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p. 40 of 68 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asia Azerbaijan Kazakhstan Kyrgyz Republic Tajikistan Turkmenistan Uzbekistan The Pacific III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia : Central Asia

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Turkmenistan

With cotton output falling sharply, GDP growth in 2002 slowed. The growth was based primarily on further increases in natural gas production and exports. However, the prevailing macroeconomic and education sector policies need to be urgently reviewed to sustain industrial growth and diversification and avoid adverse long-term consequences.

Macronomic Assessment

GDP growth in 2002 slowed significantly on account of an extremely poor cotton harvest, which declined to a mere 0.5 million tons from 1.1 million tons in 2001, and against an official target of 2.0 million tons for the year. Performance in the agriculture sector, which accounts for some 25% of GDP and provides a livelihood for over one half of the population, was boosted by expansion of wheat and rice output bringing grain production up by 15% for the year to meet its official target.

According to preliminary official estimates, GDP growth was an impressive 14.9% in 2002, based primarily on a further increase in the export of natural gas, oil, and oil products and an increase in output of food processing and light industry. These official growth estimates are based on a 25.0% increase in industry sector output that in turn is reportedly derived from a 41.0% and 66.0% increase in the output of light industry and food processing subsectors, respectively. These estimates, however, do not appear to reconcile with other officially reported economic indicators such as consumption of electricity, which remained stagnant in 2002, an 11.0% decline in imports from already low levels in 2001, and continuing high levels of unemployment. Moreover, there are hardly any signs of increased private sector activity, except for the continuing boom in construction of luxury housing in Ashgabat.

The officially estimated shares in GDP for 2001 are about 35% for industry, 25% for agriculture, 32% for services, and 6% for construction. Official 2002 growth estimates of 9.5% in agriculture and services and 6.5% in the construction sector look plausible. However, keeping in view the performance in electricity output and the decline in imports, industrial growth estimates seem highly exaggerated. The natural gas subsector is estimated to account for nearly three quarters of the industry sector value added (official estimates state this to be much lower at 45% of the sector). Its output increased by 4.0% in 2002. Based on these observations, it appears that industry sector growth can be more realistically estimated at about 7-8%, even allowing for some growth in the light industry and food processing subsectors. This yields an estimate of GDP growth of about 8.6% for 2002, a substantial drop from the 20.5% increase recorded in 2001, and well below the preliminary official estimates.

Inflation increased to 8.8%, from 6.0% in 2001. However, changes in the official price index reflect a controlled and repressed price structure that is largely determined by the government policy of providing utility supplies like gas, power, and water almost free of cost and heavily subsidizing other necessities such as housing, bread, and transport and by the use of price controls. Monetary policy is not geared to macroeconomic considerations as the Central Bank of Turkmenistan (CBT) and the operations of the largely state-owned commercial banking sector are almost entirely oriented to directed lending to meet the needs of SOEs. Frequent management changes at CBT during the year appear to have further limited its effectiveness, while the banking sector continued to stagnate because of extensive controls and restrictions. The large differential between the market and official exchange rates remained virtually unchanged during 2002, although the market rate appreciated by about 2% to TMM22,300 to the dollar. The official rate remained pegged at TMM5,200 to the dollar.

The 2002 state budget was essentially balanced, with expenditures exceeding revenues by only TMM500 billion or about 0.1% of GDP. The overall fiscal position of the Government, however, is difficult to assess because of large off-budget accounts including the foreign exchange reserve fund that is managed by the President's Office. Indeed, nonbudget funds managed by various ministries and government agencies received about TMM40.5 trillion, or more than three times the budget revenues.

