IMF Executive Board Concludes 2010 Article IV Consultation with Turkmenistan

Public Information Notice (PIN) No. 10/146
November 5, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On September 3, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Turkmenistan.1


Turkmenistan's economy has proved resilient to the global financial crisis. The economy was affected by the crisis mainly through lower external demand for hydrocarbon exports, causing natural gas and oil production to fall. However, government policy aimed at diversification of gas export markets paid off as new pipelines to China and Iran became operational in 2009 and 2010, respectively. As a result, hydrocarbon production is expected to increase significantly over the next five years, translating into growing fiscal revenues and a further strengthening of the external position. This favorable outlook provides a strong foundation for speeding up current economic reforms, including improving public financial management, increasing financial intermediation, and stimulating private sector growth.

Economic performance continued to be strong in 2009. Despite a sizable drop in hydrocarbon production due to lower demand on the external market, real gross domestic product (GDP) grew by 6.1 percent in 2009, reflecting continued growth in public investment spending and a surge in foreign direct investment. Inflation slowed significantly from 8.9 percent in 2008 to 0.1 percent in 2009 primarily due to falling import prices coupled with a stable exchange rate, a more liberal trade regime, and an increased access to foreign exchange.

The current account balance reversed from a surplus of 19 percent of GDP in 2008 to a deficit of 16 percent of GDP in 2009, due to the loss in gas exports to Russia, fall in oil prices, and a surge in imports of goods, mainly related to foreign direct investment (FDI). Nonetheless, thanks to tripled FDI inflows, Turkmenistan’s external position remained strong.

Fiscal policy continued to reflect the objectives of the National Program of Social and Economic Development. At 7.8 percent of GDP, the surplus of the state budget exceeded the budgeted target. While total revenues fell as a percent of GDP, current expenditures increased on account of higher education and social security spending and the doubling of capital spending. The budget surplus was saved in the Stabilization Fund, the total value of which is estimated at 15 percent of GDP at end-2009.

Public financial management reforms continue to move forward as the new budget code drafted with assistance from European Union is expected to be finalized by end-2010. Concurrent with the new budget code, the authorities are also conducting a treasury modernization project.

Monetary policy remained focused on exchange rate and price stability in 2009. The strong external position and limited integration with international financial markets helped the Central Bank of Turkmenistan (CBT) maintain a stable exchange rate of the manat. Directed lending under government projects continued, but is expected to moderate somewhat in 2010.

After a successful unification of the exchange rate in 2008 and introduction of the new manat in January 2009, reform efforts shifted to the implementation of International Financial Reporting Standards (IFRS) in the banking system and strengthening the anti-money laundering and combating financing of terrorism (AML/CFT) framework. A comprehensive action plan envisages IFRS implementation across all banks by end-2011. Turkmenistan's significant progress in bringing the AML/CFT framework closer to international standards was publicly acknowledged by the Financial Action Task Force.

Efforts to develop the private sector of the economy have gained momentum. The government's recognition that private sector development is important for economic diversification and sustainable growth has lead to increased support to Small and Medium Enterprises (SMEs) and the enhancement of investors' rights. Recent legislation aims at streamlining registration procedures, simplifying taxation, and easing SME's access to financing.

Executive Board Assessment

Directors noted that the Turkmenistan's economy is expected to continue to perform strongly and the authorities' recent reform initiatives are encouraging. They also noted that speeding up market-oriented reforms is critical to ensure sustained growth over the medium and long term. They encouraged the authorities to use the current favorable outlook and strong external position and focus on the following priorities: improve public financial management, develop the financial sector, eliminate the remaining foreign exchange restrictions, and promote private sector development, including SMEs. The recently increased focus on strengthening implementation capacity and training is welcome.

Directors called the authorities to focus on the improvement of public financial management by enhancing the selection and monitoring of public investment projects while focusing on the quality and efficiency of spending and giving priority to productive projects and social infrastructure. Directors recommended the authorities to request technical assistance (TA) from the World Bank and other donors to develop skills and capacity in project appraisal and public financial management.

Directors welcomed the ongoing fiscal reforms focusing on the development of a new budget code and treasury modernization and considered that further consolidation of hydrocarbon revenues under the budget is needed by gradually including the remaining extra-budgetary funds in the state budget. The objectives and operations of the recently created Stabilization Fund (SF) should be set according to best international practice to ensure longer-term fiscal sustainability. The use of SF resources for extra budgetary projects should be phased out and the saving function should be strengthened. Directors called the authorities to utilize Fund TA on issues of optimal management of hydrocarbon resources. In addition, the authorities should consider joining the Extractive Industries Transparency Initiative to increase transparency and accountability of the hydrocarbon revenue.

Directors noted that the rapid expansion of fiscal spending may lead to a build-up of inflationary pressure. With global demand recovering, the authorities should scale back the fiscal stimulus and be prepared to further cut non-priority spending if inflationary pressures emerge. Such cuts should not affect outlays for education, healthcare, and social security as there is scope to increase them further, particularly in rural areas. Directors called to improve efficiency of social spending by restructuring social programs and subsidies to target those who need them most. In particular, administered prices should be gradually phased out and targeted social programs should be implemented to limit the impact of such price adjustments on the most vulnerable.

