IMF Concludes 2010 Article IV Consultation with Turkmenistan
OREANDA-NEWS. November 29, 2010. Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with
Background
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
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.
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
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
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.
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