General information
General political situation
Turkmenistan declared itself independent in October 1991. The country’s dominant political figure before independence, Saparmurat Niyazov - Turkmenbashi, remained in place, and his position as Turkmenistan’s leader was confirmed by presidential elections in June 1992. In January 1994 in a referendum his mandate was subsequently extended with another 5 years until 2002. A new Constitution was adopted in 1992 which established Turkmenistan as a secular state and recognises the principle of separation of powers (legislative, executive and judiciary) as well as the right of ownership. Elections for the Medjlis (parliament) in December 1994 were largely dominated by the National Democratic Party. Western style democracy and human rights are still unknown to Turkmenistan after centuries of feudalism and 70 years of Soviet rule. Nevertheless the Government takes democratisation seriously and recently created an Institute for Human Rights. Foreign assistance, for instance through the Tacis Democracy Programme, will be requested.
Turkmenistan territory is 488,000 square kilometres, of which more than 90% is the Karakum desert. According to the latest population census Turkmenistan has approximately 4.5 million inhabitants. The main ethnic groups are the Turkmen (77%), Uzbeks (9%), Russians (7%) and Kazakhs (2%). Inter-ethnic relations are harmonious and reportedly there are less emigrants from Turkmenistan than from any other CIS State. The Turkmen are predominantly Sunni Muslims, but as a result of Soviet repression Islam does not yet play a dominant role in society.
At the international level, Turkmenistan has taken a cautious approach towards multilateral co-operation, both at the CIS and the Central Asian level, preferring to develop bilateral relationships with its most important partners (Russia, Turkey, Iran, EU, USA.). Turkmenistan’s foreign policy is based on the concept of “Positive Neutrality” which was recognised on 12 December 1995 by a UN General Assembly Resolution. Turkmenistan is the only CIS country member of the non-aligned Movement. It is also a member of the United Nations, IMF, World Bank, CSCE, ECO, and has applied for a Partnership and Co-operation Agreement with the European Union.
Social and economic performance & reform
In January 1994, the Halk Maslahaty, Turkmenistan’s supreme representative body, approved a programme of economic reform called “Ten Years of Prosperity”. The plan sets priorities and targets, based upon the 1992 situation, for the three years, 1994 to 1996 and until 2002. Key elements of the plan included the privatisation of state enterprises, the reform of land ownership and the privatisation of collective and state owned farms and investment in new pipelines for the export of gas and oil outside the former Soviet Union.
However, between 1990 and 1993 the real Gross Domestic Product (GDP) of Turkmenistan declined at an accelerating rate which contrasted sharply with the targets of the Ten Year Plan (+11.6% per annum).
Despite a healthy start of the privatisation programme in 1994, the state sector still accounts for over 90% of GDP. The domestic price and wage structure is severely distorted and public sector producers are continuously required to meet state orders. Incentives for growth in production are low and revenues do not allow for investments which also deters foreign investors. The growing private sector has yet incomplete access to competitive markets for products, inputs and credit.
Local public sector producers often depend on directed subsidised credits that are likely to be either written off or rescheduled in order to pay the wages or buy sufficient input materials. The resulting high rates of inflation create a price uncertainty that makes it difficult to plan for the future. They have also taken their toll on the Manat which went from 1$: 2M in November 1993 to 1$: 5,200M in December 1996.
Foreign trade is highly regulated in order to keep domestic consumer prices low and should generate earnings to support a programme of centralised public investment. However, local producers have difficulties in procuring new technology for more efficient production. The problem is compounded by the disruption of inter-republican trade flows within the former Soviet Union, though links with geographically closer trading partners (Iran, Turkey) are being developed.
Because of Turkmenistan’s remoteness to major markets, the availability of a good transportation is critical for the competitiveness of its agriculture and industry. In May 1996 a railway and road connection was opened between Seraks and Mashad (Iran) which links Turkmenistan (and the entire CIS) to the Trans-Asian Railway system with connections to China, the Persian Gulf and the Bosphorus. A new airport has been opened in October 1994 and Turkmenistan hopes to become a regional travel hub once the new runway will be completed in 1997. A masterplan for the port of Turkmenbashi is being developed with assistance from the EBRD which should make it the gateway to Central Asia, while TICA, the Turkish International Co-operation Agency, will draw up a highway masterplan. Traceca has been instrumental through a large number of cross-border projects. Since better access from abroad also implies a higher risk of illicit trafficking, the Government studies ways to improve customs operations.