Directors noted that maintaining a fixed exchange rate regime as a means to promote price stability is appropriate in the short to medium term, but more flexibility should be considered in the long-run. Directors noted that strong reserve position and low integration with global financial markets helped the authorities maintain the fixed exchange rate. In the long-run, a shift to more exchange rate flexibility would help develop a deeper foreign exchange market and help limit the adverse effects stemming from commodity price volatility. Directors indicated that such a shift would first require significant progress toward increased policy coordination and central bank independence, development of a credible monetary anchor, improving prudential regulation and bank risk management, and developing a deeper foreign exchange market.

Directors commended continuing reforms to further liberalize foreign exchange regulations, develop foreign exchange market, and facilitate trade. Directors considered that shifting more responsibilities to banks would help decentralize the approval process in the Interbank Currency Exchange (ICE). The authorities are encouraged to accept the obligations under Article VIII of the Fund’s Articles of Agreement.

Directors considered that a shift of directed lending to the fiscal authorities would help improve monetary policy conduct. This would increase the CBT's independence and strengthen monetary policy by allowing it to focus on price stability. Furthermore, it would facilitate the development of monetary policy instruments essential for the banking sector and, over the longer term, strengthen the monetary transmission mechanism. Directors stated that, if the government chooses to continue state support to targeted sectors, it can consider creating government agencies specializing in such support.

Directors welcomed the continued reforms of the banking system aimed at deepening financial intermediation. Promoting the development of commercially-oriented banks would enhance financial intermediation and benefit the authorities' efforts to diversify the economy. Directors encouraged the authorities to abolish interest rate controls mainly associated with directed lending. Directors commended the authorities for their efforts to support SMEs and develop the private sector as well as the recent joint initiative with private entrepreneurs to create a private bank with participation of foreign capital, including from the European Bank for Reconstruction and Development (EBRD), to enhance access to finance by the micro, small, and medium-sized businesses. Directors urged the authorities to further enhance the business environment by facilitating SME's access to bank financing.

Directors called for the IFRS to be implemented across the whole banking sector, including the CBT. The recently adopted comprehensive action plan to fully move to IFRS by end-2011 is encouraging and should be strictly enforced for the whole banking system. A subsequent bank recapitalization should also be implemented to strengthen banks. Directors have also welcomed the CBT's efforts to strengthen banking supervision and regulation to further facilitate the transition to the IFRS framework.

Directors welcomed the significant progress in the AML/CFT area over the last year. In June 2010, a FATF Plenary Session publicly acknowledged Turkmenistan's progress in developing its national AML/CFT framework. The remaining technical deficiencies are being addressed with technical assistance from the Eurasian Group and IMF. Directors encouraged the authorities to continue their engagement with the FATF, EAG, and IMF to enhance its AML/CFT. Achieving full compliance with FATF recommendations would notably allow Turkmenistan's banks to better provide high quality international banking services.

Directors welcomed the authorities' decision to move to international statistics standards by 2012. Better quality data would enhance the ability to analyze economic developments and improve macroeconomic management. Directors encouraged the authorities to expand the statistics reforms to include monetary and fiscal statistics, disseminate more macroeconomic data, and join the General Data Dissemination System (GDDS) over the medium term.

Turkmenistan: Selected Economic Indicators
  2005 2006 2007 2008 Prelim. 2009 Prelim. 2010
  (Annual percentage change)
Production and prices              
   Real GDP 13.0 11.4 11.6 10.5 6.1 9.4 11.5
   Consumer price index (e.o.p) 10.4 7.1 8.6 8.9 0.1 4.6 5.0
  (In percent of GDP)
Investment and saving              
   Gross investment 21.5 18.3 19.0 37.1 47.4 49.2 49.7
   Gross saving 26.7 34.0 35.1 55.8 31.2 44.3 63.4
General government (State budget)              
   Total revenue 20.5 20.2 17.3 23.6 22.4 18.4 17.5
   Total expenditure and net lending 19.7 14.9 13.4 12.3 14.7 15.6 16.3
   Overall balance (+=surplus) 0.8 5.3 3.9 11.3 7.8 2.8 1.2
  (Annual changes)
Monetary Indicators              
   Reserve money 3.3 16.4 70.3 -3.7 56.7 30.0 27.0
   Manat broad money 5.6 11.0 96.4 -7.6 68.6 33.0 30.0
  (In millions of U.S. dollars, unless otherwise specified)
External sector              
   Export of goods 4,944 7,155 9,114 11,786 8,946 9,502 11,765
     Of which: Hydrocarbons 4,198 6,228 8,093 11,007 8,419 8,958 11,200
   Import of goods 2,947 2,558 3,780 5,363 8,071 7,587 7,849
   Current account 875 3,351 4,037 3,560 -2,981 -981 763
     In percent of GDP 5.1 15.7 15.5 18.7 -16.1 -4.9 3.3

Sources: Turkmenistan authorities; and IMF staff estimates.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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