Foreign trade turnover in 2002 stagnated, reflecting an 11.0% fall in imports and an 8.9% increase in exports. The trade surplus almost doubled to $1 billion from $535 million in 2001 with the $465 million improvement about equally due to the export gain and the import decline. The decline in imports is worrisome as it reflects, perhaps, Turkmenistan's growing disengagement from global trade and investment flows and a slowdown in industrial expansion and diversification. With exports of cotton fiber declining by nearly 46%, the export increase was mostly due to a 9.4% rise in unit value for natural gas (as well as some increase in volume). The predominance of hydrocarbons in total exports increased from 82.8% to 84.0% in 2002 (Figure 2.23). Data on other accounts—services, capital, and reserves—of the balance of payments are not available and this would be necessary to better understand recent economic developments. However, Bank for International Settlements data indicate an over $200 million increase in Turkmenistan deposits in banks abroad in the 9 months through September 2002 and this would suggest an overall surplus on the balance of payments.

The Government's policy of heavily subsidizing consumption of basic necessities, combined with an increase in average nominal wages by about 20% during 2002, has ensured maintenance of welfare levels. However, this masks the increasing gap in living standards in urban centers like Ashgabat compared with provincial capitals and rural areas. Moreover, the worsening state of education and health facilities in rural areas, which is a result of a decline in their share of budgeted expenditures, is a further area of concern in growing welfare disparities. Growth and income prospects in the longer term are being undermined by education policies that have cut the number of years of education to nine and generally caused deterioration in educational facilities and standards. This issue is emerging as a source of discontent within the professional and educated urban population.

Policy Developments

The macroeconomic policy regime remained unchanged—to the extent that it did not regress—during 2002. The most deleterious aspect of this policy regime is the more than 300% spread between official and market exchange rates, which effectively translates to a regime of arbitrarily determined multiple exchange rates. This is a severe impediment for private sector growth and inhibits FDI. The policy of heavily subsidizing consumption of utilities and basic necessities needs to be reviewed and gradually moved toward approaching full cost recovery. This would allow self-financing in these sectors and restrain wasteful consumption. Moreover, the policy of maintaining nonbudget funds under independent charge of individual ministries needs review. These funds, which financed 24.0% of total fixed investment in 2002, also accumulate as unspent balances.

Integrating nonbudget funds and their balances with the budget, if transparently managed and audited, would be a substantial improvement in fiscal management and enhance fiscal stability. Finally, there is a growing emphasis on directing education to vocational training in the belief that higher education and advanced skills are not at present needed for the economy. This policy and experimentation with the curriculum is resulting in dilution of education standards and, if not corrected urgently, is likely to result in a de-skilling of the workforce, adversely affecting productivity and management over the longer term.

Outlook for 2003-2004

Reconstruction of Afghanistan and trade expansion with neighboring Iran could provide new sources of external demand for Turkmenistan's hydrocarbon, energy, textiles, and light industry exports. There are reports also of new, larger contracts under negotiation for natural gas exports with the Russian Federation and Iran that will help improve utilization of existing production capacities. Domestic demand is unlikely to show significant improvement in a policy regime characterized by strict price controls, a pervasive industrial licensing system, and tight control of banking and foreign transactions. Cotton production and exports should also do better in 2003 after their dismal performance in 2002. Based largely on external demand for hydrocarbons, cotton, and textiles, as well as some strengthening of domestic demand, arising mainly from an improved agricultural performance, GDP growth is expected to be an annual 7-8% in 2003 and 2004, subject to risks of adverse global price fluctuations and transport bottlenecks. With the continuation of the existing price control and subsidy policies, inflation may be expected to continue to remain within single digits during 2003-2004.

The completion of a feasibility study for the trans-Afghan natural gas pipeline, designed to export 30 billion cubic meters of the country's gas to Pakistan and other Asian markets, is likely by October 2003. The study's findings may result in heightened investor interest yielding substantial benefits, improving growth prospects for 2004 and beyond. Nonetheless, growth based primarily on capital-intensive extractive sectors is unlikely to generate sufficient employment to absorb the existing pool of unemployed and new entrants to the work force. Therefore, unemployment and social stress may well increase in the next few years unless a more active policy is pursued both to stimulate private sector-led growth and to diversify exports.

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