Turkmenistan over the past two years has been running 10% annual fiscal deficits which is well beyond the budgeted 2%. Part of the problem is that the revenues from gas exports have been disappointing as traditional markets either no longer require supplies (Russia) or are unable to pay (Caucasus countries, Ukraine), while there is no longer access to world markets. The Government has been in negotiations with external oil and gas companies to reach alternative markets. Principle agreements have been reached for the construction of pipelines via Iran to Turkey and via Afghanistan to Pakistan but a number of important questions still need to be solved before implementation can start.
Prospects
The disappointing revenues from gas exports and the pertaining difficulties of obtaining access to non-CIS markets, made the Government realise by the end of 1995 that accelerated economic reforms would be necessary. On basis of recommendations from the IMF a number of measures have been taken to stabilise the macro-economic situation. For instance, to reduce inflation the Government has introduced a ceiling for credits which will be extended through competitive bids. Extra-budgetary accounts from for instance the Ministry of Agriculture (cotton) and Oil & Gas, will now be incorporated into the central state budget to increase financial control.
Also, as of 1 January 1996 the multiple exchange rate system has been unified and a currency exchange has been created, which is a good basis for further trade liberalisation. Bread will no longer be sold for free as of 1997 but instead is undergoing a sharp increase in price and also other products have the gap between their local and border price reduced. This should reduce government spending on social purposes, now over half of the budget, and stimulate domestic output. The same is true for public services in the health and education sectors which require increasing contributions from the beneficiaries.
In addition, the government is giving a boost to the privatisation programme with some 200 medium-size enterprises to be turned into joint-stock companies (15% of GNP) and the creation of a stock exchange which should pave the way for mass privatisation.
Also, Turkmenistan hopes to secure revenues from gas exports that will now be sold to Gasprom (Russia) although at a volume and price far below the estimates of the 10 Year Programme. When in 1997 the Ukraine and Georgia will also start paying back their combined debt of $2 billion for gas deliveries, the Government will be able to start financing the structural adjustments of the Ten Year Programme.
Sectoral priorities for Tacis
Private sector development and restructuring of state enterprises
A National Programme for Privatisation has been adopted in October 1994 which foresees a destatisation in three phases. A healthy start was made with the privatisation of some 1800 small scale services which has resulted in the emergency of a small but growing SME sector. The government is determined to continue in 1996 with the second phase where in some 200 medium-sized enterprises (15% of GDP) will be converted into joint-stock companies which should be followed by mass privatisation.
However a successful privatisation programme depends on a number of elements that yet need to be further developed in Turkmenistan. First, despite impressive efforts by Government and Medjlis, significant gaps, inconsistencies and intransparencies remain in the country’s legal framework. Legislation affecting foreign and domestic investors needs to be harmonised while their capacity to enforce the legal regime needs to be strengthened if Turkmenistan wants to attract investment from abroad. Simultaneously its capacity in international contract negotiation and arbitration needs to be enforced as a number of foreign investors have taken advantage of Turkmenistan’s inexperience.
Second, privatisation needs to be accompanied by measures to strengthen the governance of enterprises that will not be privatised, while competitive market conditions should be secured. The Government will need to transform state enterprises into corporate entities managed according to commercial law as to avoid a conflict of interest between those who regulate the industry and those who carry out the commercial activity.
Third, Turkmenistan needs to strengthen the institutional framework for economic policy making. In the past, policy decisions and the processing of information originated in Moscow and the republican administration was only in charge of implementation. Therefore, there was little capacity to analyse economic developments or to formulate policy. Training to improve such capacity would be high priority.
Fourth, enterprises have not shed labour, despite the contraction of output. Unemployment is practically non-existent. However, there is a trade-off between improving the financial situation of enterprises and protecting employment. The implementation of a reform programme would make it necessary to reduce legal restrictions and encourage labour mobility.
Fifth, Turkmenistan needs to have sound and implementable fiscal policies and public finances to create a macro-economically stable climate in which the private sector can flourish.
