Wayzata World Factbook 1996

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U.S. DEPARTMENT OF STATE TURKMENISTAN: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES BUREAU OF ECONOMIC AND BUSINESS AFFAIRS TURKMENISTAN Key Economic Indicators (Billions of manat unless otherwise noted) 1992 1993 1994 2/ Income, Production and Employment: GDP (at current prices) 1/ 302.0 13.2 222.5 By Sector: Agriculture 1/ 44.3 1.8 42.4 Industry 1/ 215.4 5.4 84.5 Electrical Energy 1/ 9.0 0.4 7.2 Oil/Gas 1/ 60.0 1.1 49.3 Construction 1/ 25.6 2.0 57.8 Production/Non-Production Services 1/ 16.7 4.0 37.8 Per Capita GDP (manat/at current prices) 3/ 71,800 3,065 50,400 Labor Force (000s) 1,991.5 2,053.2 2,075.0 Unemployment Rate (pct.) N/A N/A N/A Money and Prices: (annual percentage growth) Money Supply (M2) N/A N/A 12.8 Base Interest Rate 4/ 2-15 40-50 150 Personal Saving Rate 4/ 10-40 4-50 20-160 Retail Inflation 8.1 18.7 15.8 Wholesale Inflation 10.9 17.1 5.1 Consumer Price Index 8.3 18.6 16.0 Exchange Rate: (USD/ruble) Official N/A 2 10 Commercial N/A N/A 75 Balance of Payments and Trade: Total Exports (FOB/mil. USD) 5/ 1,870.6 2,600.0 2,300.0 Exports to U.S. (mil. USD) N/A 0.12 20.40 Total Imports (CIS/mil. USD) 5/ 1,123 1,600 1,540 Imports from U.S. (mil. USD) N/A 29.1 63.2 Aid from U.S. N/A N/A N/A Aid from Other Countries N/A N/A N/A External Public Debt 6/ N/A 288.2 180.0 Debt Service Payment (paid) N/A N/A 4.4 FOREX Reserves (bil. USD) N/A N/A N/A Trade Balance (mil. USD) 5/ 747.6 1,000.0 760.0 Balance with U.S. (mil. USD) N/A -28.98 42.80 N/A--Not available. 1/ 1992 Figure in million rubles. 2/ 1994 Figures are all estimates based on available monthly data in October 1994. 3/ 1992 figure in rubles. 4/ Figures are actual, average annual interest rates, not changes in them. 5/ Merchandise trade. 6/ Foreign credits. Note: On October 1, 1994, attracted foreign credits consisted of $468.2 million for the 1993-94 period. A new currency, the manat, was introduced on November 1, 1993. Since that time, as the following report will reflect, the rate of the manat has fluctuated so greatly as to make the conversion of domestic data to USD almost meaningless. At any one time there are three exchange rates: an official rate, a commercial rate, and a black market rate. Converting any given data into USD could reflect incorrect information. 1. General Policy Framework Turkmenistan declared independence following a national referendum on October 27, 1991. Saparmurad Niyazov, head of the communist party since 1985 and president since the creation of the position in October 1990, was elected president of the new country in a direct election on June 21, 1992. Unchallenged, he won 99.5 percent of the vote. The 1992 constitution declares Turkmenistan to be a secular democracy in the form of a presidential republic. In practice, it remains a one-party state dominated by a strong president and his closest advisors within the Cabinet of Ministers. On January 15, 1994, a referendum was held which extended Niyazov's presidential term until the year 2002. President Niyazov has declared his intention to develop a market economy while maintaining the state's role in sectors involving oil and gas, electrical energy, rail and air transportation, communications, information, education, science, health, and culture. Privatization began with a leasehold program for development of new agricultural lands by private farmers, which was approved by the government and put into effect in early 1993. In practice, undeveloped plots of land were distributed among those intending to grow agricultural products in exchange for forfeiting the right to freely sell or give away such products. Farmers must sell most of their crops to the state at fixed prices and do not own their land. There are currently 200 such landowners, each possessing no less than 50 hectare plots of land. The state has encouraged them through construction of irrigation systems, favorable tax and credit policies, etc. Niyazov also declared a small business privatization process, which began in December 1993, through auctions of state services and, later on, privatization of trade and public catering enterprises. Most of the enterprises are being bought by labor collectives and individuals. The government claims that 818 enterprises were privatized by October 1, 1994. The Ministry of Economics and Finance is overseeing the privatization process which is expected to continue through 1996. Turkmenistan's economy is highly dependent on the production and processing of energy resources and cotton. Natural gas provides 69 percent or $1,235 million of total exports. Energy reserves are estimated at 15.5 