Turkmenistan-Fiscal and Monetary Conditions

In the first half of the 1990s, Turkmenistan slowly established independent fiscal and monetary institutions and policies to replace the centralized Soviet system upon which the republic had relied prior to independence. These innovations have included a separate national currency, an independent national bank, and mechanisms to control budgetary deficits.

Banking System

Until Turkmenistan became independent, its banks essentially functioned as accounting branches of the Soviet State Bank. Especially after introducing its own currency in November 1993, Turkmenistan experienced a need to develop a true banking system. The current structure, defined by the 1993 State Banking Law, includes a central bank (called by the Russian term Gosbank) that is responsible for the conduct of monetary policy and supervision of the banking system, a state-run savings bank (called by the Russian term Sberbank) and an external trade bank (called by the Russian term Vneshekonombank), and commercial banks such as the Turkmenistan International Bank for Reconstruction and Development. The latter institution is designed specifically to attract investments and promote exports in the gas and oil industries.

Turkmenistan's banks are expected to operate under a fractional reserve system that allows commercial banks to set interest rates based upon the increase or decline of their reserves in the state bank, giving them an incentive to allocate credit more easily or stringently as the market allows. However, in reality the republic's Ministry of Economy, Finance, and Banking determines the levels of bank access to central bank credit.

The central bank favors credits to lower-level banks for supporting privatization, developing market infrastructures, expanding exports, and strengthening the banking structure. Generally, foreign companies are encouraged to seek external sources for financing projects in the republic. Banking policies include loans at significantly lower interest rates for agriculture than those granted to industrial enterprises. Goods purchased from state administrations can be paid for by checks that will be debited to accounts in the commercial banks.

Currency

Turkmenistan introduced its own currency, the manat, in November 1993, beginning at an exchange rate of two manat to one United States dollar and one manat to 500 rubles (for value of the manat--see Glossary). Manat banknotes are printed in denominations of 1, 5, 10, 20, 50, 100, and 500, and tenge coins (100 tenge to 1 manat) are minted in denominations of 1, 5, 10, 20, and 50.

Procedures were devised to prevent a run on the currency and to stabilize the economy as much as possible during the introduction of the manat, including the closing of currency stores, posting of new prices that were to remain stable until an exchange rate had been reached, limiting the conversion of rubles to manat to a one-time 30,000 rubles exchange, and giving everybody sixty manat gratis. However, people began to produce false passports to get the free manat and to exceed the 30,000-ruble exchange limit. The state did not have enough stocks of the new currency to satisfy those who had "overcome their suspicions of the banking system."

Following the inauspicious introduction of the manat, Turkmenistan's government has not tried to artificially support official exchange rates, which have varied significantly from those in illegal money markets. By May 1994, the official rate was 60 manat to US$1, while in black markets it was 80-85 manat to US$1. In January 1996, the official rate was 200 manat per US$1.

Fiscal Policy

Turkmenistan was the only CIS country to have a balanced budget in 1992. Under the Interrepublican Memorandum of Understanding of October 1991, Turkmenistan's share of the Soviet Union's remaining international debt was fixed at 0.7 percent, or about US$420 million. An agreement with Russia in July 1992 erased this debt entirely when Turkmenistan renounced claims to former Soviet assets. This agreement virtually eliminated all of Turkmenistan's hard-currency debt.

In 1993 increases in the minimum wage and social safety net strained fiscal discipline, but the government introduced a "sub-soil" tax on oil and gas exploration by Turkmengaz and other companies, as well as a value-added tax (VAT--see Glossary) of 20 percent and a profits tax of 30-45 percent to increase government revenues for its social programs. Despite this strategy, the 1993 deficit was estimated at 10 percent of GDP, far more than the 2-3 percent projected by the government.

By the mid-1990s, increased entitlements such as free utilities had combined with careless monetary management to reduce investment and raise deficit spending and inflation. Until other gas pipelines are opened up to paying customers, experts predicted that Turkmenistan's hard currency reserves (estimated at US$500 million in 1993) would not remain at a high enough level to cover the government's undisciplined approach to budgeting.

Data as of March 1996