Country brief 2006 Updated September 2006
Turkmenistan is a middle-income country with a gross national income per capita of about $1,700 in 2005, according to the estimates of international financial organizations. The country is richly endowed with hydrocarbons; Turkmenistan’s recoverable natural gas reserves rank among the top ten in the world. It also has substantial proven oil reserves and an extensive irrigation system. Turkmenistan is a major exporter of natural gas, oil and oil products, and electricity.
Economy
Developments since independence
Following independence in 1991, the country experienced several years of economic decline caused by the break-up of traditional economic ties, poor harvests, and problems related to energy exports such as economic mismanagement, payment, and transportation. The economy was hit hard in 1997 when non-payments by the Commonwealth of Independent States countries forced a suspension of virtually all natural gas exports.
By 1998, however, the economy began to recover and with the resumption of natural gas exports to Ukraine and Russia in 1999-2000, recovery accelerated. According to official statistics, real gross domestic product (GDP) has been increasing by an average of 17 percent annually since 1999.
Another contributor to this recovery has been large-scale, mainly state-driven, investments averaging over 30 percent of GDP in oil refineries, textiles, food processing, transportation, and various construction projects. Although alternative estimates by international financial organizations indicate that the growth rates may have been substantially lower than official estimates, the economy appears to have expanded strongly over the past five years.
Recent economic developments
Thanks to rising export revenues from natural gas and oil and oil products, which together account for some 80 percent of Turkmenistan’s merchandise exports, the current account has been in surplus since 2000. Turkmenistan has been a major beneficiary of the recent high world market prices for oil. In 2005-2006, Turkmenistan negotiated improved payment terms for its natural gas exports with Russia and Ukraine, including the elimination of barter settlements and a nearly 50 percent increase in the export price. The 25-year agreement with Russia, signed in the spring of 2003, and the 30-year agreement with China, signed in the spring of 2006 for natural gas exports, will help maintain Turkmenistan’s steady stream of foreign exchange inflows into the future.
This strong external position has led to the continued accumulation of foreign exchange reserves. External public debt has also been steadily reduced. By 2005, external debt stock was less than 60 percent of the 2000 level.
Robust economic growth and comfortable current foreign exchange earnings from hydrocarbon resources, however, mask Turkmenistan’s very limited progress in economic reforms since independence.
The state has maintained a pervasive presence in the economy. Privatization stalled in the late 1990s, with most large- and medium-scale enterprises, especially in the sectors considered by the authorities as essential for the economy of the country, remaining in state hands. Enterprise operation is still subject to mandatory state plans, and production resources are distributed by the state. Almost all trade transactions (domestic and foreign) must be registered with the State Commodity Exchange.
Virtually all cotton and wheat crops are grown under the state order system and procured by the state at below-market prices, although some initial positive steps to initiate reforms of the state-order system for cotton have been recently taken by the authorities. To date, basic commodities such as water, energy, natural gas, and salt are free or heavily cross-subsidized.
Despite its significant foreign exchange earnings, which create a favorable environment for reforms, Turkmenistan is one of the few countries in the world that has not introduced current account convertibility. The parallel market exchange rate is four to five times the official rate, which severely dampens the prospects for accelerated private sector growth in Turkmenistan. Fiscal management is also very fragmented and non-transparent.
A significant share of Turkmenistan’s foreign exchange earnings from energy exports is directed towards infrastructure and national prestige projects, some of which appear to have little economic return. At the same time, the limited capacity of the existing natural gas pipelines and lack of alternative natural gas export routes is already beginning to constrain the country’s natural gas export potential and makes exports vulnerable to disruptions. Since 2004 there have also been signs of increasing inflation, and the parallel market exchange rate has depreciated.
The picture portrayed by social indicators is also mixed. Absolute poverty, based on the $2.15 per capita per day poverty line, is less than one percent. But at the same time, 45 to 50 percent of the population was estimated to consume below the subsistence minimum in 2003, and 30 percent of the population has a level of consumption below half the national average. The official joblessness rate is zero, as the state guarantees employment for every Turkmen citizen. However, surveys indicate that unemployment is growing, especially among youth. The policy of accelerated public sector wage increases—wages and salaries were doubled three times in the past five years and raised another 50 percent in January 2005—may be contributing to unemployment.
Challenges ahead
“First generation” market reforms remain the key challenge for Turkmenistan. Strengthening macroeconomic stability, introducing currency convertibility, liberalizing the foreign trade regime, sharply reducing the role of the state, and privatizing ought to top the authorities’ reform agenda. Other reform challenges include the following:
Public sector management. Turkmenistan’s top development priority is to ensure that a sound and transparent system of public resource management is in place. With a better system, Turkmenistan could use its considerable natural resource wealth to address the large level of income inequality and improve basic living standards with its own resources.
Agriculture and rural development. Rural development is critical as it accounts for almost one-fifth of GDP and is a source of livelihood for half of the population. Turkmenistan took an initial step in 1997-1998 in changing the status of most farmers to “lease-holders.” However, in practice, the rural economy continues to operate under total state control over inputs and marketing through state orders.
Private sector development. Turkmenistan needs to dramatically improve its business environment, particularly for small enterprises, so that the private sector contributes to employment generation and helps reduce poverty. Just 25 percent of GDP is produced by the private sector, which faces steep barriers. These obstacles include highly restricted access to foreign exchange, reflected in the black market premium of 400-500 percent.
Environment and social indicators. Turkmenistan faces serious environmental, water, and lifestyle problems, which affect the living standards of the population. Health indicators such as life expectancy and infant mortality were historically among the worst in the former Soviet Union countries and, despite some recent improvement in official statistics, remain of concern. The quality of education and basic health services has also significantly deteriorated over the past ten years.
Regional issues. The development of Turkmenistan is tied to regional issues such as water resource management, energy sharing, Caspian Sea rights, and the development of trade and pipeline routes. However, Turkmenistan has at best been a reluctant participant in regional cooperation activities.
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Despite the daunting reform agenda facing them, the Turkmen authorities have been extremely cautious about taking steps towards real economic reforms. In the past, the Bank sought to engage with Turkmenistan through loans, technical assistance, and policy and strategy advice. However, the results achieved have been very limited.
The Turkmen authorities have recently expressed willingness to engage more actively with the Bank, and they have taken recent positive steps to address long-standing issues that hindered development of a Bank program in Turkmenistan. Thus, the Bank, at the request of the Government of Turkmenistan, is currently exploring ways of supporting Turkmenistan in selected areas through a small and focused technical assistance program.
United Nations Building, c/o World Bank
Galkynysh Street, 40
Ashgabat 744000 Turkmenistan
Tel: (993-12) 350-477
Fax: (993-12) 351-693
Email: sdjepbarov@worldbank.org
Website: http://www.worldbank.org/tm
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