IMF Article IV With Turkmenistan

by Ulrika Lomas, Tax-News, Brussels

25 August 2009

On August 14, the International Monetary Fund released details of its Article IV consultation with Turkmenistan, concluded by its Executive Board on July 24.

According to the IMF’s report, limited exposure to international financial markets, a small external debt, and strong fiscal and external balances have kept Turkmenistan relatively protected from the global crisis. Favorable contractual prices for its gas exports are expected by the IMF to further boost the country’s fiscal revenues and external reserves. The IMF considers that this positive outlook provides a great opportunity to deepen and accelerate economic reforms, which were initiated in 2008 with the successful unification of the exchange rate.

Economic performance continues to be strong, in spite of the global economic crisis. Real GDP growth of 10.5% in 2008 was supported by large public investments in construction and infrastructure and high activity in transportation, communication, and retail. Inflation peaked at 18.9% in July 2008, due to price adjustments for petroleum products and transportation, high international food prices, and some impact of the May 2008 unification of the exchange rate. However, it moderated to 9% by year-end, due to declining international food prices, cuts in tariff rates, and improved access to foreign exchange that facilitated access to competitively priced imports.

The current account surplus continued to expand, reaching 18.75% of GDP in 2008 on account of a 20% increase in export receipts from higher oil and gas prices, and despite an acceleration in imports of goods and services, boosted by rising domestic demand and easier access to foreign exchange. International reserves have increased significantly.

The 2008 state budget closed with a surplus of 11.25% of GDP on account of strong revenue performance and the slow execution of investments. Hydrocarbon revenues were boosted by high oil and gas prices and the impact of the unification of the exchange rate. Improvements in tax and customs administration raised the buoyancy of non-hydrocarbon revenues. The IMF estimates that a large positive balance from off-budget operations brought the overall fiscal surplus to about one third of GDP.

The IMF noted some progress with public financial management reforms. Turkmenistan authorities have completed the draft budget code with EU assistance and are now working on the preparation of complementary legal and regulatory documents. In October 2008, the authorities created the Stabilization Fund of Turkmenistan where state budget surpluses will be accumulated. The fund’s priorities and functions are still being elaborated.

The IMF Executive Board, in its recommendations, commended the authorities for their continued strong macroeconomic performance despite the ongoing global financial crisis, and commended them for their prudent policies and recent reform initiatives. Going forward, the IMF advocated that, capitalizing on Turkmenistan’s strong fiscal position and external balances, authorities should be carefully implement further reforms, with priority areas being public financial management, the monetary policy framework, and financial sector development.

The IMF welcomed measures taken to increase social and development spending, and its ongoing budget reform, and called for the early adoption and implementation of the budget code. The Board stressed the importance of consolidating all the government’s operations in the national budget to improve budget execution and transparency. While welcoming the establishment of a stabilization fund, the IMF encouraged the authorities to further clarify the scope of operations, and prioritize its objectives, to enhance the accountability in hydrocarbon revenue management and long-term fiscal sustainability.

The IMF welcomed progress in reforming the financial sector and the planned revision of financial legislation, which the IMF considers are crucial for private sector-led growth in the non-hydrocarbon economy. The Board commended the authorities for the recent passage of the AML-CFT law, and looked forward to swift issuance of the implementing regulations and establishment of the oversight agency. The Board advocated that efforts continue to promote competition in the banking system, including by opening up the sector to domestic investors and reputable foreign banks. The Board also recommended the introduction of IFRS accounting and audit obligations for all banks to strengthen banking supervision.

While welcoming the improvements in macroeconomic statistics, the IMF noted that remaining weaknesses in national accounts and in the coverage of fiscal data continue to hamper surveillance. The Board recommended further improvements in these areas and called for wider public availability of economic and financial data.

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