sector, also temporarily dampened domestic demand and its impact on inflation. Although the budget remained balanced, given its limited coverage, it was not an adequate indicator of emerging fiscal pressures. In structural areas, land was transferred to individual lease-holds in preparation for privatization, as envisaged under the agricultural reform program announced at end-1996. However, privatization continued to be sluggish. By end-1997, less than half of the small state enterprises were privatized and there was virtually no progress with the privatization of medium- and large-scale state enterprises.

II. Real Sector Developments And Systemic Reforms

A. Overview

6. As noted earlier, developments in real GDP during 1993–96 were dominated by the contraction in the output of gas and cotton, Turkmenistan’s two most important export items. In 1993, these two products jointly accounted for almost 60 percent of GDP (Table 1).1 By 1996, reflecting export market constraints and payments problems, gas production approximately halved. Cotton production suffered from inefficiencies in the agricultural sector. Nevertheless, at end-1996, gas and cotton still accounted for about half of GDP. The drop in output, coupled with lack of financial restraint, sharply raised annual inflation rates until 1996, which marked a turnaround in this trend. Real wages declined substantially during 1993–96 to among the lowest in the region.

7. Real GDP declined by 26 percent in 1997 as gas production fell by half and gas exports by 73 percent following the suspension of shipments in March, and cotton fiber production declined by 42 due to the poor harvest in 1996. Notwithstanding these developments and strong wage growth following the doubling of budgetary wages in 1997 (which contributed to a 78 percent public sector wage increase and a soaring of real wages by 84 percent), inflation declined dramatically from 446 percent in December 1996 to 21 percent in December 1997. The inflationary impact of some measures (wage increase, large directed credits, sizeable external borrowing) was offset by other measures (cuts in nonwage budgetary expenditure, wage restraint imposed on public enterprises, increased sales of foreign exchange, slow release of proceeds of foreign borrowing, discontinuation of CBT credit auctions). Turkmenistan’s progress with structural reforms remained very limited. Most of the few remaining controlled prices on food products were liberalized, but the prices of utilities remain heavily subsidized. The government made rapid progress with the transfer of agricultural land to private lease-holds, although the key cash crops, cotton and wheat, remained under state orders at procurement prices much below respective world levels. Agricultural services and processing industries continued to be state-owned. In addition, progress with privatization was slow, although the government issued plans to accelerate the process and privatize all eligible enterprises by the year 2000.

B. Structure of the Economy

8. Turkmenistan’s energy sector is the cornerstone of its economy. The country’s proven and probable gas reserves—estimated at around 2.7 trillion cubic meters (tcm) and concentrated mainly in the giant Sovetabad field in the southeast of the country—are among the largest in the world, while indicative reserves are estimated at 14 tcm. After peaking at 90 billion cubic meters (bcm) in 1989, Turkmenistan’s annual gas exports declined to an average of 24 bcm during 1994–96. Until January 1, 1996, gas exports were under control of the Ministry of Oil and Gas and all shipments were guaranteed under intergovernmental arrangements. Subsequently, such guarantees were discontinued and gas exports were conducted through direct arrangements between trading enterprises. With a view to ensuring payments and reaccessing European markets, as of January 1996, Turkmenistan entered into a joint-venture (Turkmenrosgaz) with Gazprom (45 percent share) and a U.S.-based Russian trading company, Itera, (4 percent share) to develop and export its gas. Under the agreement, Itera was responsible for marketing the gas at a price of US$42 per 1,000 cubic meters at the border of Turkmenistan, and collect 53 percent of the payments due in goods and 47 percent in cash. However, following a further deterioration in the payments situation, Turkmenistan stopped all gas shipments as of end-March 1997 and unilaterally terminated Turkmenrosgaz in June. Unresolved differences with the Russian Federation on prices, transit fees, and payments arrangements have, so far, prevented the resumption of gas exports.2

9. Turkmenistan has been examining various options for alternative gas pipelines. The only one realized so far (as of end-December, 1997) is the Korpedzhe-Kurdkui gas trunk line to the Islamic Republic of Iran with a capacity of 2 bcm in its first year of operation and a maximum annual capacity, attainable in 3 years, of 8 bcm. Export revenue, however, will remain relatively small in the beginning years as 35 percent of export receipts will be used to repay Turkmenistan’s share of the construction costs (around US$192 million). Several other pipelines are under consideration (Box 1). In February 1998, Royal Dutch Shell started a feasibility study on a pipeline to Turkey, and eventually to Europe via Bulgaria. Turkmenistan has signed an agreement in principle with Turkey for deliveries of 15 bcm per year after the year 2000, once the pipeline is completed.

Alternative Gas Pipelines Under Consideration 1/

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Source: Data provided by the Turkmen authorities.

The data on length, capacity, and cost are estimates.

Via Islamic Republic of Iran or under the Caspian.

All the above projects would require considerable foreign financing. The first option, to Pakistan through Afghanistan, faces significant financing problems, due to the political instability in the country. U.S. legislation imposing sanctions on U.S. companies operating in the energy sector of the Islamic Republic of Iran when investment exceeds US$20 million rules out significant U.S. financing for pipelines to Turkey through this country. The feasibility study for the route under the Caspian Sea has started only recently. Little progress has been made on the option through China, and the availability of cheap liquefied natural gas (LNG) in the Far East markets could hamper financing.

10. In addition to natural gas, Turkmenistan has considerable oil reserves, concentrated in the Amudarya region in Eastern Turkmenistan and the Caspian basin (both on-and offshore). Currently, all oil is produced on-shore and one of the major problems facing Turkmenistan’s plans for developing its off-shore areas stems from the debate between the littoral states about the legal status of the Caspian Sea. Most of the countries now seem to favor dividing up the seabed into national sectors, but a final agreement on this or on the dividing lines between the sectors, has not yet been concluded.

11. Turkmenistan’s oil production dropped from 300,000 barrels per day (bd) in the 1970s to 85,000 bd or about 4.2 million metric tons (mt) in the early 1990s. All crude oil is processed locally at two refineries, Turkmenbashi (former Krasnovodsk) and Chardzhou, whose combined capacity is around 12 million mt per year. In 1996, Turkmenistan started upgrading the Turkmenbashi refinery. A catalytic cracker unit and a lube plant are being built, financed by foreign loans (US$300 million); other projects (a polypropylene and a polyethylene plant) in the amount of US$400 million each are under preparation. Until early 1998, Turkmenistan exported only refined products (to increase production of the Turkmenbashi refinery), but the first export of crude oil produced under production sharing agreements was made in March 1998. Most oil is exported by means of barges across the Caspian Sea and on through the Russian Federation. Also, some products are exported in swap deals with the Islamic Republic of Iran, whereby Turkmen products are delivered to the northern regions of that country in exchange for equivalent products at Gulf ports.

12. To improve the development of the oil sector and attract foreign investment, Turkmenistan adopted a Petroleum Law in 1997 (discussed in greater detail later in the paper). This was an important step in improving the investment climate in the energy sector and facilitated the subsequent conclusion of production sharing agreements with Monument Oil of the United Kingdom and Petronas of Malaysia. In September 1997, the authorities invited tenders for offshore exploration and production of oil and gas in the Caspian Sea, although initial interest appears to have been limited due mainly to the uncertainty surrounding the status of some of the fields and the lack of a national plan for oil and gas development.

13. Agriculture is the second most important sector in the economy, accounting for about 10 percent of GDP and 44 percent of employment in 1997. The territory of Turkmenistan is predominantly desert, with irrigated arable land constituting only about 4 percent of the total land area.3 The most important cash crops are cotton and wheat. Cotton is exported after processing into cotton fiber, while wheat is consumed domestically.4 In recent years, the government’s policy has been to achieve self-sufficiency in grains, and toward this end, the area under cultivation has been increased sharply from 260,000 hectares (ha) in 1993 to 452,000 ha in 1997 (Table 1). Turkmenistan also produces livestock, fruits, and vegetables for domestic consumption.

14. Under a reform program for agriculture announced at end-1996, most agricultural land has been leased to farmers free of charge for a period of 10–15 years, with the understanding that farmers grow specified crops (cotton and wheat) and meet production targets. If performance is satisfactory, as judged by the local peasant association and ultimately approved by a national commission chaired by the President, the farmer would be entitled to the ownership of land and given freedom in crop choice, with no production targets. However, the farmer would not be able to sell the land. Under this program, from a total of 1.7 million ha arable land, 1.3 million ha were transferred into long-term leases during 1997 and 90,900 ha were transformed into private property. By end-1997, the government had also transferred most of the livestock production into private hands, including 82 percent of all cattle and poultry, more than 50 percent of the sheep, and 25 percent of the pig farms.

15. The government continues to exert significant control over the agricultural sector, primarily through state orders. Although those on milk and meat were abolished in January 1997, virtually the entire harvests of the two key crops, cotton and wheat, are still under state orders.5 The procurement price for wheat was raised three times to manat 400,000 per mt in 1997, while the cotton price remained unchanged at manat 1 million per mt. At these levels, both prices are considerably below the comparable world market prices (Table 2). However, agricultural inputs continue to be heavily subsidized. Water is provided free of charge, while fertilizer and seeds are provided at a 50 percent discount. Farmers continue to depend heavily on government organizations for input supplies and marketing of products, as there has been virtually no progress in the privatization of agricultural services.

16. The rest of the economy is closely related to the energy and cotton sectors. It is estimated that about a third of industrial production is oil and/or gas based and another third is cotton based. The textile industry has expanded in recent years. Four more textile factories—joint-ventures with foreign investors, producing both for the domestic and export markets—were built in 1997, in line with the government’s policy of increasing value added from cotton and diversifying exports. There is also a flourishing informal private sector, engaged mostly in retail trade, construction, and transportation.6 In terms of share in GDP, construction was the most important non-export sector of the economy in 1997.

C. Recent Developments in GDP

17. National account statistics published by Turkmenstatprognos7 continue to show considerable weaknesses, despite technical assistance to date from the OECD, Japan, and the IMF (Appendix I). There are deficiencies both in the source data and the methodology used (Box 2). The GDP estimates prepared by Turkmenstatprognos and the MEF (on an income-basis) have been adjusted by IMF staff to correct for some of the shortcomings, but the estimates thus derived should still be interpreted with caution.

18. The estimated 26 percent decline in real GDP in 1997 (Text Table 1, Figure 1) reflects sharply divergent developments in the export (gas and cotton fiber)8 and domestic sectors of the economy. In 1997, Turkmenistan produced only 17.3 bcm of gas, about half of the production of 1996, due to the termination of exports in March. Gas exports, where most of the value added is generated, declined by 73 percent to 6.5 bcm. Most value added in the cotton sector is derived from the export of fiber (at world market prices), as raw cotton is bought from the farmers at low fixed procurement prices. In 1997, fiber production declined by 42 percent to 141,670 mt, reflecting a very poor cotton harvest in 1996.9 As a result, exports of cotton fiber declined by 52 percent to 63,000 mt in 1997, which, in turn, reduced value added from the export sector by 42 percent in real terms. Export prices remained about the same as in 1996.

Text Table 1.

Turkmenistan: Gross Domestic Product (GDP) by Sector, 1993-97

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

Export prices are adjusted to reflect the market exchange rate.

Figure 1.
Figure 1.

