TURKMENISTAN: EXCHANGE RATE DEPRECIATION ALLOWS

UNCLAS SECTION 01 OF 02 ASHGABAT 000802 SENSITIVE SIPDIS STATE FOR SCA/CEN, EEB E.O. 12958: N/A TAGS: PREL PGOV EFIN ECON TX SUBJECT: TURKMENISTAN: EXCHANGE RATE DEPRECIATION ALLOWS GOVERNMENT TO INCREASE STATE BUDGET ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: On June 25, Turkmenistan's Parliament passed an adjusted State Budget for the 2008 financial year. The revision took place due to the appreciation of the manat against the U.S. dollar -- the currency of Turkmenistan's reserves. The budget has increased by 93 trillion manats or almost 79%. However, the budget structure has not been revised and remains opaque. END SUMMARY. BUDGET INCREASE ¶3. (SBU) Turkmenistan's Mejlis (Parliament) on June 25 passed a new law amending the 2008 State Budget previously approved on December 14, 2007. The adjusted budget has grown about 79%, from 118 trillion manats to 211 trillion manats. Government and social spending account for 16% of the overall increase, while expenses of state-owned enterprises represent 63%. WHY THE INCREASE? ¶4. (SBU) A series of steps to depreciate the previous "official" exchange rate of 5,200 manats per dollar to 14,200 manats per dollar over the first half of the year allowed for additional budgetary allocations in manats. An additional source of funding has been the resources previously held in various extra-budgetary funds, which was the standard practice under former President Niyazov but which the current president vowed to bring under control. On February 4, President Berdimuhamedov signed a decree eliminating 13 extra-budgetary funds that used to accumulate large amounts of domestic currency and foreign exchange. According to the decree, the funds have been transferred to the state budget and the Foreign Exchange Reserve Fund (FERF). However, it is not clear what share of funds went into the budget proper. SAME TWO-TIER BUDGET STRUCTURE ¶5. (SBU) Turkmenistan's budget structure remains unchanged. It consists of Tier 1 (tax revenue),Tier 2 (state-owned companies) and the Foreign Exchange Reserve Fund (FERF),which is outside the budget. Tier 1 finances the government, including local government, law enforcement, education, social welfare, healthcare, culture ministries and agencies, and the construction of communal/residential buildings. In the revised 2008 budget, Tier 1 is around 43 trillion manats, or 20% of the total state budget, while Tier 2 still dominates the budget with around 168 trillion manats, or around 80% of the overall state budget. Compared with the original 2008 budget, Tier 1 expenditure grew by 68%, while Tier 2 expenditure will increase by 82%. LOCAL BUDGETS TO GROW EVEN MORE ¶6. (SBU) Local budget allocations have further risen by a total of 56%. The projected local revenue comes from insignificant local duties and a percentage of the Value Added Tax (VAT),Corporate Income Tax and Mineral Resources Tax. The Government of Turkmenistan estimates that the tax revenues would be sufficient to finance planned local public expenditure -- with the exception of Dashoguz Province. An additional 2.2 trillion manats have been allocated as a subsidy to Dashoguz. DEFICIT ¶8. (SBU) The new budget also eliminated the 5.2 trillion-manat deficit planned earlier for the current year. Funding in the original 2008 budget comes from surplus budget funds from previous years, including 6.2 trillion manat in 2006. ¶9. (SBU) COMMENT: The first half of 2008 saw some positive developments in the public finance system, including significant steps to unify the exchange rate and the abolishment of extra-budgetary funds. However, the latest version of the budget still has a two-tier budget, a legacy of former president Niyazov's opaque financial structure. The 2009 State Budget will be the major challenge and milestone in reforming the budget system of ASHGABAT 00000802 002 OF 002 Turkmenistan. END COMMENT. HOAGLAND