IMF Executive Board Concludes 2013 Article IV Consultation with Turkmenistan
On July 30, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Turkmenistan and considered and endorsed the staff appraisal on a lapse of time basis.
With Turkmenistan commanding the world’s fourth largest proven reserves of natural gas, large hydrocarbon exports have produced strong economic growth over the past decade. Output growth averaged 12 percent and GDP per capita more than tripled in the last 10 years to reach the upper-middle-income economy level. Economic growth has been based on hydrocarbon sector and state-led investment.
In 2012, Turkmenistan recorded a second straight year of double-digit real GDP growth at 11.1 percent as high public investment fueled strong non-hydrocarbon growth. The external current account was broadly in balance as growth in imports of investment goods outpaced growth in exports. External buffers remain strong. Inflation increased to 7.8 percent year-on-year by end-2012, reflecting administrative price increases for some food and transportation services.
The fiscal position strengthened in 2012 with the state budget non-hydrocarbon primary deficit and the overall non-hydrocarbon deficit (including Fund staff estimates of extrabudgetary funds activities) declining as a share of non-hydrocarbon GDP. The fiscal surplus, generated when hydrocarbon revenues are included, was transferred to the Stabilization Fund which provides funding for the newly created State Development Bank (SDB) for lending to public projects.
The peg against the US dollar continued to anchor monetary policy. Manat broad money growth decelerated considerably in 2012, but the pace of the credit to the economy remained unchanged at 23 percent. The share of directed lending by the Central Bank of Turkmenistan to state-owned enterprises declined year-on-year as some lending shifted to the SDB. As a result, the SDB’s share in total credit to the economy increased to a quarter of total credit in 2012.
The near-term growth prospects for 2013 and 2014 are positive. Staff projects GDP growth of 12 percent in 2013 and 10.4 percent in 2014 as a result of increased public investment and growing gas exports to China. Inflation is projected to slightly decline through the end of 2014. The key risks to the forecast arise from uncertainty over gas export volumes to Iran and the possibility of lower gas prices or slower demand from China or Russia.
Executive Board Assessment
In concluding the 2013 Article IV consultation with Turkmenistan, the Executive Directors endorsed the staff’s appraisal as follows:
Turkmenistan faces the benefits and challenges posed by large hydrocarbon wealth. Large gas and oil exports facilitated strong economic performance and the accumulation of considerable buffers. Managing and using the hydrocarbon resources to foster broad-based and private-sector-led growth while maintaining macroeconomic stability will require prudent policies and bold structural reforms.
Fiscal policy should shift to a neutral stance to ensure that spending does not fuel inflation. The authorities’ budget implies an expansionary fiscal stance in 2013, driven by higher investment. However, a neutral fiscal stance is needed to support the authorities’ low inflation objective, especially given the limited monetary policy tools. A neutral stance would entail maintaining the primary non-hydrocarbon fiscal deficit unchanged as a share of non-hydrocarbon GDP in 2013–14, which can be achieved by cutting non-priority capital spending by about one percent of GDP in each year.
Putting in place a comprehensive framework in line with IMF guidance for resource rich countries would help anchor fiscal policy decisions. Given Turkmenistan’s long gas production horizon, a price-based rule combined with a structural primary balance target could help insulate government spending from hydrocarbon price volatility. Such a rule could be supplemented by the strengthening of fiscal institutions and the Public Financial Management (PFM) framework. The new budget code under consideration by the parliament provides an excellent opportunity to take steps in this direction.
The authorities need to enhance the quality and transparency of public spending. The plans for continued large public investment spending should be accompanied by improved capacity to monitor expenditure efficiency and transparency, including procedures for public procurement and ex post assessments. Otherwise, the high spending may compromise long-term fiscal sustainability, fuel opportunities for corruption, and weaken prospects for the diversification of the non-hydrocarbon economy.
Phasing out directed lending will enable the development of monetary tools. Monetary policy is constrained by large directed lending by the central bank and the need to support a U.S. dollar exchange rate peg. Directed lending distorts price and interest rate signals and crowds out private intermediation. The authorities need to follow through with their intentions to wind down directed lending by establishing a timetable to guide implementation. Over the longer term, capacity needs to be built to support greater exchange rate flexibility to help smooth out the impact of commodity price shocks on the real economy.
Bold reforms to the state-owned financial sector are needed to allow the development of private financial intermediation. Positive steps that have been taken in recent years include the introduction of International Financial Reporting Standards. Efforts should now focus on allowing market-based mechanisms in the determination of interest rates and lending activities, improving banking supervision and risk management practices, and introducing corporate governance standards in banks.
Accelerating market economy reforms would facilitate private sector activity and diversification away from state-led development. The government’s footprint in the real economy needs to be reduced. Reforms to liberalize prices and privatize key areas of the non-hydrocarbon economy require follow through in a transparent and competitive manner. The recently announced decision to pursue WTO observer status is promising. Gains in competitiveness could be achieved by reforms aimed at improving the business climate and facilitating trade, including by liberalizing foreign exchange regulations. Opportunities for corruption could also be tackled by further strengthening the anti-money laundering framework through an effective implementation of preventive measures by financial institutions.
The authorities need to increase data transparency and quality. Improving statistical capacity is necessary to strengthen the analysis of macroeconomic policy and facilitate economic decision making. The recent efforts to bring national statistics into line with international standards are welcome. These efforts should lead to the opening of a country page in the IMF International Financial Statistics and facilitate timely dissemination of data. To increase data transparency, the authorities are strongly encouraged to join the IMF’s General Data Dissemination System (GDDS), which could facilitate the development of their national statistical system, including through technical assistance.