Turkmenistan: Selected Real Sector Indicators, 1994-98

Citation: IMF Staff Country Reports 1998, 081; 10.5089/9781451837230.002.A001

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

GDP Estimates by Turkmenstatprognos, MEF, and IMF Staff

GDP computations for 1996 and 1997 are available only on a production basis, while income- and expenditure-based estimates are available only for 1993–95. The main deficiencies in the estimates are, first, inadequacies in the source data, as public enterprises do not have an accounting system in line with the requirements of the system of national accounts. Second, much of private sector activity is in the informal sector, and its contribution to value added is included on the basis of an estimate only. Third, a large part of exports is still conducted in barter, complicating valuation as it may not properly reflect actual market prices. Fourth, value added in the export sector (which affects cotton fiber, gas, and oil) is computed at the official exchange rate rather than the more depreciated market rate. Fifth, the domestic price of gas is fixed at very low levels, underestimating the actual contribution to value added. Sixth, Turkmenstatprognos does not compile GDP in constant prices or at quarterly frequencies, and accounts on an expenditure basis are at an early stage of development. The MEF computes GDP only on an income basis in current prices. Starting in 1997, the MEF uses the market exchange rate in computing GDP. Finally, the interpretation of GDP data is complicated by the fact that the estimates includes production (mainly of gas) that is exported but not paid for.

For the calculation of nominal GDP, the IMF staff estimates substitute the market for the official exchange rate to correct value added from the export sector, but cannot correct for the deficiencies in source data. Current year estimates of real GDP are based on the sectoral shares for the preceding year and the real growth rates for the current year, computed from physical volumes for gas, cotton fiber, and selected items for the rest-of-the-economy.

Nominal GDP

(In billions of manat) 1/

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Turkmenstatprognos and IMF staff estimates are those made in February 1998, while the MEF’s estimates date back to November 1997.

19. By contrast, the domestic sector grew by 34 percent in real terms in 1997, buoyed by a construction boom and a sharp rebound in raw cotton and wheat production. Construction activity continued to display strong growth, with its share in GDP more than doubling to reach 24 percent and exceeding the combined shares of the cotton and the gas sectors. While the decline in economic activity in the export sector contributed to this outcome, the increase in the share of construction reflected mainly large investment projects, such as the refurbishing of the Turkmenbashi refinery, the construction of several bank and other office buildings, a new mosque, a presidential palace, the pipeline to the Islamic Republic of Iran, as well as the completion of four textile plants, and a sports stadium. Most of the construction was undertaken by foreign contractors and financed partly by foreign loans. Following considerable investment in the sector in recent years, production of crude oil increased by 8 percent in 1997 to reach 4.5 million mt.

20. Strong growth in the production of cotton and wheat in 1997 raised the share of agriculture in GDP from 6.4 percent in 1996 to 9.4 percent in 1997. The favorable performance of these crops reflects, for the most part, improvements in financing and fertilizer supplies as part of the agricultural sector reforms, as well as better weather conditions. Both cotton and wheat production rose by about 45 percent in 1997. Wheat yields, while still low by world standards, increased from 0.9 to 1.4 mt per ha, a significant improvement over the preceding year, although (as with cotton) much lower than historically. Production in the livestock and diary sectors benefitted from the lifting of state orders on meat and milk. Four new textile plants became operational in 1997, with a combined production capacity of 20,000 mt of cotton yarn, raising domestic use of cotton fiber from 35,000 mt in 1996 to 40,304 mt in 1997. Output of the textile sector grew by 28 percent (Table 3) and textile exports reached US$14 million in 1997.

21. For 1997, the only available data on income and expenditure is on money incomes of the population, derived from financial transactions through the banking system (Table 4). According to this data, the share of wages in total money incomes increased from 71 percent in 1996 to 80 percent in 1997, while the share of pensions declined from 21 percent to 13 percent during the same period, as pensions were not adjusted in line with the wage adjustment in 1997. Spending on goods provided by the government and co-op stores and on services continued its downward trend. The share of spending on foreign exchange rose to account for 57 percent of all consumer expenditures, reflecting increased availability of foreign exchange in 1997, as well as the continued lack of confidence in the manat.

D. Developments in Consumer Prices

22. The only consumer goods that remain under direct price control are utilities and communal services, petrol, transportation, and building materials (Table 5). Prices of controlled goods are set by the Cabinet of Ministers as part of the social safety net system. The prices of meat and milk were liberalized following the elimination of the state orders on these products as of January 1, 1997, as was the price of cotton oil. A number of products—meat, vegetable oil, tea, sugar, and flour—remained available in state stores at subsidized prices against coupons financed through the budget until mid-1997. However, although a large part of the population was eligible for coupons under the income ceiling of manat 120,000 per capita, administrative procedures were cumbersome and relatively few made use of the facility. As of January 1, 1998, all coupons were eliminated except for flour, which remained available at manat 35 per kg in quantities not exceeding 5 kg per person per month in the cities and 6 kg per person in rural areas. Since mid-1997, the cost of this subsidy is borne by the Bread Association and financed through cross-subsidization by other bread products. The noncoupon price of flour is free. The price of standard bread remains controlled, but bakeries are free to charge market prices for other types and sizes.

23. Controlled prices were raised during 1997, although remaining well below international levels. The price of flour was raised by 250 percent, while the price of bread was increased in two steps by 78 percent, although it still amounted to only US$0.15 per kg by early 1998. An increase in the petrol price was reversed following complaints by consumers, but the prices of building materials were increased 19–26 times, bringing them closer to cost-price levels. The prices of some of the communal services and electricity were also increased—the latter by almost 9 times—but remained highly subsidized. At end-1997, house rent and utilities remained essentially free.

24. Consumer price inflation was reduced very sharply from a twelve-month rate of 446 percent in 1996 to 21 percent in 1997, with a fairly even increase in the prices of food and nonfood items, and a slightly stronger increase in the prices of services (Table 6). Reflecting the normal seasonal pattern of the availability of local fruits and vegetables, inflation rates were the lowest in the summer months and highest in the winter season.

25. The rapid decline in inflation reflected not so much a coordinated policy approach to lowering inflation, but a somewhat ad hoc adoption of policies to neutralize the impact of measures that threatened stabilization. Thus, the injection of liquidity through foreign borrowing was contained by limiting release of the loan proceeds; the expansionary impact of a doubling in budgetary wages was countered by the sequestration of government nonwage spending; and the resumption of interest-free directed credits on a large scale was accompanied by the discontinuation of CBT credit auctions (offsetting some of the increase in credit but eliminating the CBT’s only market-oriented monetary policy instrument). At the same time, CBT foreign exchange sales were stepped up (to about 14 percent of broad money per month).10 This allowed a rapid increase in private imports of consumer goods through informal channels, which eased supply constraints and sharply lowered consumer goods prices relative to overpriced barter equivalents obtained in official trade. In addition, the sales contributed to a stabilization of the commercial bank and parallel market exchange rates.11 Nevertheless, there was a large liquidity overhang by the end of the year, which started to unwind during the first months of 1998, mainly to clear wage arrears and pay for the 1997 cotton crop. However, the CBT contained inflation at 2–3 percent per month in the first quarter of the year, mainly by continuing its foreign exchange sales, which amounted to about US$40 million or 20 percent of end-1997 broad money during this period.

E. Wages and Employment

26. Basic wages in the public sector12 are set in accordance with wage scales that differ by occupation and length of employment. Off-budget ministries and public enterprises typically supplement the basic wage by food allowances, material assistance, and various premia and bonuses. Private enterprises are free to set their own wages. Until the end of 1995, the government expressed public sector wage scales as multiples of the minimum wage, which was set by the President. In 1996, the government set the average economy-wide wage, to which the minimum wage was linked—which then served essentially as the basis for computing social benefits—and introduced an excess wage tax of 50 percent on wages in excess of 150 percent of the official average wage13 in an effort to control wage increases. As of March 1, 1998, the floor for the excess wage tax was increased from manat 60,000 (effective since October 1996) to manat 200,000 and a second floor of manat 400,000 was introduced, above which the tax rate was set at 60 percent. As of 1997, the minimum wage no longer plays a role and social benefits are computed on the basis of the average wage.

27. Nominal and real wages increased sharply in 1997, reflecting an almost doubling of economy-wide wages in October 1996, followed by a further doubling of budgetary wages in March 1997, with a partial spillover into the rest of the economy. The March adjustment in budgetary wages was intended to narrow the gap with actual wages in the off-budget public sector. In an effort to limit the effect of the budgetary increase on public enterprise wages, the government issued directives to these enterprises to strictly contain their wage increases within their ability to pay. This policy, however, was only partly successful as average public sector wages increased by 42 percent during March–April, considerably more than can be attributed to budgetary wages alone (Table 7). Thus, during 1997, average real wages increased by 84 percent. Nevertheless, real public sector wages were still about two-thirds their 1994 levels. In addition, the average U.S. dollar wage (US$35 in 1997) was among the lowest in the CIS.14 The successive large wage increases, moreover, triggered large wage arrears in the enterprise sector, which were partially cleared in early 1998 following an instruction by the President to clear all wage arrears.15 Notwithstanding these difficulties, in March 1998, the government announced a further doubling of budgetary wages.

28. Official unemployment figures remain very low, since each citizen of Turkmenistan is guaranteed employment.16 The 1995 Household Survey puts the unemployment rate at about 3 percent of the labor force. Provisional data for 1997 indicate a slight decline in total employment, as increases in industry and agriculture were offset by declines in construction and “other” sectors. After declines in 1995 and 1996, employment in state enterprises increased slightly (Table 9). Reflecting the agricultural sector reforms, employment shifted from farmers associations to the nonstate (agricultural) sector. The latter accounted for 28 percent of total employment at end-1997, of which about two-thirds was in agriculture and one-fourth in small enterprises.

29. In June 1996, the government set up labor exchanges to match workers seeking employment with job vacancies in state enterprises. Workers who register at the exchanges are not counted as unemployed; they have to accept the exchange’s offer of employment to avoid being delisted. Of the more than 60,000 people registered during 1996–97, about 20–30 percent were provided with employment.

F. Income Distribution and the Social Protection System

30. Available data for recent years indicate that, unlike in most other transition economies, the distribution of income in Turkmenistan has not become markedly more uneven (Table 10, Figure 2). Although fluctuating sharply, the ratio of the highest (in construction and geological prospecting) to the lowest sectoral wage (mainly in agriculture) was about 2.5 in both 1994 and 1997. In addition, monthly wage increases across sectors have become more uniform. The subsidies for utilities and housing apply equally to all income levels, further lowering the ratio of high to low incomes. However, the wage data exclude the private sector, while public sector employees may have a second income-generating activity in the informal sector, so that income inequality may be more pronounced than indicated by official wage data.

Figure 2.
Figure 2.

Turkmenistan: Nominal Wages by Sector, 1996-97 1/

Citation: IMF Staff Country Reports 1998, 081; 10.5089/9781451837230.002.A001

Source: Data provided by the Turkmen authorities.1/ The upper panel shows the standard deviation of the monthly increases of the nominal wage across the 24 sectors of the economy and the lower panel the ratio of the highest to the lowest sectoral wage. A low standard deviation indicates that the monthly wage increases are similar across all sectors, while a high standard deviation points to proportionately higher increases in some sectors. The administrative increase in March 1997 is associated with a high standard deviation which suggests that not all sectors were equally able to follow the increase in budgetary wages.2/ The data for 1994 and 1995 are annual averages and cover somewhat different categories than in later years.

31. The social safety net system in Turkmenistan comprises four elements: price subsidies, state pensions (either old-age or disability), family allowances, and guaranteed employment (Box 3). In 1997, the only changes to the system were the elimination of the remaining price subsidies on food products (except bread and flour) and the introduction of a new subsidy on baby food. In addition, the maximum income level for support through coupons for flour was raised from manat 80,000 per capita to manat 120,000 per capita. The basis for the allowances was set at manat 200,000 in 1996 and kept unchanged in 1997, remaining well below the value of the minimum consumption basket in that year (Table 11). Contrary to previous policy, pensions were not increased in line with budgetary wages in March 1997. However, the minimum pension was increased to manat 100,000 in March 1998. The government is preparing a new self-financing, fully-funded pension system to replace the present pay-as-you-go system. When the new system is introduced, the system of nonpension allowances is to be revamped and reduced in scope.