“Private sector development and restructuring of enterprises” has been a focal sector for Tacis since 1992. Other donors include the World Bank which provides a $25 million technical assistance loan with among others assistance in the areas of privatisation, financial services and private sector development, and a focus on strengthening the institutions involved in the privatisation process. The loan has been extended as of 1 September 1995, but its implementation remains uncertain. The EBRD opened a $35 million credit line in support of the SME sector. UNDP and USAID have provided incidental assistance through seminars, etc.
Agriculture and Food Production
In 1994 Gross Domestic Product (GDP) was valued at 222.5 billion Manats ($3 billion or $690 per head). Agriculture accounted for 19% of GDP, 42.4 billion Manats ($565 million) of which cotton accounted for 65% (almost $370 million). Over 40% of the population is employed in the agricultural sector.
In 1995 all kolkhozes- and sovkhozes were converted into “dayhan co-operatives”. However, privatisation of farms and other enterprises within the agri-food sector will remain unattractive as long as state orders account for the majority of farm sales and the state controls the marketing and distribution of food products. Due to the pricing system, farmers are forced to subsidise the consumer for basic products such as bread, meat and milk, whilst cotton is used as a “milk cow” by the Ministry of Agriculture which only pays farmers around 10% of the realised price for cotton exports. The rest of the cotton revenues, in total $300 million per year, is used to finance construction, to purchase industrial equipment, to pay off state debt, to import foodstuffs and to pay for state orders from farms.
Agricultural policy is based on greater self-sufficiency in food supplies. However, gross agricultural output has remained almost static over this period - in contrast to the Government’s Ten Year Plan target of +9% per annum between 1992 and 2002. Cotton production declined by over 10% between 1990 and 1994, whereas grain production more than doubled as land was transferred into grain production. The output of livestock products fell in absence of appropriate feed, especially in the Public Sector. Fruit and vegetable production was halved as the traditional former Soviet Union market was lost. Where this was not cut back sufficiently as in melons, there is now a surplus. The loss of export markets is partly related to growing the wrong varieties, e.g. seeded grapes, and an inability to produce exportable value added products, such as dried fruit and wine. The real value of the food processing output was virtually unchanged between 1990 and 1994. This compares with the Government’s long term plan of +12% per annum. The poor performance is attributable to the lack of suitable raw materials, low capital investment and poor maintenance.
At 1994 prices, most farms were unable to make a profit and they have only survived through the state writing off their debt at the end of the year. As prices do not reflect scarcity, central allocation is being used which results in shortages of crucial inputs at critical times, at both the farm, the food processing plant and the consumer level. Inefficient use of water (free of charge!), salinisation, irrigation of inappropriate land, and overdevelopment of cotton cultivation also contributed to low agricultural yields. In November 1995 Turkmenistan needed to apply for food aid from the European Union.
However, there are also positive trends. For instance, private production has flourished and in certain cases accounts for over 50% of production evidencing that realistic market prices are an incentive for optimising yields. A psychologically important step was made by a significant raise in the price of bread which was originally intended to be sold for free by 1997. On other agricultural products as well the gap between the local and the border price has been reduced. In 1996 retail food stores under the Ministry of Agriculture should be privatised, while in 1996 and 1997 the six associations under the Ministry of Agriculture (production plus agricultural chemicals & seeds, food processing except cotton, cotton processing & trade, bread & grain products, machinery & services, capital construction) should be prepared for privatisation. Cotton exports have benefited from high prices for raw cotton and the country has invested heavily in the production of added value cotton products which are starting to show up in the export statistics. The creation of peasant unions in 1995 presents a good starting point for land reform and farm restructuring since now all farm enterprises are under the same legal status. For all that, producers will most likely prefer co-operative relations for management of water and production and marketing of cotton.
Tacis has been by far the major donor in the agricultural sector. The depth and wide range of information that has been gathered through the various projects is unique and should be used as a basis for further transfer of know-how and small pilot projects with EU technology. Possible areas of assistance could include continued assistance to the Project Technical Advisory Unit, rural development, vocational training. As to other donor activities, the organisations of the UN system including the World Bank have been focusing on water management including its environmental and health aspects. Tica together with assistance from Israel and the USA is developing a model farm, while the EBRD extended a credit to a Turkish-Turkmen textile joint-venture. Smaller projects will or have been carried out by GTZ (pilot privatisation, agri-banking), Kuwaiti Fund (feasibility study for baby food production), FAO and others.
