TURKMENISTAN: IMF ARTICLE IV REVIEW CAPTURES HALF

UNCLAS SECTION 01 OF 03 ASHGABAT 000617

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB

E.O. 12958: N/A
TAGS: PGOV EAGR EFIN EIND EINV EPET ETRD SOCI TX
AORC
SUBJECT: TURKMENISTAN: IMF ARTICLE IV REVIEW CAPTURES HALF
OF THE ECONOMIC PICTURE

REF: A. 08 ASHGABAT 1493

B. ASHGABAT 462

C. 08 ASHGABAT 1394

D. ASHGABAT 423


1. (SBU) Sensitive but unclassified. Not for public
Internet.


2. (SBU) SUMMARY: A team from the International Monetary
Fund (IMF) confirmed that the international financial crisis
has not affected Turkmenistan because of the country's
limited integration in international financial markets.
Declining oil and gas prices and a reduction in demand for
these products on the world market have so far only had a
slight affect on Turkmenistan's economy. Increased
efficiency due to infrastructure improvements in
Turkmenistan's petrochemicals sector have made up for some
losses. Turkmenistan's textile sector will likely feel the
effects at some point in the future, and Turkmenistan is
committed to supporting this industry. The team was
complementary about the progress of currency reform, both
unification of the exchange rate and redenomination, and
recommends maintaining a fixed exchange rate for at least a
year to build up public confidence in the redenominated
currency. Turkmenistan may need to appreciate its currency
in the future due to the strength of its oil and gas sector.
However, the exclusion of a macroeconomic point of view
limits the value of the International Monetary Fund Article
IV Review report because it offers an incomplete picture of
Turkmenistan's economic climate, particularly for private
sector companies considering entering the market. END
SUMMARY.


3. (SBU) International Monetary Fund Article IV Consultation
Mission team members, Middle East and Central Asia Department
Deputy Division Chief, Valeria Fichera, and Economist, Anna
Bordon, briefed donors on May 12 regarding their
consultations with the Government of Turkmenistan. As part
of the Fund's annual Article IV review process, this team
reviewed development and progress of reforms and public
finance management with the Central Bank, Ministry of
Finance, Ministry of Economy and Development, and the State
Statistics Committee over two weeks. This review also
focused on the impact of the global financial crisis in
Turkmenistan, and looked at progress on exchange rate
unification and redenomination.

IMF CONFIRMS MINIMAL EFFECTS OF GLOBAL FINANCIAL CRISIS


4. (SBU) The IMF team agreed with Post's previous reporting
on minimal local effects of the global financial crisis (Ref.
A) due to Turkmenistan's limited integration in international
financial markets. Fichera said that the recession has had
only some moderate impact, in spite of sharply declining oil
and gas prices, because price reductions have not yet caught
up to Turkmenistan. (NOTE: The price that customers are now
paying for Turkmenistan's oil and gas exports will change in
accordance with the terms of pricing section of the contract.
For gas going to Russia, this should happen in June. END
NOTE.) Turkmenistan is feeling some effects due to the
dropping demand for oil and gas on the world market, but oil
and gas sector infrastructure improvements as well as the
very high income from the first quarter of 2009 which will
help compensate for income loss during this period. The
Rural Development Program is stimulating the local economy,
which is growing at a rate of 11 percent, and the government
is accelerating program projects in order to take advantage
of low international construction material and equipment
costs. Turkmenistan expects further economic growth in 2010
-- estimated at 8.5 percent -- because of the commencement of
gas exports to China which should begin at the end of 2009.
Turkmenistan is aware that the global financial crisis will

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affect the textile sector, but is committed to supporting its
industry throughout this period. The IMF recommended that
the private sector implement reforms in the agricultural
sector which the government envisaged implementing itself.

EXCHANGE RATE AND FINANCIAL SECTOR REFORM


5. (SBU) The team took a positive view of exchange rate
reform, noting that the government was successful at keeping
a steady supply of money in the marketplace, mounting a broad
public information campaign, and enforcing continuation of
acceptance of both currencies as the redenominated currency
continues to circulate. The new currency has impacted
positively on inflation: as a point of comparison, inflation
was 10 percent in June and July of 2008, 8 percent during the
rest of 2008, and has been gradually declining each month of

2009. Fichera said that the government has the means to
survive shocks greater than those envisaged for the medium
term as well as in 2010 and 2011. Fichera also said that the
government intends to implement any reforms in the financial
sector gradually, and the IMF believes that the new currency
will encourage deposit mobilization. The IMF recommends
maintaining a fixed exchange rate for at least one year in
order to build trust in the new currency, Fichera said,
adding that the authorities would like to maintain a fixed
rate longer. Turkmenistan is at risk for needing to
appreciate the manat because of the strong oil and gas
sector. As a first step towards modernizing interbank money
transfers, the IMF discussed the possibility of using
certificates for transfers, which would also ensure liquidity.

PUBLIC ACCOUNTS REFORM


6. (SBU) According to the team, Turkmenistan's budget
surplus came from increased revenues due to higher prices on
the world oil and gas market that occurred after the budget
was written, as well as an increase of tax revenues from the
official sector in the post-exchange rate unification period.
The team confirmed that the Stabilization Fund will
initially use budget surpluses to finance public works
projects (Ref. C) -- such as Rural Development Plan
construction projects -- and therefore, the IMF told Turkmen
officials that the Fund should be referred to as a
Development Fund. Fichera said that the government is
actively working to learn about the experience of the IMF and
European countries in setting up traditional Wealth
Stabilization Funds and will pursue these avenues, especially
in the next year as gas revenues increase with the opening of
the pipeline to China. Fichera mentioned that she criticized
the lack of transparency of budgets. She said that the
country's financial situation is solid, aided by increased
efficiency due to upgrades in the oil and gas infrastructure.
The government is not keeping any savings in foreign (hard)
currency, and is looking at other countries' systems with the
intention of improving its own.

STATISTICAL METHODS WILL BE IMPROVED, BUT WHO WILL SEE THEM?


7. (SBU) Fichera said that Turkmenistan will run a consumer
price index in the provinces beginning in 2010, but could not
confirm if this information would be shared with donors.

ANTI-MONEY LAUNDERING LEGISLATION


8. (SBU) Fichera said that Turkmenistan expects to pass
anti-money laundering legislation -- currently in draft form
-- in spring 2010. The government told Fichera that it took
IMF comments into account when reviewing the draft law, but
the Fund has not seen the final version of the law and cannot
confirm this fact or what changes have been made.


9. (SBU) COMMENT: Without participation of the World Bank

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or another entity that could offer perspective on the
macroeconomic level which would address the many challenges
to private sector development -- Avaza (Ref. D),the banking
system, poverty reduction, and lack of transparency and open
sharing of statistics -- the IMF Article IV Review report
gives an incomplete picture of Turkmenistan's economic
climate and is of limited value, especially to private sector
companies considering entering the market. END COMMENT.
MILES