Summary of the Social Safety Net System

The social safety net system consists of:

  • Price subsidies. Flour, bread, and baby food are provided at highly subsidized prices and salt is free of charge. Subsidized bread, baby food, and salt is available at unlimited quantities for every citizen; flour can only be bought at the subsidized price with coupons up to a limit, and coupons are only available to families with a monthly income below a specific amount per capita (manat 200,000 for 1998). 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 virtually free of charge.

  • 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 1997, 413,904 people received a pension from the budget’s Pension and Social Security Fund, of which 294,714 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 financed by a pay-roll tax and 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 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 to free education and health care, informal support by family members is another major aspect of the overall social safety net in Turkmenistan.

32. Nevertheless, the standard of living remains very low in Turkmenistan and the social indicators are among the least favorable in the region. Recent World Bank studies in the agricultural and health sectors17 have revealed low incomes and poor health, especially in rural areas, where the majority of the population lives, reflecting low yields in the agricultural sector. Indications are that the social development situation has worsened since independence in 1991.18 The proportion of the population living in poverty increased from 12 percent to 48 percent of the population between 1988 and 1994. Life expectancy is among the lowest, and infant mortality among the highest in the region.

G. Private Sector Development and Privatization

33. Turkmenistan has passed a number of basic laws for the development of the private sector, including a law for the privatization of state owned enterprises, a bankruptcy law, and an investment law. However, the economy is still dominated by the state sector and privatization has remained limited to the small (less than 100 employees) service and retail sector. While 81 percent of the 32,164 enterprises registered in Turkmenistan in 1997 were non-state entities, their contribution to GDP is estimated at only about 25 percent.19 Foreign investment continues to be heavily concentrated in the oil, gas, and textile industries, exclusively through the establishment of joint-ventures. Registration procedures for new domestic private companies remain cumbersome and inefficient.

34. In 1997, Turkmenistan made a number of changes in its approach to and organization of privatization. A major revision of the privatization law20 in June 1997 allowed, for the first time, domestic and foreign entities to participate in the privatization process on an equal footing and to hold a majority stake in privatized businesses. In addition, several presidential decrees were issued. On April 7, as part of a 1,000-day reform program, the President announced an acceleration of privatization, with the objective of completing the privatization of trade and catering enterprises by August 1998, and the remainder by December 1999. Auctions, corporatization (formation of joint stock companies), and investment tenders would be used to further the process of privatization.21 Subsequently, the government:

  • Announced its willingness to divest itself of 100 percent of its ownership in enterprises slated for privatization;

  • Established (August 1997) a central registry for all commercial and noncommercial enterprises at the State Agency for Foreign Investment (SAFI);

  • Issued a decree for the sale of 50 small- and medium-sized enterprises, primarily under the Ministry of Textile Industry; and

  • Established in consultation with the World Bank (January 1998) the Center for Preparing State Enterprises for Privatization under SAFI to work in parallel with the State Property and Privatization Department (SPPD) at the MEF, although the latter would remain in charge of privatization of small enterprises.

  • Issued a further decree and two regulations (April 14, 1998) to clarify procedures pertaining to the transformation of state-owned enterprises into joint-stock companies and the floatation of state blocks of shares, as well as to set out the institutional responsibilities for carrying out these procedures.

35. Progress with privatization remained limited in 1997. A total of 101 enterprises were privatized, of which 98 were small (the average number of employees in the enterprises sold off in 1997 was only 25), two were medium-sized, and one was a large enterprise. Of the 98 small enterprises, 95 were privatized through auctions and 3 were sold to the employees. The average selling price of the small enterprises was manat 34 million (US$6,400). In addition, two medium-sized state enterprises were sold at auctions at an average price of manat 179 million (US$34,000). Turkmenistan sold only one large enterprise, the Nebit Dag hosiery factory, for manat 62.8 billion (US$12 million), using a tender procedure.22 As a result, of the 4,343 enterprises identified for privatization, only 1,858 had been privatized by end-1997. These were mainly small enterprises in the services and retail sectors. In five auctions of state enterprises held between end-December 1997 and March 1998, only 13 enterprises were sold from a total of about 70 that were offered. The main reasons for the disappointing performance were the generally poor state of the enterprises and the highly overvalued asking price.

H. Environment

36. Turkmenistan suffers from serious environmental problems in both the industrial and agricultural sectors. To address these concerns in the industrial sphere, a pollution tax was introduced, imposing levies in the event that enterprises exceed maximum levels of pollution. Initially, implementation was poor, but the government has recently taken steps to improve compliance, including taking offending enterprises to court and enlisting the assistance of banks to sequester overdue pollution taxes. In the agricultural sector, the main problem has been the application of herbicides and insecticides by air. This has led to the contamination of the water supply and exposed the rural population to dangerous quantities of chemical agents. Hence, this application technique has been phased out and replaced with the distribution of these chemicals directly at ground level, thereby minimizing the impact on the environment.

37. The expansion of cotton and wheat production has placed considerable demands on Turkmenistan’s water supply, which primarily draws on the waters of the Amudarya and Syrdarya rivers. These two rivers drain into the Aral Sea and the heavy use of their waters for irrigation by Turkmenistan and other countries in the region has caused the volume of the Aral Sea to shrink by an estimated two-thirds between 1960 and 1990 and contributed to a sharp rise in the sea’s salinity level. Turkmenistan is actively working with four other Central Asian states in the Aral Sea Program to find regional solutions to this problem.

38. A further problem, the cause of which is not fully understood, is the rising level (by about 2.5 meters since the early 1980s) of the Caspian Sea. This has resulted in extensive coastal flooding, as well as pollution of fresh water systems in the coastal region. The Caspian Sea has also absorbed pollutants along its flooded perimeter. Turkmenistan is working with regional governments, as well as several international organizations (including the World Bank and the United Nations) to resolve this matter.

III. Public Finances

A. Overview23

39. The underlying fiscal situation weakened in 1997, although the budget was kept broadly in balance as in previous years (Text Table 2, Figure 3, Table 12). Revenues were negatively affected by the cessation of gas exports as of end-March 1997. Moreover, the budget did not receive its agreed share of revenue from the servicing of rescheduled gas debt.24 The wage component of expenditures rose sharply on account of the doubling of budgetary wages in October 1996 and in March 1997. The MEF continued its policy of limiting expenditures to available revenues, and consequently “unprotected” expenditures had to be cut sharply in real terms.25 Budgetary management was further complicated by a rapid increase in the barter component of the budget.26 Budget coverage continued to be limited as several ministries and government agencies remained off-budget (Appendix II), although some were brought under the treasury system in mid-1997 (in extrabudgetary accounts). The approved 1998 budget (in constant prices) projected a deficit of 1.2 percent of GDP. However, a doubling of budgetary wages effective March 1, 1998, and the uncertainties related to the resumption of gas exports and the repayment of rescheduled gas debt, reduce the likelihood that the deficit can be contained to the envisaged level in the absence of new revenue/expenditure measures.

Text Table 2.

Turkmenistan: General Government Operations, 1994-98

(In millions of manat)

article image
Source: Data provided by the Turkmen authorities.

Budget approved by parliament, in constant fourth quarter 1997 prices and December 1997 exchange rate. Principal repayments on foreign debt are reclassified from expenditure to financing.

Excludes revenue and expenditure of the state funds and certain other extra-budgetary expenditures.

Figure 3.
Figure 3.

Turkmenistan: General Government Operations, 1994-97

Citation: IMF Staff Country Reports 1998, 081; 10.5089/9781451837230.002.A001

Source: Data provided by the Turkmen authorities.

B. Revenues

40. Total budgetary revenues rose from 17 percent of GDP in 1996 to 29 percent in 1997, following small increases in the ratio in previous years.27 This was realized despite a sharp real decline (73 percent) in gas exports, a major source of budgetary revenue. The principal explanatory factors were:

  • The divergent effects of developments in the tradable and nontradable sectors of the economy on budget revenues and GDP. Budgetary revenues and expenditures were mainly affected by the large increase in value added in the nontradables sector, while nominal GDP was heavily influenced by developments in the export sector (as discussed in paragraph 18). Hence, nominal GDP growth was far lower than the growth in budgetary revenues.

  • The taxable base of the gas sector declined by much less than gas exports. This was attributable to three factors. First, slightly more than half of the payments due on gas exports in 1996 were received in 1997 (while this carry-over effect was very small in 1996), considerably mitigating the impact of the drop in gas exports in 1997. Second, the 40 percent foreign exchange tax on cash receipts from gas exports (introduced in March 1996 and abolished as of April 1997),28 had a considerable negative effect—estimated at 36 percent—on the tax base in 1996, but not in 1997, as cash payments were received mostly in the second half of the year, by which time the tax was abolished. Third, the depreciation of the average official exchange rate (used in valuing the tax base) by over 20 percent raised the manat value of gas export receipts.

  • To finance the budgetary cost of the wage increase in March 1997, the government allocated half of the proceeds from repayments on restructured gas debt to the budget, with the other half allocated to the FERF, which is controlled by the President. In effect, the budget received considerably less than expected, as the FERF retained a larger share of the second quarter payment, resulting in a manat 73.3 billion loss to the budget, and the fourth quarter payment was received only in 1998.29 Nevertheless, the budget’s share of the rescheduled gas debt contributed the equivalent of 2.6 percent of GDP to overall revenue.

Reflecting the above, revenue from gas exports (excluding the receipts from rescheduled gas debt) declined marginally from 4.7 percent of GDP in 1996 to 4.2 percent of GDP in 1997, although its share in total revenue declined from 28 percent to 14 percent (Table 13). Nongas revenue rose by 13 percent of nominal GDP, accounting for 86 percent of total revenue. In addition to the revenue from rescheduled gas debt (initiated in 1997 and shown under nongas revenue), this mostly reflected the positive impact of the increase in economy-wide wages on revenue from the personal income tax and the pay-roll contributions to the Pension and Social Security Fund (PSSF—adding 4.9 percent of GDP to revenues). Revenue collections, however, were 12 percent lower than budgeted, with the biggest shortfalls occurring in VAT, Natural Resources Tax (NRT), and profit tax collections, all of which were influenced by the lower than anticipated gas export receipts.30 In addition, by Presidential decree of January 1997, all capital construction expenditure by the oil and gas sector was exempted from taxation, backdated to July 1996, substantially reducing revenue from payment of tax arrears, compared to the plan.

41. The structure of revenues remained broadly the same in 1997, although the share of the four main taxes—VAT, profits, natural resource, and payroll (social security) taxes—declined to 74 percent of total budgetary revenues from 83 percent in 1996, reflecting new revenue from rescheduled gas debt in 1997 (Tables 14 and 15). Indirect taxes carried the largest share (46 percent of the total), of which the VAT and the NRT were the most important sources, constituting 28 percent and 8 percent, respectively, of total revenue. NRT revenue rose by 61 percent in nominal terms, reflecting the receipt of payments on 1996 gas exports and higher oil exports. The VAT was primarily affected by developments in the nongas sector, which accounted for almost 70 percent of VAT revenues in 1996. Total VAT collections rose by 86 percent in nominal terms, buoyed by the growth in domestic consumption following wage increases. Revenues from excises increased by 120 percent in nominal terms, which mainly reflected a rise in revenue from oil, a reclassification of taxes from “other” to excises, and, to some extent, a broadening of the range of imported products under excise (see paragraph 44).

42. Direct taxes constituted 24 percent of total revenues in 1997, slightly less than in 1996. Similar to most BRO countries at an early stage of transition, profit taxes were a more important revenue source (21 percent share) than personal income taxes (4 percent share). Profit tax revenues benefitted from the rapid growth in the nontradable sector, while income tax collections rose sharply, reflecting the substantial increase in average real wages during 1997.

