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p. 38 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asian Republics Azerbaijan Kazakhstan Kyrgyz Republic Tajikistan Turkmenistan Uzbekistan The Pacific III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia : Central Asian Republics

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Turkmenistan

With a third successive year of around 20% rates of growth, GDP in 2001 recovered to above pre-independence levels. Economic prospects, however, remain strongly linked to export earnings from natural gas, oil, and cotton. While industrial and agricultural diversification policies have had some success, policy distortions in the foreign exchange regime discourage private sector growth and inflows of FDI.

Macronomic Assessment

With GDP growth in 2001 officially reported at 20.5%, the economy registered the third year in a row of around 20% expansion. Turkmenistan has benefited from positive developments in external circumstances, which, to a large extent, deter- mine the economic performance and prospects of its export-dependent economy. The continued economic upturn in the Russian Federation and the Ukraine, which together absorbed 88% of total natural gas exports, and in other Commonwealth of Independent States (CIS) economies sustained export demand. Natural gas exports rose because of fuller capacity utilization of a new pipeline to Iran and a larger offtake by the Ukraine and other CIS importers via the Russian Federation. Nearly 7 billion cubic meters (bcm) of gas were exported in 2001 through the pipeline. Natural gas production increased to 51.3 bcm, a rise of 9% over the 2000 level. Of this, 37.3 bcm were exported, 11% more than in the previous year. Oil production also rose, by 12%. The value of industrial output, which consists mainly of oil and gas production, registered an impressive growth rate of 27%. However, transport bottlenecks continued to impose a binding constraint on further expansion of energy product exports.

Cotton exports, the other major revenue earner for the economy, also increased, in their case by 7%, and were helped by a 10% larger harvest than in 2001 (according to official figures). The superior quality of Turkmenistan’s cotton fiber and the higher share of processed and value-added cotton exports partly mitigated the impact of a fairly sharp decline in average international cotton prices. Aided by favorable weather conditions and continued policy support, wheat production registered growth of 18% and contributed to a 23% rise in agricultural output. The emergence of a small export surplus in cereals testified to the success of the Government’s policies to diversify agriculture away from a cotton monoculture and to generate self-sufficiency in grain production. The services sector has lagged behind industry and agriculture, as a result of weak development in private financial and retail trade activities. Transport and construction, which remain largely in government hands, showed growth of 4% and 7%, respectively, during January–October 2001, compared with the same period in 2000.

A tight monetary policy stance brought down inflation further to about 6% during the first 6 months of 2001, from an average level of 7.4% in 2000. The banking sector, dominated by public sector banks and government control over all foreign exchange transactions, remains underdeveloped. Essentially, the Government is operating a directed banking sector with public sector commercial banks having very limited autonomy and scope for credit management. The differential between the market and official exchange rates was unchanged over the year, with the market rate depreciating by less than 1% (to 21,500 manat to the dollar) and the official rate remaining pegged at 5,200 manat to the dollar. The huge differential between the two rates has generated widespread rent seeking and distortions that effectively discourage private sector growth.

The state budget recorded a deficit of 291 billion manat (1.2% of GDP) during January– October 2001. Revenues, at TMM5.37 trillion, were 14% short of the annual target and expenditures were 15% below target at TMM5.66 trillion. The true state of the fiscal balance, however, remains unclear because of the large number of off-budget accounts, including the foreign exchange reserve fund, which is managed directly by the President’s office and which absorbs a substantial share of foreign exchange revenues from exports. Foreign trade turnover, equivalent to nearly 80% of GDP, increased by 16% from the 2000 level and was estimated at $4.49 billion. Despite a 32% rise in imports—a result of capital goods imports for the Turkmenbashi oil refinery and other projects in the petrochemical and textile sectors—compared with only a 5% rise in exports, the trade balance still generated a small surplus of $275 million. While details of invisible trade flows are not available, there are significant outflows of foreign exchange on this account, leaving the external current account with only a marginal surplus.

Poverty incidence in Turkmenistan is perhaps the lowest among the transition economies of Central Asia. Extensive subsidies—the sustainability of which, however, remains questionable—in the provisioning of basic goods and services for the entire population have helped shelter people from price increases. Nearly 80% of total annual public expenditures are directed toward social and public services. The high GDP growth rates achieved in the last 3 years, combined with the Government’s scheme for subsidized availability of basic commodities and services, has brought down the level of absolute poverty to negligible levels. Relative poverty, defined as the proportion of the population living on less than 50% of the country’s average per capita income, is estimated at 15.9%.

Policy Developments

The Government has adopted a three-pronged overall economic policy framework: a transition strategy that accords to the state the leading role in economic development, a gradual approach to economic liberalization and privatization, and a special emphasis on minimizing social costs by subsidizing the provision of basic necessities and services. Within this framework, the Government is also pursuing the twin goals of industrial diversification and self-sufficiency in food and other basic goods.

As part of the diversification strategy, some public sector investment and foreign exchange earnings have been used for establishing textile and garment manufacturing plants, often in collaboration with Turkish partners. These joint ventures are now exporting to the US and Europe. As a result, the share of the textile sector in total industrial production increased from 10.4% to 26% during 1995–2000 while the share of cotton processed domestically in total cotton fiber production rose from 3% to 35% over the same period. However, given the multiple exchange rates and hidden subsidies available to these firms, their financial and economic viability cannot easily be ascertained.

The Government is also attempting to raise the output of processed oil and petrochemical products, and thus achieve higher value-added exports. In pursuit of this, it is undertaking a $1.5 billion upgrade of the Turkmenbashi refinery and developing an associated petrochemicals complex, which is expected to come into operation later in 2002. Another smaller refining and processing facility is being built near Atamurat, in Lebap province, to supply neighboring countries such as Afghanistan and Uzbekistan.

Outlook for 2002–2003

The economic outlook over the next few years remains strongly linked to the export prospects for natural gas, cotton, and—to an increasing extent—crude oil and refined oil products. The country currently produces 51 bcm of gas, representing the utilization of only half its installed production capacity. In 2002, the production target for gas is 72 bcm, a near 40% increase over 2001’s level. Similarly, with expanded capacity coming onstream at the Turkmenbashi oil refinery in 2002, a marked increase in production and exports of refined oil products can be expected. Moreover, exports of natural gas, oil, and other basic commodities to the northern and western regions of Afghanistan, which border Turkmenistan, are likely to strengthen over the medium term.

Based on these outcomes, GDP growth is expected to be around 11% in both 2002 and 2003 (Figure 2.25). The official target for GDP growth in 2002 is 18%, which could be achieved if some of the more ambitious (but less likely) export contracts for natural gas materialize, and if exports of textiles and garments are substantially larger than in 2001. On the other hand, there is a risk that, because of the Government’s inflexible policy stance with respect to the dominant role of the state in the economy and its maintenance of an extensive system of regulations and controls over trade and industrial activity, the economy may become increasingly isolated from global trade, investment, and financial flows. This could pull down future rates of economic growth.

The risk of an externally induced significant economic downturn, however, may be quite weak, for several reasons. These include the dependence of some CIS economies on energy supplies from Turkmenistan; the emergence of import demand from reconstruction activity in neighboring Afghanistan (the two countries already have extensive trade and commercial links); and the ready market for the country’s high-quality cotton fiber in industrial economies, with which strong export links have been established since independence.

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