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Asian Development Outlook 2004 : II. Economic Trends and Prospects in Developing Asia : Central Asia
Turkmenistan Output growth was strong in 2003 and is expected to remain buoyant in 2004-2005, largely due to continued expansion of energy production and exports. However, it will have only a limited impact on living standards and is likely to be short lived unless the Government rationalizes public spending, reverses the negative trends in human capital formation, and implements structural reforms. Economic Assessment According to preliminary official statistics, the economy maintained strong momentum in 2003, with GDP growing by 18.1%, slightly down from the rate of 19.8% in 2002. Industrial output grew by 16.2%, with rapid expansion reported in almost all industrial subsectors. Agricultural output rose by 9.9% on account of a record grain harvest and a partial recovery in cotton production from the previous year’s extremely poor harvest. The services sector expanded by an impressive 24.9%, led by domestic trade and hotels, restaurants, and catering. However, official output statistics should be treated with caution, as they tend to overestimate true growth for at least two reasons. First, they continue to be based on reports by enterprises. While private companies generally underreport output growth to evade taxes, SOEs-which account for the bulk of the economy’s total output-have a strong incentive to exaggerate output figures because the performance of their managers is evaluated primarily on their meeting government-set production targets. Growth was driven largely by domestic investment, which reached TMM16.0 trillion (27.0% of GDP) in 2003. Most of this consisted of state-led investments in so-called priority sectors, such as oil and gas extraction, petrochemicals, electricity generation and transmission, textiles, and luxury housing. About $173 million (1.5% of GDP) was invested by foreign companies developing Turkmen oil fields under five production-sharing agreements. Since Turkmenistan officially guarantees employment to every citizen, there is no official unemployment in the country, and people registered as job seekers at labor exchanges are not formally considered unemployed. The number of such people remained unchanged at about 57,000 (2.6% of the labor force) in 2003. True unemployment is believed to be much higher, due to substantial hidden unemployment and underreporting. The official average wage rose by 84.2% to TMM1.75 million in 2003, in part reflecting a 100% upward adjustment in public sector salaries in February 2003. While the official exchange rate of the national currency, pegged at TMM5,200/$1, remained unchanged, the illegal parallel market rate appreciated by 7.4% to about TMM20,000/$1. This helped reduce open inflation-as measured by the official CPI-to 5.5% in 2003 from 8.8% in 2002. The state budget moved to a small deficit of 1.0% of GDP in 2003, after a surplus of 0.2% in 2002. However, the overall fiscal position of the Government is difficult to assess because much of its revenue and expenditure is channeled through extrabudgetary funds and off-budget accounts of budgetary organizations. Since most export earnings accrue to extrabudgetary funds, it can be inferred that the total revenues of these funds were most likely greater than the revenues of the state budget in 2003. The merchandise trade surplus nearly doubled to $1.27 billion in 2003 from $736 million in 2002. Exports surged by 30.3% to $3.72 billion, largely on account of high world prices for energy products and cotton fiber. This was partly offset by a 15.6% rise in imports, which reached $2.45 billion. Reflecting the Government’s policy to increase exports with high value added, the share of petrochemicals in total exports rose to 18.3% in 2003 from 14.2% in 2002, while the share of natural gas and crude oil fell to 58.6% from 69.4%. At the same time, the commodity composition of imports did not change significantly, with machinery and equipment accounting for about half of total imports. Ukraine, which imports some 36 billion cubic meters of Turkmen natural gas annually, remained by far the country’s largest trading partner, accounting for 27.0% of its total foreign trade turnover in 2003. Policy Developments Turkmenistan maintains a policy management system akin to central planning. In managing the economy, the Government relies on such attributes of central planning as production targets, mandatory state procurement, directed bank credits, foreign exchange restrictions, and intergovernment trade arrangements. Key sectors, including oil and gas, remain in state hands. As the enterprise sector continues to operate under “soft budget” constraints, price controls and restrictions on withdrawing cash from banks are used to contain open inflation in the consumer goods market. A central element of the social protection system is the provision of basic consumer goods and utilities free of charge or at heavily subsidized prices to the entire population. In line with this approach, in August 2003 the Government adopted the Strategy for Turkmenistan’s Economic, Political, and Cultural Development for the Period up to 2020; the strategy sets ambitious production targets for all sectors of the economy, to be supported by state-led investments. Specifically, using 2000 as the base year, the strategy envisages gross output increases of 28-fold for the total, 26-fold for industry, and 18-fold for agriculture, by 2020. The strategy also calls for a 12-fold rise in public sector salaries between 2003 and 2020 and maintenance