43. Revenue arrears continued to be a major budgetary problem in 1997. Official estimates put revenue arrears—which occurred in all major taxes except the income tax—at about manat 600 billion or 21 percent of total revenues by end-1997. The large tax arrears reflect the sharp increase in interenterprise arrears and problems associated with the sale of barter and clearing goods31 received in payment for gas exports. The government, in turn, incurred expenditure arrears (mostly in nonwage categories) during the year.32 These developments prompted increased recourse to noncash settlements, the share of which increased from 30 percent of the budget in 1996 to 51 percent in 1997. Noncash settlements picked up during the year, rising from 33 percent of revenues in the first quarter to 64 percent in the final quarter. The main area of noncash settlements was construction, and involved in many instances tripartite agreements between the budget and one or more off-budget ministries and enterprises. This large share of barter or “netting out” transactions not only greatly reduced the MEF’s control over the execution of the budget, but also created valuation problems.33

44. The following tax measures were introduced during 1997:34

  • Capital expenditures of the Turkmenbashi refinery were exempted from taxes (under the general provision to exempt construction activity in the energy sector from taxes, as noted earlier).

  • To simplify taxation of agricultural incomes and improve collections, effective January 14, 1997, the VAT, personal income, and payroll (social insurance) taxes for agricultural producers were replaced by a flat 8 percent tax on the value of output. The rate was set at a level intended to make the change approximately revenue neutral. The revenues generated were apportioned between the PSSF and income taxes at 25 percent and 75 percent, respectively.

  • Goods exported by enterprises of the Ministry of Textile Industry were exempted from VAT as of August 1, 1997.

  • As of July 1997, the number of products subject to excise taxes was substantially increased, including the import of fresh vegetables, pasta, jams, cotton, and carpets. The main objective of this measure was to protect domestic production, while the revenue effect was minimal. In addition, excise taxes were introduced on a number of export goods, including mineral water, wool, and animal skins, with equally low revenue effects.

  • Other new revenue measures included the introduction of a patent fee on businesses that are considered nonlegal entities (effective January 1997), and a land tax on nonagricultural and nonstate organizations (effective October 1997). The revenue impact of both measures was insignificant. As of April 1997, a 0.3–0.5 percent turnover tax for maintenance and repair of rural roads was introduced.

  • The foreign exchange tax of 40 percent on cash receipts from oil and gas exports, payable to the FERF, was abolished effective April 1, 1997, but reintroduced for gas exports at a rate of 50 percent as of December 25, 1997.

C. Expenditures

45. Budgetary expenditure rose sharply to 29 percent of GDP in 1997. This was due to large wage increases in October 1996 and March 1997, resulting in an almost tripling of average annual budgetary wages compared to 1996. The strongest growth was registered in wage-sensitive expenditure categories such as education, health, and defense. In order to keep the budget in approximate balance, unprotected expenditures were cut by about 30 percent in real terms.35 Price subsidies and capital investment expenditures were affected the most. Also, contrary to previous practice, pensions were not increased when wages were adjusted in March 1997, so that the higher receipts from payroll taxes could be used to finance the wage increase. By the end of the year, cash expenditures were virtually confined to the protected categories (wages, pensions, stipends, and medicines).

46. Developments in the largest expenditure categories mirrored wage developments, given the large share of wages in these items. Expenditures on healthcare, defense, and education, each of which accounted for around 16 percent of total expenditures in 1997, increased sharply in nominal terms (in the order of 155–175 percent).36 In the case of defense, the effect of higher wages was compounded by higher outlays on food due to the elimination of the procurement prices on milk and meat. However, expenditures on pensions and social security (PSSF), accounting for 14 percent of total expenditure, grew more slowly, because of the delinking of wage and pension adjustments in 1997. Old age pensions constituted 90 percent of PSSF expenditures (Section II, Box 3). On a net basis, the PSSF moved from a deficit of 0.4 percent of GDP in 1996 to a surplus of 0.9 percent of GDP in 1997.

47. Operational expenditures (mainly goods and services—13 percent of total expenditures), subsidies (10 percent of total) and capital investments37 (12 percent of total) were sharply reduced in real terms to finance the March 1997 wage increase. Subsidies on a number of goods under price control were eliminated when the prices of these goods were liberalized in early 1997 (Section II, paragraph 22). During May–August 1997, budgetary subsidies for flour and public transportation were shifted off-budget to the state enterprises concerned. However, a new budgetary subsidy on baby food was introduced in October, raising expenditures on subsidies in the fourth quarter. In addition to price subsidies recorded under expenditure on the national economy, the budget also reimburses public enterprises for the costs of the subsidies on utilities, which are included under operational expenditures (8.5 percent of total expenditures).

48. The budget incurred a small amount of wage arrears by the end of the year, which were, however, cleared on December 31, 1997 by means of CBT credit. The lack of a centralized register of commitments at the treasury precludes a definitive judgement of the amount of nonwage arrears at end-1997 after the netting of revenue and expenditure arrears in the budget.

D. Financing

49. Similar to previous years, the budget remained approximately balanced as the MEF continued to limit expenditures to available revenues in 1997. The budget recorded a very small surplus of manat 3.6 billion or less than 0.1 percent of GDP. Government deposits with the banking system increased sharply in the first quarter due to the receipt of the first payment from the rescheduled gas debt at end-March. However, during the following quarters, the government gradually drew down its deposits and by end-December it resorted to an overdraft of manat 27 billion from the CBT to clear wage arrears. For the year, total domestic financing amounted to manat 53 billion, 0.6 percent of GDP. The budget did not receive foreign financing, and repaid foreign loans for a total amount equivalent to manat 58 billion.

E. Local Budgets

50. The budget of the general government includes the central government and local budgets of five provinces—Akhal, Balkan, Dashkovuz, Lebap, and Mary—and the city of Ashgabat. Local governments are financed by transfers from the central government or assignment of tax revenue. The central government collects most taxes (90 percent of the total in 1997), while local governments collect the bulk of the personal income tax, the property tax, local taxes and fees, and receive a small share of profit taxes. In 1997, local governments accounted for about 33 percent of total expenditures, mainly on education (14 percent of total expenditure), health care (9 percent), investment, operational spending, and subsidies (7 percent).

F. Budget Coverage

51. The coverage of the budget remains limited as a large number of ministries and government agencies remain off-budget (Appendix II). The latter include “self-financing” ministries which generate their own resources (mainly through commercial activities) to finance their activities. There are also four recently created state funds for the oil and gas, transport and communications, agricultural, and health sectors (Box 4), in addition to the government investment fund which captures investment spending financed from the FERF. Moreover, a number of government subsidies are provided off-budget by state-enterprises, including subsidies on flour, transportation, and agricultural inputs, as well as by the CBT in the form of low-cost credits. Also, many on-budget ministries have revenues that are not included on budget. Many of the off-budget institutions have both functions that would normally be included on budget and others that would not, greatly complicating estimates of the size of the gap in coverage. Nevertheless, some indication is provided by the 1998 budget for the state funds noted above, which amounts to 75 percent of the regular budget.

52. In 1997, the government took the first steps toward expanding the coverage of the budget. The 1997 budget plan included expenditure of the OGDF and the GIF. Revenues of these funds were assumed to match their expenditures, and their inclusion on budget was thus deficit-neutral. Although this measure helped improve transparency of the public sector operations, the MEF did not have control over these revenues and expenditures, as the operations of the funds did not pass through the treasury system, nor did the funds report actual revenues and expenditure to the MEF. In June 1997, the expenditures of 31 self-financing ministries and organizations were incorporated in the treasury system, but this was for reporting purposes only as their transactions were recorded in extrabudgetary accounts outside control of the MEF.

The State Funds1

During the past two years, the government has established (by Presidential decree) a number of state funds to manage the resources of state enterprises in the main economic sectors, and to service their foreign debt and other debt assigned to them by decree. The Funds receive their revenue directly from the sale of the products of the sector, and make transfers to the sectoral ministry and enterprises for the payment of taxes, operational expenses, and investments. The funds are managed by a Board of Directors, chaired by the President, and include a Deputy Head of the Cabinet, senior officials and heads of enterprises in the sector, and the chairman of the Vneshekonombank.38

The Oil and Gas Development Fund (OGDF) was established in April 1996. It receives all revenue from exports and domestic sales of oil and gas by the state-enterprises in the sector.

The Agricultural Development Fund (ADF) was set up in October 1996. The revenues of the ADF are obtained from the export of cotton and a 3 percent tax on profits of all public enterprises.

The Transport and Communications Development Fund (TCDF) was founded in January 1997. The fund receives its revenues from the various ministries and agencies involved in transportation (air, river, sea, and road transport) and from the sale of telecommunications services. Revenues are predominantly received in U.S. dollars. Resources of the fund are channeled to certain priority projects such as airport development, satellite TV, and the installation of a digital telephone network.

The Health Development Fund (HDF) was established in March 1998, and does not yet appear on budget. This fund receives its revenues from fees of the state voluntary medical insurance fund—which are presently on budget—a part of the surpluses of enterprises and medical institutions, profits from paid medical services, and fees from licensing medical and pharmaceutical activities. Expenditures are allocated to purchases of medical equipment and medicines, financing of investments in the pharmaceutical industry, and debt-service payments of the Ministry of Health and the medical industry.

1 In addition to the four funds listed in the box, the budget includes a number of other “funds.” The Government Investment Fund, which is included on budget in the same way as the OGDF, ADF, and TCDF, is not a legally established entity, but merely a name for all projects financed by contributions from the FERF. The PSSF is an integral part of the budget, as are the Emergency and Road funds.

G. The 1998 Budget

53. The budget for 1998—approved by parliament in December 1997—envisages a deficit of manat 161 billion or 1.2 percent of GDP.39 The total financing need, including repayments on foreign debt, is manat 231 billion, of which manat 212 billion is to be financed by CBT credit and manat 19 billion through sales of treasury bills to the nonbank sector. As in previous years, the budget is expressed in prices and the official exchange rate prevailing at the end of 1997. The budget is more extensively documented than before, although it is not yet made publicly available. As of this year, the budget is expressed in a functional as well as an economic classification (Box 5). Coverage is further extended by incorporating, in addition to the OGDF and the GIF, estimates for the ADF and the TCDF, although all funds are again included in a deficit-neutral manner and remain outside the control of the MEF.

Budget Classification

In order to improve budget presentation, for the first time in 1998, the MEF presented the budget on the basis of both a functional and an economic classification in line with the Government Finance Statistics of the IMF. Traditionally, budgetary expenditures were recorded using a functional classification. Fiscal management and projections, however, become more transparent if fiscal information is classified in a consistent manner according to economic categories, such as wages, interest, subsidies, and transfer payments, rather than by function, such as education, health care, or defense. The economic classification, however, is not yet widely used in the internal budgeting process of many government agencies. In addition, the 1998 budget execution will continue to be based on a functional classification until the MEF becomes sufficiently acquainted with the new system.

Based on an economic classification, the composition of the 1998 budgetary expenditures is as follows:

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54. The 1998 budget projections assume gas exports of 20 bcm and a collection ratio of 50 percent.40 It is further assumed that the budget will receive its full 50 percent share of the repayments on rescheduled gas debt (including principal repayments by Georgia). Expenditure growth is driven by large increases in social/cultural spending (education, health, and culture), as well as on defense and pensions. National economy expenditures are projected to decline, reflecting the full-year impact of the elimination of the subsidies on flour and public transportation as of mid-1997, and a reduction in operational expenditures.