trillion cubic meters of natural gas and 6.3 billion tons of oil. Turkmenistan possesses large deposits of various minerals and salts, with indications of commercially exploitable gold, silver and platinum. Despite this abundance of fuel and natural resources, agriculture accounts for nearly one-third of Turkmenistan's gross national product and more than two-fifths of the country's total employment. Cotton is the dominant crop, covering more than 45 percent of arable land and constituting 56 percent of total agricultural production. The 1994 target is to harvest 1.5 million tons through improved technology. Grain production is the second priority. Turkmenistan hopes to harvest one million tons of wheat in 1994. By 1996, Turkmenistan hopes to be self-sufficient in wheat production. Turkmen farmers rely heavily on irrigation. Agricultural yields are 2-3 times lower than might be expected due to years of inefficient water use, salinization, inappropriate land irrigation, and over-development of cotton cultivation. The government has reduced the area occupied by cotton fields and encourages research into more efficient water usage. Water distribution among farmers is limited and strongly controlled by the state. The ration of water usage varies and is free of charge; however, extra supplies beyond the ration can be bought at low state-subsidized prices. Limited water resources do not allow development of the remaining 90 percent of this highly arid country. Large scale specialization of agriculture creates a heavy reliance on food imports. In 1992, Turkmenistan imported 32 percent of its grain, 45 percent of its milk and dairy products, 70 percent of its potatoes, and 100 percent of its sugar. To reduce dependence on food imports, the government promotes domestic grain and sugar beet production and is investing in dairy and sugar processing plants and equipment. As a member of the Commonwealth of Independent States (CIS), Turkmenistan is affected by the economic decline in neighboring countries. Non-payment from Ukraine and other CIS countries for natural gas deliveries led to reduced state investment activities. In turn, this caused production of GDP to decrease 25 percent compared with 1993. Payment defaults, primarily caused by currency non-convertability and lack of hard currency in CIS countries, make inter-republican trade much too complex, non-profitable and, thus, minimal. Turkmenistan continues to focus on clearing payments. Rail and road transport, pipeline routes, and shipping via Russia and other CIS countries remain the major export routes of Turkmen goods. Turkmenistan, Iran, and Turkey have signed a political agreement to build a gas pipeline through from Turkmenistan to Turkey via Iran. Financing, however, has not been secured, and may prove difficult due to political considerations. Turkmenistan and Iran are building a rail link between Serakhs and Meshed, which is scheduled for completion in 1996. The Government of Turkmenistan is also considering building a railroad through Afghanistan to Pakistan, but once again financing is a problem. The new international airport in Ashgabat is expected to reach full operation by the end of 1994. Turkmenistan's 1994 budget was projected including hard currency payments owed for gas shipments by Ukraine and the Caucasus (in accordance with previously concluded agreements). Turkmenistan's tax base is quite small; in 1994 some 70 percent of budget revenue came from exports of natural gas. Payment defaults have left the budget in deficit. As a result, the government has had to toughen its financial policy by denying credits, reducing numerous construction activities, maintaining high percentage rates on foreign exchange surrenderings from state-owned enterprises, and strengthening control over budget expenditures. Forty percent of budget revenues are proceeds from a value added tax on goods and services. Twenty percent of budget revenues also come from a natural resources tax and 15 percent from a profit tax on gross profit. About 60 percent of budget expenditures go to support price subsidies and 7.3 percent is designated for defense purposes. The government also maintains a foreign exchange fund to control hard currency movement in and out of the country. With respect to monetary policy, the main instruments of credit control include reserve requirements and refinance policy. In practice, the level of commercial bank access to central bank credit is determined by the Cabinet of Ministers. The government hoped that the establishment of foreign exchange auctions would introduce a more efficient financial market; however, this attempt failed due to a shortage of hard