of price and exchange rate stability. In November 2003, Parliament approved a balanced state budget for 2004, with both revenues and expenditures at TMM64.3 trillion ($12.4 billion at the official exchange rate). A total of TMM1.4 trillion was allocated to supplying gas, electricity, water, and salt free of charge to the population. At the same time, allocation to health care was apparently cut (details of the 2004 budget are lacking) so that, shortly after the budget was approved, the Government announced its decision to reduce the number of public medical workers by some 13,000 and introduce charges for a range of previously free medical services. The decision is symptomatic of the worsening state of the health care system, which-combined with a deteriorating quality of education and a continuing brain drain-is undermining the human capital base and prospects for sustainable development. Expanding the production and exports of energy products remains the Government’s top priority. In April 2003, Turkmenistan and the Russian Federation concluded a long-term intergovernment agreement on cooperation in the gas sector, according to which the country’s natural gas exports to the Russian Federation are to increase from 5-6 billion cubic meters in 2004 to 70-80 billion cubic meters for the years 2009-2028. A similar agreement with Ukraine is expected to be signed in the near future. Further, Turkmenistan started exporting electricity to Turkey via Iran in late 2003 and intends to substantially raise electricity exports to that country as well as to Afghanistan and Iran over the medium term. Turkmenistan is also looking for new export markets for its energy products. Under consideration are oil pipelines via Iran to Armenia and the Gulf as well as a gas pipeline that would carry up to 30 billion cubic meters of natural gas per year from Turkmenistan via Afghanistan to South Asian markets. The Government has recently appointed internationally reputed companies to certify the availability of gas reserves to meet these ambitious production and export targets. Outlook for 2004-2005 GDP growth is expected to remain buoyant, at around 10% per year in 2004-2005, driven largely by continuing expansion of production and export of energy products. In 2004, the Government is planning to boost the production of natural gas by 24% to 73 billion cubic meters, of which 58 billion cubic meters are to be exported. The production of crude oil is planned to increase by 50% to 15 million tons. More than half of this is to be processed in Turkmenistan, leading to a considerable rise in the production of petrochemical products. Cotton output is targeted to reach 2.2 million tons in 2004, up from 0.7 million tons in 2003. While these Government targets appear too ambitious, the production and exports of natural gas, crude oil, and petrochemical products are indeed likely to strengthen significantly in 2004-2005, as are the production and export of electricity. By contrast, agricultural production is likely to stagnate unless the Government initiates much-needed sector reforms, including the dismantling of the existing mandatory state procurement system. Open consumer price inflation is expected to be kept to about 5% by a combination of tight monetary policy, subsidies, price controls, and cash restrictions. The official exchange rate is likely to remain fixed at TMM5,200/$1, while the parallel market rate is projected to stay broadly stable at around TMM20,000/$1. The merchandise trade surplus is forecast to widen further to $1.5 billion in 2004. Exports will rise, to $4.2 billion, mainly due to an increase in the volume of energy exports. Imports are also projected to strengthen, to $2.7 billion, in part because most of the country’s natural gas is exported under intergovernment arrangements, whereby half of the payment for gas deliveries is made in kind via a reciprocal supply of goods. The trade surplus in 2005 is expected to remain unchanged, with a continued increase in the volume of energy exports counterbalancing some weakening of world energy prices. However, the anticipated rapid output growth, macroeconomic stability, and trade surpluses will have only a limited positive impact on the living standards of the majority of the population. The reason is that few new jobs will be created, while much of the additional national income will be invested in state-led projects of questionable economic and social value. Furthermore, the economy would remain vulnerable to possible swings in world energy prices, bottlenecks in export routes, and possible delays in payments for deliveries of natural gas by its major trading partners. A sharp fall in world oil prices or constraints on increased exports of natural gas due to the limited throughput capacity of existing pipelines would have a major adverse impact on exports, output growth, and the Government’s fiscal position. Finally, growth based on exploitation of natural resources is likely to be short lived, as seen in the experience of many other resource-rich countries. Therefore, the Government needs to rationalize public expenditures, halt and then reverse the negative developments in the country’s human capital base, and embark on structural reforms to diversify the economy, promote the private sector, and achieve sustainable and equitable growth.
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Second, some industries that appear to be expanding at distorted domestic prices may in fact be producing negative value added at international prices. Alternative staff estimates adopted by 
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