55. The government has not yet adjusted the 1998 budget to include the following measures taken after its approval:

  • Effective December 25, 1997, a 50 percent foreign exchange tax to the FERF was imposed on cash revenue from gas exports, resulting in a decline in the gas sector’s remaining tax base and in an estimated loss of revenue to the budget of manat 114 billion or 0.9 percent of GDP;

  • Effective March 1, 1998, budgetary wages were doubled and the minimum pension was raised. These moves are estimated to increase budgetary outlays by manat 895 billion or almost 7 percent of GDP. At the same time, the government announced a number of measures to offset the cost of the wage adjustment, for a total amount of manat 210 billion (1.6 percent of GDP), including: (i) introduction of an income tax system based on differentiated tax scales, replacing the flat income tax rate of 8 percent; (ii) sale of government held strategic reserves of diesel fuel; (iii) abolition of allowances (notably for food) paid to budget personnel; (iv) abolition of tax concessions for small domestic enterprises; and (v) reduction of subsidies and transfers to ministries and agencies, particularly on utilities.

In the absence of additional offsetting measures, the budget deficit can be expected to rise substantially in 1998. The government is reviewing the options for further revenue/expenditure measures with the objective of strictly containing the budget deficit and its bank financing in 1998.

IV. Monetary Developments 41

A. Overview

56. The year 1997 was characterized by strong growth in directed credits42 and external borrowing against the cotton crop, which led to sharp monetary expansion (Text Table 3, Table 16, Figure 4). Directed credits, extended mainly to agriculture, contributed to the doubling of domestic manat denominated credit and forced the CBT to suspend (as of February 1997) credit auctions, its main market-oriented monetary policy instrument. While foreign borrowing further added to liquidity, part of the proceeds were sold by the CBT, which helped absorb excess liquidity and allowed the exchange rate to stabilize. Nevertheless, M2 (broad money excluding foreign currency deposits)43 doubled during the year, which was mainly reflected in a very sharp increase in deposits, especially in the cotton sector, but also in a 51 percent increase in currency in circulation. The ensuing inflationary pressures were contained by blocking the deposits of the cotton sector pending completion of the 1997 cotton crop cycle. However, final settlements with cotton farmers in early-January 1998 resulted in an unwinding of the sizeable liquidity overhang at the end of 1997. Thus, M2 declined sharply, the CBT sold a net amount of US$40 million in foreign exchange—the demand for which increased during January–February—and monthly inflation rose to 2–3 percent in early 1998. While nominal interest rates declined during 1997 in line with inflation, the CBT refinance rate, the treasury bill rate, and commercial banks’ lending rates on loans financed by their own resources were highly positive in real terms. However, directed credits provided free of interest or at highly preferential rates, weighed heavily in the banks’ portfolios.

Text Table 3.

Turkmenistan: Monetary Survey, 1996-98

(In billions of manat)

article image
Source: Data provided by the Central Bank of Turkmenistan.

Budgetary support and credit to the economy.

Figure 4.
Figure 4.

Turkmenistan: Selected Financial Indicators, 1996-98

Citation: IMF Staff Country Reports 1998, 081; 10.5089/9781451837230.002.A001

Source: Data provided by the Turkmen authorities.

B. Monetary Developments and Policies

Money and credit

57. As noted above, the government resumed directed credits on a large scale in 1997 after refraining from such credits during most of 1996. Thus, CBT directed credits for onlending by banks increased by manat 287 billion during 1997 (Table 17), equivalent to 67 percent of M2 at end-1996, and accounted for two-thirds of the growth in the banking system’s manat credit to the economy. The largest directed credit lines were for the financing of the grain harvest. Directed credits, notably to the textile sector, falling due in 1997, could not be repaid and were rescheduled.

58. In addition, foreign borrowing by the cotton sector boosted banks’ deposits, allowing them to almost double manat credit financed from their own resources (Table 18). Foreign borrowing remained by far the largest source of credit for state enterprises, accounting for 86 percent of all banking sector credit at end-1997.44 The proceeds of such loans, which increased by 34 percent in 1997, are generally used to finance project-related imports, and have little or no effect on domestic liquidity. In 1997, however, a considerable part of the foreign borrowing by the cotton sector45 was not import related and added to bank liquidity (Box 6), raising lending (notably to agriculture) financed by banks’ own resources by 30 percent of end-1996 M2 (Table 19).

Monetary Implications of the Agricultural Reform in 1997

The break-up of the peasant associations into individual leaseholds under agricultural sector reforms in 1997 had important monetary implications. Previously, the agricultural sector was financed by credit to (off-budget) line-ministries or production associations, which would finance the farmers’ cooperatives. In 1997, however, the financing was provided to individual farmers. Accordingly, the Daykhan Bank opened around 240,000 individual loan and deposit accounts for farmers. The account holders received a voucher book, with which they could pay the providers of inputs or withdraw money for the payment of wages, and against which the Daykhan Bank would provide standard amounts of credit. This explains the large increase in bank credit to the private sector in 1997 (which would previously have been recorded under credit to state enterprises). Also, while this system reflects a positive adjustment of the bank to the reforms and improved access to crop credit and control over its use, it is partly responsible for the overall increase in bank credit as the number of transactors multiplied and the possibility of netting within line-ministries and product associations declined.

While the grain crop was mainly financed by CBT credit, the cotton crop was financed by foreign borrowing. The proceeds from the latter loans were partly held by the cotton concern Turkmenpahta and its ginneries, and partly deposited in farmers’ accounts as advances. However, while farmers could make payments from these accounts by using the vouchers, they could not freely withdraw the money until the final payment for the 1997 cotton crop could be made and the Daykhan Bank had verified that all outstanding liabilities had been settled. As a result, these deposits increased sharply, accounting for 30 percent of the increase in M2 in 1997. Previously, any surpluses from the sale of raw cotton remained under public sector control. However, following the reforms, they were available to farmers. When the accounting for the 1997 crop was completed and the associated deposits were freed in January 1998, they were almost entirely withdrawn in the first two months of the year. This resulted in a sharp deterioration in Daykhan Bank’s liquidity, an increase in currency in circulation, and a decline in the CBT’s foreign reserves as demand for foreign currency increased.

59. During the first four months of the year, the increase in credit to the economy was offset by a decline in net credit to the budget, but by mid-year, both sectors contributed to monetary expansion. Initially, the budget benefitted from large receipts from rescheduled gas debt, but the combined effect of less-than-expected revenue from this source and higher wage costs led to a decline in the MEF’s deposits. In addition, credit to the agricultural sector accelerated by mid-year as work on the new cotton crop intensified. Credit to the economy increased further in the second half of the year, especially in the third quarter. By end-December, the budget had a net overdraft position with the CBT.

60. To help mitigate the monetary impact of directed credits and foreign borrowing, the CBT suspended the credit auctions as of February 1997. It also stepped up the sale of foreign exchange, as the loss of domestic monetary control forced it to switch to the exchange rate as its main indicator for monetary policy. Although the CBT essentially continued to lack access to international reserves during 1997, 46 it received the foreign exchange counterparts of the external borrowing by the cotton sector and the budget’s share in the revenue from the repayments of rescheduled gas debt. Thus, the CBT was able to sharply increase its sales of foreign exchange to banks to around 15–20 percent of M2 per month, and help stabilize the commercial bank exchange rate following a temporary depreciation in January 1997 in reaction to the strong monetary expansion at end-1996.47 With the easing of foreign exchange constraint, excess liquidity found an outlet in informal imports of consumer goods. In addition, the CBT also used the large margin between its buying and selling rates for foreign exchange to partially absorb excess liquidity. Furthermore, in April 1997, the remaining foreign exchange surrender requirements to the FERF (for public enterprises) were discontinued, stopping further growth in the related credit to the FERF,48 while, through moral suasion, the CBT temporized the disbursement of the proceeds from the cotton loans to the banks in order to limit banks’ excess liquidity.

61. Despite these measures, M2 increased by 102 percent in 1997. Deposits almost tripled (held mostly by the cotton sector), while currency in circulation rose by 51 percent; in real terms, deposits increased by 37 percent and currency by 24 percent. The annual average M2 velocity halved from 30 in 1996 to 15 in 1997. However, the developments during the first months of 1998 indicate that the sharp decline in velocity resulted from a large liquidity overhang rather than a structural increase in the demand for money as inflation was lowered and the exchange rate stabilized. During January-February 1998, M2 declined by 26 percent, as the final payments for the cotton crop were made. The demand for currency, which rose sharply initially, declined as cash manats were converted into foreign exchange.

Interest rates

62. At end-1995, the government lifted a 15 percent ceiling on interest rates on bank credit to state enterprises. Since then, banks are, in principle, free to set their interest rates. However, due to the government prescribed rates on directed credits, a large share of total domestic manat credit is at controlled and often highly concessional interest rates. In March 1998, the government reintroduced an interest rate ceiling of 8–10 percent on commercial bank credit to the agricultural sector.

63. The CBT refinance rate was highly positive in real terms during most of 1997, despite downward adjustments as inflation declined (Table 20). Initially, the CBT set the refinance rate in the credit auctions. After the suspension of these auctions, the CBT set the refinance rate in line with the downward trend in inflation. The rate was, on average, 2.7 percent per month in real terms49 during the first 9 months of the year. However, the refinance rate was kept unchanged at 35 percent from July onwards, so that by February 1998 it was only slightly positive in real terms.

64. Other interest rates in the financial system generally followed the trend in the refinance rate. The treasury bill rate declined in line with the refinance rate from 120 percent per year at end-1996 to 40 percent by July 1997. The (3-month) interbank rate fluctuated widely from month to month, but closely approximated the refinance and treasury bill rates (Table 21). While deposit rates were, on average, slightly positive in real terms in the second half of the year, real lending rates on credit financed from own resources were sharply positive. However, since the average interest rate on directed credits was only about 3 percent, two-thirds of bank credit was provided at highly negative real interest rates.

C. Monetary Policy Instruments

Summary

65. The CBT has a number of instruments at its disposal to regulate bank liquidity (Box 7). Following the suspension of credit auctions in February 1997, intervention in the foreign exchange market became the CBT’s main monetary policy instrument. Reserve requirements remained unchanged during 1997. Reflecting the high liquidity in the banking system, use of the CBT’s overdraft and auxiliary credit facilities was minimal, but increased sharply in early 1998 as liquidity contracted. Treasury bills continued to be issued on tap at rates set by the MEF and issues were stepped up in the final months of 1997.

Summary of Central Bank Monetary Policy Instruments

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Source: “Turkmenistan—Strengthening the Financial System,” IMF, Monetary and Exchange Affairs Department, December 1997.

At the same time, foreign currency deposits with the Vneshekonombank were exempted to allow the bank to build-up its capital.

Intervention in the foreign exchange market

66. As noted earlier, the CBT’s main instrument for controlling liquidity during 1997 was the sale of cash foreign exchange outside the auctions to banks. Such sales increased from negligible amounts in 1996 to about US$15 million per month in 1997, which helped stabilize the exchange rate. The CBT also continued to sell foreign exchange to banks (for purchases on behalf of their customers) in the weekly foreign exchange auctions, although access to the auctions remained confined to specified purposes. Auction sales also increased in 1997.

Reserve requirements

67. Reserve requirements remained unchanged in 1997, despite strong bank liquidity and credit expansion, as the CBT concentrated on reducing excess liquidity through foreign exchange intervention (Table 22). Since banks had automatic access to the CBT’s overdraft facility and a two-day period to increase reserves up to the required level, noncompliance was exceptional and for small amounts only.

Central Bank refinance and credit facilities

68. The CBT extends credit in manat to the government and to 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 to finance the budget proper, while CBT loans are generally extended for on-lending to off-budget ministries. The government’s large deposits at the end of the first quarter of 1997 were gradually drawn down during the year and, by end-1997, the MEF had a manat 27 billion overdraft with the CBT to finance wage payments. The overdraft declined in January 1998, when the budget received its share of the fourth-quarter repayment on rescheduled gas debt, but, reflecting the difficult underlying budgetary position, increased sharply again in February. Long-term loans outstanding declined slightly due to repayments on loans disbursed in 1996.