Energy (oil & gas)
Per capita energy consumption in Turkmenistan is comparable to many Western European countries. Low investment costs for energy expansion, the readily available export markets for transformed energy and weak conservation incentives propelled domestic energy use in the last decade. Because of its small population and immense resources, Turkmenistan entered the post-Soviet era with the largest per capita energy exports in the region and one of largest endowments of per capita proven petroleum reserves in the world.
The energy sector which accounts for over 80% of Turkmenistan’s foreign currency earnings, faces many key challenges. The first is maintaining its gas productive capacity. Over the period 1985-1990, gas production exceeded reserves replacement by nearly 3 years of production. The main difficulty in reserves replacement is that the country does not have the technical ability to explore for hydrocarbons in the untouched, but geologically more complex areas. In addition, domestic resources are not sufficient to appraise and develop new gas resources. The oil industry has already proven reserves, but again resources are insufficient to develop them. The Government has concluded that foreign investment is the key to gaining access to financial resources, and to technology as well. The country’s capacity to market natural gas should be strengthened as well as its ability to conclude sound long-term commercial contracts which reduce the potential for volatility in gas export revenues due to unpredictable changes in transit transport pricing. Foreign investment requires an appropriate legal and taxation framework for oil & gas operations. Tacis has been asked for technical assistance, among others, in the area of tendering procedures, licensing, contracts and arbitration.
While domestic energy consumption comprises only a small fraction of the total energy supply in the economy, there is potential for increased domestic gas utilisation. Initiatives to increase domestic gas include: petrochemicals, LNG to substitute for imports, and electricity generation for export. Electricity generation provides a high netback value to gas sales. However, several issues, including arrears of customers, are being addressed before expanding this capacity.
Turkmenistan has maintained a system of highly centralised control of all domestic energy prices. One feature of the present pricing framework is that it provides little incentive for the efficient management of enterprises and the efficient use of energy by consumers. Price controls, based on average enterprise operating costs, encourage the cross subsidisation and continuation of non-viable activities, particularly in the absence of competition or regulatory monitoring of efficiency.
Advice on energy efficiency was part of Tacis assistance under the 1992 programme, as well as organisational and legal advice to the Ministry of Oil & Gas on export routes and procurement of equipment, auditing and training. Further assistance from Tacis is sought by the Ministry. The World Bank within the framework of a $25 million technical assistance loan has uncertain plans to strengthen joint-venture administration and regulatory function in the Ministry of Oil & Gas and provide training for the oil and gas sub-sector in technical and managerial skills.
Demography
In the 1995 the population of Turkmenistan totalled 4,483,300. This number can be broken down as follows:
Male 2,225,300
Female 2,258,000
Urban 2,020,200
Rural 2,463,100
Turkmen 77%
Uzbek 9,2%
Russian 6,7%
Kazakh 2%
Armenian 0,8%
Azeri 0,8%
Tartar 0,8%
Others 2,7%
Climate
Big differences exist between the deserts and the mountains and seasonal transitions are full of false starts. Rain is minimal except at higher altitudes; what rain there is falls mainly in March to April and October to November. The finest times in the lowlands are in April and May (also good for wild flowers) and September/October (also good for fruit in the markets). Midsummer is awfully hot with temperatures over 40 degrees Celsius. December and January are cold with temperatures below zero at night and just above zero during the day.
National holidays
It is advisable to keep a note of national holidays on an ongoing basis. There is a call for some of the former Soviet holidays to be replaced by new dates which the Turkmenistan population wishes to mark or celebrate and this led to some uncertainty.
The dates below were celebrated during in 1996
January 1 New Year
January 12 Day of Remembrance
February 19 Day of State Flag
March 8 International Women’s Day
March 21 Novruz-Bairam
May 9 Victory Day (World War II)
May 18 Day of Revival and Unity
October 6 Memorial Day
October 27/28 Independence Day
December 12 Neutrality Day
In addition the Government decides on 3 days in May for Kurban-Bairam.
Saturdays and sometimes even Sundays can be declared working days when there is a national holiday in the middle of the week, in order to let people rest a few days in succession.
Further reading