currency. On August 1, 1994, the Commodity and Raw Material Exchange (CRME) was set up to regulate and control hard currency revenue from exports and imports. All CRME transactions are in manats; foreign buyers/sellers can exchange money through the Central Bank. Only transactions which take place through the CRME receive export licenses. Turkmenistan joined the IMF, World Bank, and European Bank for Reconstruction and Development in 1992. It is a member of the Economic Cooperation Organization (ECO), along with other central and south Asian countries, Iran, and Turkey. Turkmenistan became an observer to the GATT in June 1992. The Uruguay Round agreements are not currently under discussion in Turkmenistan. 2. Exchange Rate Policy On November 1, 1993 the government introduced a new national currency, the manat. The initial exchange rate was set at an unrealistic two manat = one dollar. The government also established a currency auction to assist in setting the exchange rate for the manat. However, due to limited foreign exchange availability, the last auction was held in May 1994. For purposes of trade with Russia, the manat, the dollar, and the Russian ruble are equally valid. The official manat/dollar exchange rate is determined by Turkmenistan's Central Bank. On April 15, 1994, the official foreign exchange rate was changed to ten manat = one dollar, where it has remained ever since. In an attempt to attract investors, commercial banks introduced a new commercial rate at sixty manat = one dollar. On August 15, 1994 the commercial exchange rate was raised to 75 manat to one dollar in connection with the establishment of the Commodity and Raw Material Exchange. The government plans to reintroduce the foreign exchange auction once sufficient foreign exchange has been collected. The government is depending on the successful operation of the CRME to provide this hard currency to the Central Bank. 3. Structural Policies The government is anxious to attract foreign investment to develop Turkmenistan's substantial energy, mineral, and agricultural resources. Laws concerning foreign investment, banking, taxation, foreign exchange regulation, and property ownership, which were passed in October 1993, are intended to create a legal commercial framework. In 1993, the Khalk Maslakhaty (People's Council) created "economic zones of free entrepreneurship" in seven regions through Turkmenistan. These zones offer favorable taxation and production terms for private enterprises. According to Turkmenistan's tax laws, every enterprise is required to pay a 25 percent profit tax and a 20 percent value-added tax. Fifty percent of foreign exchange proceeds from the export of goods and raw materials, and 60 percent of the proceeds from gas exports, are surrendered to support the government's foreign exchange fund. Foreign investments are exempt from this export tax. The government continues to regulate salaries. Following the introduction of the manat and the subsequent increase in inflation (about 23 percent by October 1994) the president announced a mandatory salary increase effective July 1, 1994. The minimum and average salaries were set at between 250 and 1,200 manat per month. Pensions, stipends, and allowances were also increased slightly. The government also continues to control prices for staples, medicines, rent, public transportation services, and some production costs. Price liberalization, which began in 1992, is expected to continue. Only 50 to 60 kinds of products will be subsidized in 1995, at which time the remainder of prices will be freed. 4. Debt Management Policies In the "zero-option" agreement signed with Russia on July 31, 1992, Russia assumed all of Turkmenistan's former Soviet Union (FSU) debt obligations, while Turkmenistan surrendered all claims to FSU assets. Turkmenistan currently faces difficulties collecting hard currency payments for gas deliveries to Ukraine and the Caucasus. The overall debt of these countries to Turkmenistan is $1.5 billion. Despite these payment problems, Turkmenistan is forced to continue supplying these countries with gas due to pipeline and storage constraints and a lack of other options. Turkmenistan hopes that the IMF agreement with Ukraine, and the expected economic improvement in Ukraine's economy, will result in Ukraine resuming hard currency payments to Turkmenistan. Turkmenistan purchased $10 million worth of PL-480 Title I wheat in FY 1993 and 1994. Turkmenistan also took advantage of $5 and $10 million in GSM-102 credits which were granted in FY 93 and 94, respectively. A new FY 95 Title I agreement is currently under consideration by the government. Turkmenistan has also concluded long-term credit deals with American, European and Turkish companies, the European Bank for Economic Development, and the Iranian government. The World Bank is exploring a proposed $25 million credit extension to Turkmenistan in order to strengthen Turkmen economic potential. 