69. The CBT’s own instruments (as opposed to directed credits) for the provision of credit to banks are credit auctions, an overdraft facility, and an auxiliary credit facility. Following the suspension of credit auctions in February 1997, CBT credit to banks has been provided on direction by the government or as overdrafts. Gross directed credits amounted to manat 338 billion in 1997 (79 percent of end-1996 M2), of which more than 80 percent was interest-free, short-term credit (less than one year) to the agricultural sector. By end-1997, the CBT opened a new interest free credit line for manat 200 billion to finance the 1998 grain crop, which was partially used to meet repayments on the 1997 loan. In addition, the manat 160 billion loan provided to the Ministry of Textiles at end-1996, which was to be repaid in 1997, was rescheduled by government decree until 1999. Foreign credit lines to finance the cotton sector were fully drawn in 1997. In March 1998, the government announced a manat 308 billion interest-free credit line from the CBT to finance the 1998 cotton crop.

70. As noted earlier, access to the overdraft facility was very limited during 199750 due both to the high level of liquidity in the banking system and the increase in the interest rate on this facility to 1.7 times the refinance rate as of January 1, 1997. However, by end-February 1998, overdrafts rose to manat 92 billion (14 percent of M2) as the liquidity situation deteriorated. Similarly, banks had no need to resort to the auxiliary credit facility in 1997.

71. The CBT’s policy is not to grant manat 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 throughout most of the year, except for a short-term bridging loan to the cotton sector in March 1997. However, the CBT intermediated in the foreign borrowing of the cotton sector, providing an official guarantee to lower the borrowing costs.51

72. In addition to these market-related instruments, the CBT continues to impose restrictions on cash holdings and, related to this, on cash withdrawals from banks. These restrictions apply to cash holdings of enterprises—which are essentially limited to wage payments—and of bank branches. The objective of the restrictions is to limit tax evasion by controlling cash transactions of enterprises.

Treasury bills

73. The MEF increased treasury bill issues, at the end of 1997 and early 1998. However, as rates and terms continue to be set by the ministry and there is no secondary market, treasury bills do not play a role in monetary policy. Treasury bills are sold monthly, mostly to banks at the initiative of the MEF. Since end-1995, the bills have a maturity of one month, are issued at face value, and are nontradable. Despite an increase in treasury bills held by banks from manat one billion at end-1996 to manat 9 billion at end-1997, these still amounted to only one percent of manat credit to the economy on the latter date. A first treasury bill auction was held in August 1996, but failed due to inadequate coordination. New rules and regulations for auctions are being prepared by the MEF and the CBT.52

D. The Financial System

Commercial banks

74. In 1997, there were no significant changes in Turkmenistan’s financial system, consisting of the CBT and 15 commercial banks.53 54 The CBT licenses and supervises the banks. Seven commercial banks 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 (Appendix II includes a list of the banks with government participation). Four banks are locally privately-owned, and two are branches of foreign banks. Twelve banks have general licenses (two more than in 1996), allowing operations with non-residents and in foreign currencies, while two have a domestic license only. Turkmenistan has no tradable financial instruments and no nonbank financial institutions, although insurance companies are gradually developing.

75. The banking system remains heavily concentrated in the traditional public sector banks. Most banks engage in financing a specific economic sector or selected public enterprises, with competition only starting to emerge. The interbank market is very small, due partly to delays in settlements.55 Three public sector banks accounted for 97 percent of all commercial bank manat credit to the economy at end-1997, and most foreign currency transactions were channeled through the State Bank for Foreign Economic Affairs (Vneshekonombank).56 Reflecting the underdevelopment of the formal private sector in Turkmenistan, 96 percent of all credit was outstanding to public sector enterprises at end-1997, although the share of the private sector in manat credit increased from 10 percent at end-1996 to 19 percent at end-1997, reflecting credit extended directly to farmers as part of the agricultural sector reforms.

76. The commercial banks play only a minor role in financial intermediation and continue to function more as administrators of public sector financial transactions. Public enterprises finance investments mainly by foreign borrowing. Manat credit is financed mainly by the CBT and is overwhelmingly (around 90 percent) short-term (less than one year). There continues to be a general lack of confidence in domestic banks, 57 due partly to continuing restrictions on cash withdrawals, and in the currency. Despite its strong growth, M2 still amounted to only 6.5 percent of GDP in 1997 (compared to around 9 percent in Kazakhstan, 12 percent in the Kyrgyz Republic, and 15 percent in Uzbekistan). Bank deposits were only 2 percent of GDP and consisted mainly of current account balances of state enterprises. Savings and other deposits held by the private sector—excluding the blocked accounts of the cotton sector—increased to about 16 percent of total manat deposits by end-1997. However, as noted earlier, this reflected changes brought by the agricultural sector reforms. Previously, most private sector deposits were held at the Savings Bank, but due to increased competition and higher interest rates, almost 90 percent of these were held by other banks by end-1997.

Bank supervision

77. Under the Law on Commercial Banks and the Central Bank Law, the CBT is responsible for the supervision of commercial banks. It has implemented a cautious licensing policy, and has also closed a number of smaller banks in recent years. In addition, the CBT has introduced a set of modern banking supervision regulations, consisting of: (i) a minimum capital requirement of 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; (ii) a capital adequacy requirement of 8 percent of risk-weighed assets, defined in line with internationally accepted standards; (iii) a liquidity ratio of 30 percent of liabilities, 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; (iv) a concentration risk ratio, limiting loans to a single borrower to 20 percent of paid-up capital. The penalty for exceeding the limit is equal to the interest earned by the bank on its excess lending; and (v) loan classification and provisioning regulations, operational since April 1996, mandating provisions according to the prescribed classification, based on the duration for which the loan repayment is overdue. Following the introduction of the new accounting system in March 1998, the CBT has turned its attention to further strengthening prudential regulations and bringing them closer to international standards.58 The CBT conducts off-site and on-site supervision; however, due to staffing constraints, not all banks can be inspected annually.

78. While banks generally comply with the prudential guidelines, their overall financial situation is not as strong as these indicators would suggest. The capital adequacy requirements assign a zero rating to credits extended by government decree (directed credits) and to foreign currency loans, assuming that these loans are fully government-guaranteed, and thus the majority of banks’ assets are excluded from the requirement. Also, although overdue loans were only about 4.5 percent of total short-term manat loans of banks at end-1997, the situation differed considerably by bank. Furthermore, directed credits may be rescheduled (and thus no longer classified as overdue) without clear indications on how they will be repaid. Finally, the large overdrafts with the CBT in the first two months of 1998 indicate that banks may have overextended their credit operations in 1997, based on the (temporarily) high deposits of the cotton sector.

Interenterprise arrears

79. The continuing large increase in interenterprise arrears—from manat 1.8 trillion or 24 percent of GDP at end-1996 to manat 4.0 trillion or 41 percent of GDP at end-1997—is a further sign of strain in the financial system.59 The share of energy enterprises in total arrears increased from 40 percent to 47 percent, while the share of agricultural enterprises remained at around 23 percent. The large growth in arrears may be explained by the difficult economic situation—especially in the gas and cotton sectors—the confiscation of enterprise revenue by state funds, and the lack of formal commercial debt instruments and interenterprise credit.

V. External Sector Developments

A. Overview

80. The vulnerability of Turkmenistan’s economy to external shocks was made dramatically clear in 1997 when the suspension of gas shipments and a sharp decline in cotton fiber exports reduced total exports by 55 percent to a post-independence low of US$759 million or 41 percent of GDP (Text Table 4, Figure 5). Imports also declined considerably. There was, moreover, a sharp deterioration in the services account associated with payments to foreign companies for construction services. Thus, the current account reverted from a small surplus in 1996 to a deficit of US$596 million (32 percent of GDP) in 1997, incurring a deficit for the first time since the country’s independence. However, the deficit was more than offset by large capital inflows, repayments on restructured 1993–95 gas debt, and partial clearance of arrears owed to Turkmenistan on 1996–97 gas exports. Thus, the balance of payments registered an overall surplus of US$157 million, somewhat higher than the average of the previous three years. Gross international reserves rose to US$1,285 million, or from 9 months of imports in 1996 to approximately 15 months of much lower imports in 1997.

Text Table 4.

Turkmenistan: Summary Balance of Payments, 1993-97

(In millions of U.S. dollars, unless otherwise indicated)

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Source: Central Bank of Turkmenistan.

Gas exports are presented on an accrual basis. Nonpayment for gas exports is recorded as arrears in the capital account Transit charges for gas exports are included in services (transportation) until 1995. As of 1996, gas is exported f.o.b. at the Turkmenistan border.

A negative sign means an increase in debt, a positive sign reflects a repayment.

Repayments on rescheduled gas debts.

Payments of previous arrears to Turkmenistan.

New arrears incurred to Turkmenistan.

New arrears incurred and previous arrears paid by Turkmenistan.

Figure 5.
Figure 5.

Turkmenistan: Selected External Indicators, 1993-97

(In millions of U.S. dollars, unless otherwise stated)

Citation: IMF Staff Country Reports 1998, 081; 10.5089/9781451837230.002.A001

Source: Data provided by the Turkmen authorities.1/ Exports are presented on an accrual basis. Arrears due to non-payment of exports are recorded in the capital account.2/ Gas exports before 1996 include transportation and transit fees.

81. Against this background, there was nonetheless some progress in specific areas. During 1997, Turkmenistan normalized relations with foreign creditors by eliminating remaining arrears on the servicing of its foreign debt and refrained from incurring new arrears. Trade ties with members of the Economic Cooperation Organization (ECO)60—which promotes regional trade, investment, and economic cooperation—were further developed, Although regional trade remained relatively small, Turkmenistan played an increasing role as a transit country, especially in trade to and from the Persian Gulf. This was in part spurred by the opening of new communication routes, such as a rail link with the Islamic Republic of Iran in late 1996 and the Korpedzhe-Kurdkui gas pipeline in December 1997. Also, a new 715 km fiber optics cable was completed with the Islamic Republic of Iran, which will be part of a 17,000 km network linking China to Germany.

B. Exports

82. The composition of Turkmenistan’s exports has remained essentially the same since the Soviet period, when it was one of the main providers of energy and cotton to the Union. Gas, oil products, and cotton continue to account for the bulk of exports, although their share in total exports fell from 92 percent in 1996 to 84 percent in 1997, due to the sharp decline in gas and cotton exports. Of these three goods, the share of oil products has tripled from 12 percent of total exports in 1996 to 36 percent in 1997, reflecting the combined effect of lower gas and cotton exports and higher exports of oil products.

Energy

83. Gas exports averaged about 24 bcm annually during 1994–96, but declined by 73 percent to 6.5 bcm in 1997 (Table 23). Turkmenistan had concluded provisional gas export contracts with the marketing company Itera to export 20 bcm of gas to traditional trading partners (notable Ukraine) and 20 bcm to other countries (in Central Europe) during 1997. All exports were to be at a price of US$42 per thousand cubic meters (tcm); payments would continue to be 53 percent in goods and 47 percent in cash for traditional partners, and equally split between goods and cash for Eastern and Central European customers. However, in the first quarter of 1997, Turkmenistan received only limited payments on outstanding arrears for 1996 gas exports, and no payments came through on gas exports of that quarter. This prompted the government to suspend all gas-exports as of March 26, 1997. Following an agreement with Itera in June (Box 8), most outstanding arrears for 1996 were paid in the remainder of 1997 (mainly in goods), while only a small amount (US$62 million or 22.5 percent of the total owed) was received (all in goods) for gas exports in the first quarter of 1997 (Tables 24 and 25).

