OREANDA-NEWS. On March 16, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Turkmenistan.

Background

Over the last year, Turkmenistan’s economy remained resilient to regional market turbulence, supported by strong hydrocarbon exports and public investment. Real GDP growth reached 10.3 percent, and CPI inflation was contained to an average 6 percent in 2014 in spite of tariff hikes for utilities and transportation. The current account deficit narrowed to 5.9 percent of GDP in 2014, mostly reflecting lower-than-expected imports of capital goods. Large international reserves equivalent to 22 months of imports provided assurances on the country’s capacity to mitigate shocks.

Since then, the authorities have taken pro-active measures to increase resilience in a difficult external environment. After having maintained a parity of 2.85 Manat to the dollar since May 2008, the authorities devalued by 22 percent in January with a view to lessen the pressures from depreciating currencies in the region on domestic firms. Initiatives to help contain inflation, including privatization of small-scale agriculture, and support for export and import-substituting firms, have complemented the devaluation. On the fiscal front, the approved 2015 budget implies a moderate tightening of the fiscal stance. The tightening reflects a slowdown in the growth of public investment as major projects reach completion, and will help maintain inflation in check and address absorptive capacity issues. The government also took actions to streamline energy subsidies as a first step towards cost recovery.

In 2015, real GDP growth is projected to decelerate to 9 percent on the back of declining natural gas export revenues and lower public investment as a share of GDP. In spite of the recent devaluation, inflation is expected at 6 to 6.5 percent on an end-of-year basis (7 to 8 percent on average) owing to a projected further fall in global food prices as well as U.S. dollar—and hence Manat—appreciation. With lower hydrocarbon revenue and the restraint in the growth of investment spending, the overall fiscal surplus would shrink to about 1 percent of GDP and the external current account would worsen to a deficit of 11 percent of GDP. Both fiscal and external positions would however gradually recover with the projected increase in natural gas export volumes. Reserves would remain at comfortable levels providing ample cover of imports and short-term debt.

Key external risks to this relatively benign outlook include permanently lower oil and natural gas prices; lower-than-expected natural gas export volumes to China or Russia; and further significant strengthening of the U.S. dollar that could hurt Turkmenistan’s real exchange rate. Unexpectedly strong inflationary pressures following the devaluation or a relaxation of the fiscal position, for example due to pressures for higher wages and subsidies or unplanned maintenance costs of large investments, could also affect this outlook. Large sovereign foreign assets provide a buffer to help mitigate the impact of any shocks for several years.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended Turkmenistan’s impressive growth record, which has led to a substantial increase in living standards and policy buffers. However, Directors noted that growth needs to be more balanced across sectors and is subject to downside risks associated with energy prices, regional spillovers, and an erosion of external competitiveness. They therefore encouraged the authorities to take measures to enhance economic resilience and accelerate efforts to spur a more diversified and inclusive private-sector-led growth.

Directors welcomed the authorities’ pro-active fiscal response in the wake of a difficult external environment. They noted that the envisaged fiscal adjustment for 2015 and the medium term is appropriate to keep inflation at moderate levels and address capacity constraints in public investment. While supporting the recent reduction in energy subsidies, Directors encouraged the authorities to implement a more comprehensive reform with adequate social safety nets. They also recommended enhanced contingency planning, in the event that the fall in energy prices proves more permanent. Directors advised accelerating reforms aimed at improving the quality and efficiency of government spending, including by linking public wage increases to productivity growth and enhancing public investment management.

Directors considered the implementation of the new budget code as an important governance and fiscal transparency milestone. They advised that its implementation be focused on the integration of budget operations of the general government, and strengthening transparency in hydrocarbon wealth management. Achieving EITI compliance and adherence to the Santiago Principles for Sovereign Wealth Funds would be visible signs of progress in this area.

Directors emphasized the need to accelerate monetary and financial sector reforms, to help create a more enabling environment for private sector development and lay an appropriate foundation for enhanced exchange rate flexibility. They encouraged the authorities to strengthen the monetary policy framework and its management, with Fund technical assistance, by transitioning from directed lending to a more market-based credit intermediation and developing domestic securities’ markets. Moreover, efforts to align the financial and supervisory framework with international best practices should continue.

Directors stressed the need for a move toward greater exchange rate flexibility over the medium term, in order to strengthen resilience to external shocks. Ongoing modernization of the monetary policy framework and financial deepening will facilitate this move.

Directors called for stepped-up efforts to implement key structural reforms in support of a more competitive private sector and a revitalized non-hydrocarbon economy. In this regard, they recommended strengthening market-based institutions, improving the business climate, restructuring state-owned enterprises, and overcoming shortages of skilled workers through labor market reforms. Effective implementation of the 2014 anti-corruption law, and aligning the AML/CFT regime with international standards—with Fund technical assistance—and its rigorous enforcement, would further strengthen governance and transparency.

Directors encouraged the authorities to continue efforts to improve statistical data quality and the dissemination of macroeconomic statistics, in line with IMF standards.

It is expected that the next Article IV consultation with Turkmenistan will be held on the standard 12-month cycle.