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Cash Restricted Turkmenistan

The external position will continue to improve thanks to higher hydrocarbon exports

Tuesday 26 June 2018

Despite its upper-middle-income status, Turkmenistan is still at an early stage of transition. Definitely, its rich natural resources have veiled the need for a change, delaying first generation reforms such as price and trade liberalization, privatization, and the creation of institutions for market regulation, which began only after 2007.

Turkmenistan has run a double-digit current account deficit for the three past years, according to the International Monetary Fund (IMF) data, although this year the hole is projected to contract to 9% of GDP or $3.8 bln, from last year’s 11.5%t, or $4.4 bln.

Hans Timmer, chief economist for Europe and Central Asia at the World Bank, said Turkmenistan’s current account deficit “is not really sustainable in the long run and foreign currency shortages reduce productive potential”.

The World Bank and the Ashgabat government have had “a more intense relationship” over the last couple of years, Timmer said, but Turkmenistan must do more before the bank can give it financial support, in particular by providing better economic data and ensuring transparency.

In a cash deprived Turkmenistan, foreign companies are struggling to make sales and collect payments as economic pressures mount in large part due to gas exports. The country is still awarding contracts to foreign and domestic firms, but some projects have stalled and IMF advises them to cut spending or devalue the manat (TMT).

Ashgabat’s troubles emerged in 2016 when Russia stopped buying the Turkmen gas, citing pricing disputes and shifts in the global energy market. Exports to China have failed short to offset the loss of Russian sales and the country’s total export revenue dropped to $8.0-8.5 bln in 2016-17, about half of what it was receiving between 2000 and 2014.

Updated on June 7, 2018
Source: Azatly Radiosy
(Courtesy of RFE/RL)

In response, the government has steadily tightened foreign exchange controls to conserve hard currency for priority projects. On the black market, the manat has fallen to 17-18/$ from 13-14/$ at the beginning of this year and 7 in late 2016. The official rate is 4.07/$. Turkmen debit-cardholders living abroad were previously limited to taking out the equivalent of $15 per day, but that amount became insignificant once virtually any attempt to extract money — whether at ATMs in Turkey, Belarus, Ukraine, or Russia, among others — ended in failure.

Private local companies such as importers of consumer goods receive only a fraction of the dollars they request. According to Turkmen entrepreneurs reported by Reuters, the Turkmen government has trouble paying foreign contractors and has not paid companies for more than three years. Two Belarusian government sources told Reuters Ashgabat has not fully paid a Belarusian state-owned company for building a fertilizer plant launched in March 2017. One source said the outstanding debt was $52 mln.

In an uncommon effort, the central bank was ordered to extend $3 bln in soft loans to the Union of Industrialists and Entrepreneurs of Turkmenistan, a body made up of local companies, to build a highway and a fertilizer plant. Previously, the government awarded such contracts to foreign companies.

However, some foreign firms continue to get Turkmen contracts. For instance, Hyundai declared it was working on a $3 bln petrochemicals facility and was in talks about two more projects in the same sector worth $4.8 bln in total. Hyundai affirmed to not having difficulties with payments from Turkmenistan and described the government as supportive.

Outlook

Turkmenistan’s economic outlook will depend largely on the price and external demand of natural gas, although industrial policy (import substitution and non-hydrocarbon export promotion) is expected to gradually help promote non-hydrocarbon activity.

The external position will continue to improve thanks to higher hydrocarbon exports. The current account deficit is expected to be financed by increases in FDI and other capital inflows, allowing the central bank to protect its official reserves and maintain the exchange rate peg.

Growth remains highly dependent on hydrocarbons and related sectors. After the successful diversification of natural gas export routes in 2009, China became the largest export market for Turkmenistan. Medium-term plans envisage a further increase in natural gas exports to China and other destinations in East and South Asia, at the same time that exports to Russia have come to a halt due to transit pricing disputes.

Exports of natural gas to Iran remain limited. In this context, a planned third pipeline to China and the proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, in case they materialize, would more than double gas export capacity. Despite the ongoing and planned diversification of markets, Turkmenistan’s exports are increasingly dependent on a single large market (China) and continue to be dominated by a single product (natural gas), making the economy vulnerable to fluctuations in global prices beyond its control.

Over the medium term, the country’s growth rate is projected to hover below 7% a year — much lower than the double-digit growth observed in the previous period — despite the continued expansion of gas exports to China.

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