84. Reflecting the increase in crude-oil production following stepped up foreign investment in this sector, exports of oil products increased by 32 percent to US$274 million in 1997, equaling the value of gas exports for the first time in the country’s history. Although full advance payment in cash is required for oil exports, some bartering still occurred in 1997, particularly against construction services from Turkey. Nevertheless, oil constituted the main source of cash foreign exchange earnings in 1997, by far surpassing gas. Oil revenues, however, were mostly earmarked for the servicing of the foreign debt incurred for the upgrading of the Turkmenbashi oil refinery.

85. Turkmenistan exports electricity to Kazakhstan and Tajikistan. As in the case of gas, however, export receipts have been hampered by nonpayment, to which the authorities have responded by periodically switching off supplies. This has resulted in a steady decline in the value of electricity exports from US$99 million in 1993, to US$58 million in 1996, and US$28 million in 1997. In the latter year, supplies were cut off for several months.

Cotton

86. Traditionally, cotton fiber has been Turkmenistan’s second most important export product. Since independence, the main destination for cotton fiber exports has gradually shifted from the Russian Federation and other countries of the former Soviet Union to South-East Asia, although Turkey is also becoming an increasingly important market. Following a Presidential decree of 1996, which banned barter trade in a number of commodities, cotton exports are settled mostly in cash. Cotton exports fell by 72 percent to US$90 million in 1997, because of the very poor cotton harvest in 1996, which lowered fiber production. The volume of fiber exports declined from 215 thousand mt to 63 thousand mt, while the average export price was approximately stable. Export receipts from cotton fiber were especially low in the third quarter, when only very low grade fiber was sold. While the 1997 cotton harvest would have allowed a strong rebound in exports in the fourth quarter, only 20 thousand mt of fiber were sold as the cotton company withheld exports in anticipation of higher prices.

Other exports

87. Other exports, consisting mainly of textile products, carpets, silk, and minerals, recovered by 20 percent to US$93 million in 1997. Part of this increase was due to increased textile production and exports, following an increase in the number of textile factories. Textiles were exported mainly to other CIS countries. (Table 26).

C. Imports

88. Turkmenistan is heavily dependent on imports of foodstuff and manufactured goods. At the same time, since much of the energy trade continues to be conducted under barter agreements, a significant part of imports consist of low-quality products, often valued at prices that do not reflect world market prices. There are very few effective mechanisms in place to ensure that such imports match local demand. In 1997, private imports of consumer goods through informal (“shuttle trade”) channels increased considerably, reflecting greater access to foreign exchange. This helped increase consumer goods availability in the market and ensured more favorable prices to consumers compared to over-priced barter equivalents obtained in official trade.

89. Imports declined to US$1 billion (55 percent of GDP) in 1997, from about US$1.7 billion (70 percent of GDP) during 1994–95, and (excluding imports of aircraft)61 US$1.4 billion in 1996. This decline was driven mostly by lower barter imports as gas exports declined, 62 while imports of investment goods (mostly foreign-financed) remained relatively high. Half of imports (slightly higher than in 1996) were from Ukraine, the Russian Federation, and other CIS countries, reflecting mainly imports of spare parts to maintain the existing stock of machinery and equipment (Table 28). Turkey was the largest non-CIS import partner, accounting for 13 percent of total imports, followed by the United States and Germany.

D. Services

90. The deficit on services increased sharply from US$150 million in 1996 to US$414 million in 1997, on an account mainly of an almost doubling in payments for construction services to US$240 million,63 which reflected an ambitious domestic construction program and the completion of the pipeline to the northern part of the Islamic Republic of Iran.64 In addition, the country’s land locked position and geographic isolation result in high transportation and travel payments, which are only partly offset by receipts from transit fees. In 1997, there was a net outflow of US$114 million on travel and transportation services.

E. Capital Account

91. The capital account surplus increased from US$55 million in 1996 to US$828 million in 1997 (Table 29). The improvement was in line with the trend observed since 1993, as new arrears incurred on payments for Turkmenistan’s gas exports declined and payments of previous arrears increased. The trend was reinforced in 1997 by a sharp acceleration in foreign borrowing, which resulted in a doubling of Turkmenistan’s external debt.

Foreign direct investment

92. In recent years, the government has encouraged foreign direct investment—mostly in the form of joint ventures with state enterprises—to develop the oil and textile sectors. To this end, Turkmenistan has enacted a set of laws: (i) incorporating a number of guarantees and privileges for foreign investors, including tax incentives; (ii) allowing individuals and companies in Turkmenistan to conduct transactions with nonresidents, regardless of ownership; (iii) giving the right to foreign legal entities or physical persons to use land, natural resources, and other assets in Turkmenistan; and (iv) creating a number of free economic zones. The regulations for foreign investments in the energy sector were revised to better reflect international practices and increase transparency. In addition, a Petroleum Law was passed. The Law restricts the type and level of taxes that can be imposed on foreign investors in the sector, and allows the free imports and exports of production equipment. The Law includes a model Production Sharing Agreement, that provides for compensation in case the investor is negatively affected by laws not included in the agreement. As regards participation in Turkmenistan’s privatization program, a decree issued in August 1997 recognizes equal rights to foreign and domestic investors.

93. Despite these moves, foreign direct investment has declined steadily from US$233 million in 1995 to US$108 million in 1997. Among the reasons for the slackening interest from foreign investors are concerns that the country is still in the early stages of the reform process and that investors’ rights are not sufficiently protected. The two production sharing agreements in the oil sector noted earlier were the main foreign investments in 1997. There is some foreign interest, however, in smaller projects, mainly in the textile sector, although, in the absence of measures to address the above-noted concerns of foreign investors, the recent trends in FDI could continue, at least in the short run.

Debt owed to Turkmenistan

94. Turkmenistan has accumulated large claims on other countries in the region, mainly due to nonpayment for its gas exports (Box 8). Such claims, however, declined for the first time in 1997. Although less than a quarter of 1997 gas exports was paid for, by far the lowest collection ratio since independence, there were improvements in other respects, notably: (i) the absolute amount of new arrears was relatively small as gas exports ceased early in the year; (ii) Ukraine started to repay its rescheduled gas debt as the grace period ended; and (iii) payments arrears on 1996 gas exports were mostly cleared during 1997. There was a total net inflow of US$417 million from repayments of gas debt and arrears, compared to a net outflow of US$58 million in 1996. However, Turkmenistan provided about US$200 million in net trade-credits to Itera (Text Table 4). As a result of these developments, the total stock of gas debt owed to Turkmenistan declined to US$1,284 million, of which US$1,031 million fell under long-term rescheduling agreements (Table 24).

95. Turkmenistan’s claims on Kazakhstan and Tajikistan related to payments arrears for electricity exports declined from US$52 million in 1996 to about US$7 million in 1997 as some payments were received and new arrears were largely avoided by stopping exports when delays occurred. Other arrears owed to Turkmenistan consist mainly of unsettled balances on correspondent accounts with Ukraine, Tajikistan, and Azerbaijan, dating from 1992–93 and amounting (according to the Turkmen authorities) to about US$67 million. There was no progress on these claims in 1997 as the parties continued to differ on the applicable exchange rates.65 Excluding debt on correspondent accounts, total debt owed to Turkmenistan declined by US$303 million to US$1,291 million (70 percent of GDP by end-1997), slightly exceeding the country’s gross official reserves and closely approximating its outstanding stock of government and government-guaranteed external debt. About 45 percent of this debt was owed by Ukraine, 30 percent by Georgia, 16 percent by Itera, and the remainder by other countries (Armenia, Azerbaijan, Kazakhstan, and Tajikistan).

Gas Debt Owed to Turkmenistan

Turkmenistan has accumulated large claims on other countries totaling US$1.3 billion by end-1997. Following the increase in energy prices to international levels during 1992–93, Ukraine and Georgia, and to a lesser extent Azerbaijan and Armenia, incurred arrears on payments for gas imports from Turkmenistan. To regularize these arrears and assist the debtor countries, Turkmenistan concluded agreements with Ukraine and Azerbaijan (in 1995) and Georgia and Armenia (in 1996), converting the arrears incurred during 1993–94 into long-term official debt (with a maturity of 6–7 years), and rescheduling arrears incurred in 1995 on a short-term basis. Under the agreements, the total amount of long-term debt was established at US$1,188 million, mainly payable in cash, and the short-term debt at US$47 million, mainly payable in goods. Ukraine and Georgia owed about 60 percent and 34 percent of this debt, respectively. Under the reform programs for their countries, the governments of Turkmenistan’s trading partners stopped guaranteeing payments for gas imports as of 1996, and thus incurred no further official import payments obligations to Turkmenistan.

The long-term rescheduling agreements have mostly been implemented, although there have been some problems with Azerbaijan’s payments. Also, in view of its very difficult foreign exchange situation, Georgia has requested Turkmenistan to lengthen the grace period for principal repayments, which ended in the first quarter of 1998. There are ongoing negotiations with both countries to find a mutually acceptable solution.

Arrears were also accumulated by the company Itera, which marketed Turkmenistan’s gas exports in 1996 and 1997. In 1996, these arrears amounted to US$268 million (including interest penalties) on its own contract, and to US$91 million on special contracts, mainly concerning barter sales for grain between Turkmenistan and Ukrainian companies. In the first quarter of 1997, Itera incurred further arrears of US$274 million on payments for Turkmenistan’s gas exports in this period. In June 1997, Turkmenistan reached agreement with Itera about the remaining arrears at that time of US$469 million (including US$21 million on special contracts), which were to be repaid as soon as possible. By end-1997, US$41 million (of which US$20 million was owed by Armgazprom following a debt swap with Itera) remained outstanding on the 1996 exports, and US$212 million on the first quarter 1997 gas exports.

External debt and international reserves

96. Virtually all foreign debt of Turkmenistan is owed by the public sector, mostly by off-budget ministries and state enterprises. All medium- and long-term foreign borrowing by these entities is approved and guaranteed by the government. A few medium- and long-term loans have been channeled through the CBT in order to obtain more favorable terms by using its official guarantee and collateral, while the bulk of the short-term borrowing in 1997 was also channeled through the CBT. However, most foreign borrowing takes place through the Vneshekonombank, which is responsible for insuring an orderly access to international capital markets and for the timely servicing of public external debt. In the initial years of independence, public enterprises borrowed heavily on relatively short maturities (2–3 years) under government guarantees issued by line ministries. As of mid-1996, the issuance of such guarantees was made subject to clearance by the Foreign Currency Committee (FCC) and registration with the State Agency for Foreign Investment (SAFI). Moreover, a key objective of Vneshekonombank’s external debt management strategy66 has been to lengthen the maturity profile of Turkmenistan’s foreign debt. As part of this effort, the average maturity of new loans rose from 5½ years in 1996 to 7½ years in 1997. Turkmenistan has incurred some arrears on its public foreign debt, which amounted to US$125 million at end-1995, but declined to US$43 million at end-1996. The arrears remaining at end-1996 stemmed mostly from administrative problems—such as disputes on which public entity should service the debt and difficulties in securing allocations from the FERF—rather than from the scarcity of foreign exchange. All external arrears were cleared by the end of 1997. Turkmenistan also received international credit ratings (on sovereign debt) during 1997, although these indicated rather high credit risk.

97. Turkmenistan’s external debt stock more than doubled from US$0.7 billion to US$1.4 billion or from 32 percent to 74 percent of GDP in 1997 (Table 30). Almost two-thirds of this increase was accounted for by loans to the agricultural sector, consisting mostly (almost 90 percent) of short-term loans to the cotton sector. Credit to the energy sector accounted for 28 percent of the increase, of which about half related to disbursements under loans to upgrade the Turkmenbashi oil refinery, and most of the remainder to the financing of the new gas pipeline to the Islamic Republic of Iran. Total undisbursed loan commitments (mostly for the Turkmenbashi oil refinery) were approximately US$480 million (25 percent of GDP) at the end of 1997. Almost half of the outstanding foreign debt contracted was from German financial institutions, and 20 percent from institutions in the United States.