5. Significant Barriers to U.S. Exports Turkmenistan's lack of a freely convertible currency, absence of an efficient banking system, rudimentary business infrastructure, and centralized decision-making system all present obstacles to U.S. exports. With Russia and the other CIS countries, a clearing arrangement exits. But even with these neighbors, trade remains based primarily on the barter system. To normalize its trade and investment with Turkmenistan, the United States concluded the first of a series of bilateral economic agreements in 1993. In October 1993, a Bilateral Trade Agreement, which provides reciprocal most favored nation status, went into effect. To date, numerous U.S. companies are involved in feasibility studies and contract discussions. Approximately eight U.S. firms have permanent representatives resident in Turkmenistan. Discussions on a U.S. - Turkmenistan bilateral investment treaty, which would establish a bilateral legal framework to stimulate investment, continued throughout 1993-1994. The United States has also proposed a bilateral tax treaty, which would give U.S. businesses relief from double taxation of income. An Overseas Private Investment Corporation (OPIC) agreement, which allows OPIC to offer political risk insurance and other programs to U.S. investors in Turkmenistan, was also concluded in 1992 and is currently in force. 6. Export Subsidies Policies The government provides substantial subsidies to state enterprises, including transportation and communications, which support production and employment. Subsidies also are focused in the export-oriented energy sector. 7. Protection of U.S. Intellectual Property A law on the protection of intellectual property was signed by President Niyazov in September 1992. The law is designed to provide adequate protection, although enforcement is untested. A copyright law, effective October 1993, was also approved. The U.S. - Turkmenistan trade agreement contains commitments on protection of intellectual property. 8. Worker Rights a. The Right of Association The government restricts the freedom of peaceful assembly. Unregistered organizations, including all political groups critical of government policy, or any of those with a political agenda, are not allowed to hold demonstrations or meetings. Citizens theoretically have the right to associate; however, such action may result in being fired from a job and/or having one's home and other property confiscated. b. The Right to Organize and Bargain Collectively Turkmen law does not protect the right to organize and bargain collectively. The government continues to prepare guidelines for wages and specifically sets wages in some, though not all, sectors. In other areas, there is some leeway. The predominantly state-controlled economy seriously limits the worker's ability to bargain collectively. c. Prohibition of Forced or Compulsory Labor Turkmenistan's constitution forbids forced or compulsory labor. d. Minimum Age of Employment of Children The minimum age for employment is 16, with the exception of working in a few heavy industries, in which case it is 18. While the average work day is eight hours, those between the ages of 16 and 18 are not permitted to work more than six hours per day. Fifteen-year old children may be allowed to work with the consent of their parents and the trade union. In such cases, which are rare, they work four to six hours per day. Violations of child labor laws occur in rural areas during the cotton harvest season. e. Acceptable Conditions of Work The national minimum wage is set quarterly and continues to fall far short of the amount required to meet the needs of an average family. Turkmenistan inherited an economic system and sub-standard working conditions from the Soviet era, when productivity took precedence over the health and safety of workers. Industrial and agricultural workers are particularly exposed to unsafe environments. The government recognizes that problems exist, but has not moved effectively to deal with them. f. Rights in Sectors with U.S. Investment U.S. investment in goods-producing industries continues to be very limited in Turkmenistan. To date, one investor is planning the construction of two cotton processing facilities. There is no indication that, once in operation, the conditions of work, or rights, will be different in these facilities than those in other industries. (###)