98. Turkmenistan’s foreign borrowing has been almost exclusively on nonconcessional terms. In addition to an Institution Building/Technical Assistance loan (US$25 million) approved in 1994, the World Bank approved an Urban Transport Project (US$34 million) and a Water Supply and Sanitation Project (US$30 million) loans in 1997.67 However, reflecting slow implementation, only US$8.5 million was disbursed under these loans by end-1997. The EBRD granted a Small and Medium Enterprise Credit (US$35 million, with a disbursement so far of US$3 million) in 1994, provided a financing package (equity and credit) for a joint-venture in textiles (US$31 million) in 1996, and approved Highway (US$50 million) and Port Projects (US$30 million) in 1997. However, disbursements have been limited.

99. Although Turkmenistan incurred relatively little short-term debt (with a maturity of less than one year) during 1995–96, as noted above, such debt increased very rapidly in 1997, with its share in Turkmenistan’s outstanding debt stock rising from about 15–20 percent at end-1996 to about a third at end-1997. Initially, this borrowing was to substitute for more costly cotton future contracts as a way to prefinance the 1997 cotton crop. However, only about a third of the loan proceeds was used for this purpose, while the remainder was channeled to the market through CBT foreign exchange sales.

100. Reflecting the lengthened maturity profile, debt service increased only slightly in nominal terms in 1997, but sharply reduced export earnings raised the debt service ratio to 42 percent from 18 percent in 1996. However, in relation to exports paid in cash plus repayments on rescheduled gas debt, the ratio declined from 75 percent in 1996 to 52 percent in 1997, principally because of the initiation of gas debt repayments. While Turkmenistan’s external debt may not be excessive in relation to its foreign exchange holdings and heavy claims on other countries in the region, given the high ratio (despite the recent decline) between debt service obligations and cash receipts from exports and repayments of rescheduled gas debt, the government has had to centralize foreign exchange income from major export sectors in state funds (see Box 4) in order to ensure the timely servicing of foreign debt.

101. In light of the persistent balance of payments surpluses recorded in recent years (US$157 million in 1997), Turkmenistan’s gross international reserves have increased steadily to reach US$1,285 million (15 months of imports) by end-1997. The country’s policy has been to maintain a relatively comfortable level of international reserves to guard against external stocks, notably large swings in gas export receipts.

F. Exchange Rate Developments

102. Exchange rates68 remained fairly stable in nominal terms during the twelve months through December 1997, although there were some notable movements early in the year. Following the rapid monetary expansion in December 1996, the parallel market rate depreciated sharply from manat 5,200/US$ at the outset of 1997 to manat 6,000/US$ by the third week of January (Table 31). In response, the CBT increased sales to the market, mainly through direct sales to banks outside the auctions. As a result, the depreciation of the commercial bank rate, which closely follows the parallel market rate, was contained at manat 5,500/US$ and the parallel market rate appreciated to the same level by early February. As of May 1997, following an eight-month period during which the official exchange rate was adjusted on a weekly basis, the CBT fixed the official rate at manat 4,165/US$ and reduced its selling rate to banks outside the auctions from manat 5,300/US$ to manat 5,250/US$.69 Thus, the spread between the official and commercial bank rates, which had peaked at around 30 percent earlier in the year, narrowed to approximately 25 percent in the second half of the year. Due to the nominal stability of the exchange rates and the decline in inflation, the official and commercial bank rates appreciated in real terms by 15 percent and 17 percent, respectively, during 1997. On an annual average basis, the real appreciation of the two rates was 25 percent and 37 percent, respectively (Figure 6). On April 20, 1998, the official exchange rate was devalued by 20 percent to the level of the commercial bank rate of manat 5,200/US$, effectively unifying the two rates. At the same time, the CBT withdrew its recommended rate for commercial banks, but set a maximum of three percent for banks’ sales commissions. The commercial bank selling rate to the public remained at about manat 5,350/US$ through May 1998.

Figure 6.
Figure 6.

Turkmenistan: Exchange Rates, 1994-98

Citation: IMF Staff Country Reports 1998, 081; 10.5089/9781451837230.002.A001

Source: Turkmen authorities.1/ A decrease indicates a depreciation.

VI. Exchange and Trade System

A. Exchange Arrangements70

103. Foreign exchange transactions in Turkmenistan are conducted at three different exchange rates: the official rate, the commercial bank rate, and the curb or parallel market rate. The official rate applies to noncash official transactions only and is normally set in weekly sessions, conducted by the CBT—usually on Friday, with the new rate applicable as of the following Monday. Although these sessions are called auctions, the official rate is determined by the CBT, which announces it at the outset of the session and, if demand for foreign exchange exceeds the CBT’s target, meets this excess in the next session. Only authorized banks participate in the auctions strictly on behalf of their customers and for transactions approved by the CBT and the Foreign Currency Committee (FCC). The types of approved transactions are specified in a regulation issued by the CBT on September 25, 1996, and consist of: (i) imports of capital goods and other investment related payments; (ii) imports of foodstuffs, medicines, and other essential consumer goods; (iii) imports of raw materials, equipment, spare parts, and other inputs; (iv) servicing of foreign debt and other obligations under international agreements and treaties; and (v) foreign exchange obligations by ministerial departments and government agencies. There is no buy/sell spread on the official rate, but since April 20, 1998, the CBT charges one percent commission on its sales. Official rates for other currencies are set according to U.S. dollar cross rates.

104. Commercial banks are, in principle, free to set their buying and selling rates, although in practice, these are strongly influenced by the CBT. First, until the unification of the exchange rates in April 1998, the CBT issued recommendations for the banks’ selling rates, which were closely followed. Second, in addition to auction sales—which are for specific import transactions—the CBT sells cash foreign exchange to banks for general purposes at a rate informally linked to developments in the parallel market rate, with a bank commission that may not exceed 5 percent (3 percent since April 20, 1998). Since banks’ purchases from the CBT substantially exceed their purchases from the market, the CBT’s selling rate mostly determines banks’ exchange rates.

105. Commercial banks are allowed to freely transact in cash foreign exchange with individuals, but sales may not, without prior authorization from the CBT, exceed the equivalent of US$1,000 per transaction. However, there are no limits on the frequency of such transactions. Entities other than physical persons may not buy cash foreign exchange from banks. Thus, enterprises cannot legally purchase foreign exchange from banks except for transactions for which banks have obtained, on their behalf, foreign exchange through the auctions. However, enterprises can sell foreign exchange to banks from their foreign currency accounts against manat (cash or noncash) at the commercial bank exchange rate.

106. The curb or parallel market, which is generally a good indicator of market demand and supply of foreign exchange, is tolerated. Foreign exchange transactions outside the banking system are not legally allowed, but enforcement varies and penalties are seldom applied. Although there was ample supply of foreign exchange through the banking system in 1997, the curb market continued to exist (possibly for tax evasion purposes)—at a very small premium of 2–3 percent above the commercial bank rate.

B. Prescription of Currency

107. Residents of Turkmenistan are required to use manat for domestic transactions. However, foreign currency is used as a medium of exchange in some sectors, most notably in hotels and restaurants. A presidential decree issued in 1994 to permit the domestic circulation of foreign currency was withdrawn in December 1995. Nevertheless, reflecting low confidence in the manat, the U.S. dollar continues to be widely used.

C. External Payments and Receipts

State Commodity Exchange (SCE)

108. The SCE was created in 1994 with the objective of regulating exports and imports and obtaining world prices for exports. Trade contracts for exports and imports of the public and private sectors, including barter transactions but excluding gas exports, must be registered with the SCE. The SCE may not authorize a transaction if, in its opinion, the terms of the contract are not sufficiently favorable to Turkmenistan. Licenses, required for all exports, are issued by the Ministry of External Affairs. There is a short negative list of prohibited exports, mainly for reasons of national cultural patrimony. The SCE charges a commission of 0.2 percent on all transactions.

Proceeds from exports and invisibles

109. All exporters are subject to a repatriation requirement and most to a surrender requirement at the official exchange rate. Before April 1, 1997, cash receipts from the export of oil and gas were subject to a 30 percent surrender requirement to the CBT and a 40 percent foreign exchange tax to the FERF. Other public sector exports (apart from cotton) were subject to a surrender requirement of 50 percent, of which 30 percent was submitted to the FERF and 20 percent to the CBT. Proceeds from exports of cotton and from the private sector were not subject to a surrender requirement. On April 1, 1997, the surrender requirements were unified at 50 percent, to be channeled entirely to the CBT, while all surrenders to the FERF, including the 40 percent foreign exchange tax on cash receipts from oil/gas exports, were eliminated. However, on December 25, 1997, the government reintroduced a foreign exchange tax to the FERF on cash receipts from gas exports, at a rate of 50 percent. In addition, such receipts are subject to a surrender requirement (to the CBT) of 25 percent. Enterprises are allowed to keep the non-surrendered part of their foreign exchange receipts in a foreign currency account in Turkmenistan, which can be used without restrictions. Proceeds from the export of oil products produced by the Turkmenbashi refinery are exempt from the surrender requirement in order to meet the foreign debt service burden associated with the refurbishment of this refinery. Only very occasionally do public sector exporters request the CBT to buy part of the foreign exchange that they are allowed to keep. Such transactions take place at the official exchange rate.

110. According to a Presidential decree of 1995, goods cannot be shipped for export by a state company until full payment has been received or guaranteed through an international letter of credit or equivalent means. The decree explicitly prohibits barter transactions for petroleum and petroleum derivatives and electricity. In practice, however, the decree is not strictly enforced and a considerable part of trade continues to be in barter, without prepayments or letter of credit. All participants in foreign exchange and trade transactions must be registered with the Ministry of Foreign Economic Relations. To open an account with a bank abroad requires an authorization by the CBT.

Payments for imports and invisibles

111. Imports are free of all legal restrictions and import licenses are not required. There are no import tariffs (except a 0.5 percent customs administration fee) and no quota restrictions. However, noncash foreign exchange to pay for imports can, in principle, only be obtained through the auction market, subject to approval by the CBT and the FCC. Letters of credit for imports can be opened only after the relevant contracts have been approved by the SCE and payments for imports can only be made when the goods have arrived in Turkmenistan. There is a negative list of prohibited imports, mainly for reasons of health or national security.

D. Exchange Restrictions

112. When the manat was introduced in 1993, the government passed the Foreign Exchange Regulation Law. This law guarantees the freedom to make payments and transfers for all international transactions. Despite this legislation, several important restrictions are still in place. First, as noted above, all foreign exchange purchases from the auctions require the approval of the CBT and FCC. Second, access to cash 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. In 1997, Turkmenistan maintained multiple currency practices arising from the application of the commercial banks’ rate to certain transactions. Although these practices were eliminated with the unification of the exchange rates on April 20, 1998, a new multiple currency practice arose from the introduction of the 50 percent foreign exchange tax on gas exports in December 1997.

113. In order to rule out the circumvention of the auction market and its prescreening process, it is illegal for enterprises to buy cash dollars from banks with manat deposits. 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

114. 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. Inward foreign direct investments are permitted, in principle, in all sectors of the economy but require approval by the Ministry of Economy and Finance, or by the Council of Ministers if the amount exceeds US$500,000. Foreign investors may reinvest their profits in Turkmenistan, repatriate their profits, or place them in national or foreign currency bank deposits. Both residents and nonresidents may hold foreign currency deposits. Commercial banks in Turkmenistan also offer anonymous deposits to nonresidents.

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

Turkmenistan: Recent Economic Developments
Author: International Monetary Fund