Mild Shock Therapy in Economic Reforms of Turkmenistan

[Some typos have been corrected in this report]

nCa News and Analysis

Ashgabat, 9 February 2008 (nCa) --- After meeting head-on the foreign currency black market early January, Turkmenistan administered Friday another doze of mild-to-medium shock therapy to push the country toward market economy and burn some flab off its economic muscles.

In an expanded session of the cabinet of ministers, President Gurbanguly Berdymuhamedov announced that every car owner would get 120 liters of gasoline free of cost every month and any volumes beyond that quota would be available at ‘market price’.

The ‘market price’ was not disclosed during the cabinet meeting but it can be assumed safely that it would be several times more than the current prices of regular and hi octane petrol. At present regular petrol is sold for 400 Manats per liter and hi octane for 600 Manats.

Shock Therapy

Besides creating the basic conditions for market economy, the government is obviously trying to nudge the population away from the entrenched habits of wasteful consumption of non-renewable hydrocarbon resources.

Exact figures are not available but it is believed that per capita consumption of petrol and diesel in Turkmenistan is the highest in the entire CIS space, primarily because petrol and diesel, till now, were available in unlimited volumes at the cheapest prices in the world. At commercial exchange rates, one US dollar could buy FIFTY LITERS of petrol, a price so low that, by and large, it lulled people into mindless wastage of precious natural resources.

The hammer of suddenly high prices of fuel, covered by the velvet cushion of free quota, may or may not work immediately the way it is intended to work. However, it is bound to encourage mightily the owners of the vehicles to go for economization of fuel, if not for the sake of future generations, at least for the sake of their own pocketbooks.

The real impact of free quota, dovetailed with manifold increase in prices of petrol and diesel, would be more psychological than financial. In fact, some families may end up driving their cars at free petrol alone.

Gas guzzlers by western standards are not common in Turkmenistan anyway. Even the mildly wasteful machines such as Volga and Moskvich are gradually disappearing from the roads. They are being replaced by new and used cars of European and Japanese origin.

Average consumption of cars in Turkmenistan is ten kilometers to a liter. This comes to forty kilometers per day of driving on free petrol.

Looking at the lifestyle of an average family, one can imagine that they need to use the car to pick and drop the children at school, travel to and from the office, go grocery shopping and make about three social calls a week to friends and relatives. Distances in Ashgabat are not very long and all of these activities would demand daily drive of about forty kilometers in city conditions. If there is the need to buy any petrol at market prices, it would be not very high and very frequent.

However, not all families fit into this pattern.

People living in the outskirts of Ashgabat and adjoining towns, working in Ashgabat and visiting their relatives at least twice a month in other cities, would need to buy a lot more fuel at the market price.

Once the people overcome the initial shock, there would be the urge to introduce fuel economy devices in their cars.

This would also lead to the market demand of LNG kits, something not very popular till now in Turkmenistan. It can be predicted with some certainty that at some stage this year the government may come up with a plan to allow public or private sector to start converting the cars to dual LNG/petrol usage.

Economic Reforms – The Vision

Before making the announcement, President Berdymuhamedov spoke for about an hour, describing his vision of economic and financial reforms.

“In the new era of great revival, we should deal with the economic challenges with short-term and long-term perspective,” said Berdymuhamedov.

He added, “The modern model of socio-economic development should be based on our economic strengths. The basic purpose of reforms is spiritual and intellectual well-being of the individual.”

Further development of the economy would depend on our ability to maintain at least 8-10% growth rate in GDP, which would be nearly five times more than necessitated by the rate of growth of the population, said the president.

This is only the start of radical diversification of economy, aimed at creation of atmosphere for comprehensive development, said Berdymuhamedov. Implementation of this strategy requires qualitative change in our investment policy and creation of conditions for smooth inflow of investment, he said.

Berdymuhamedov stressed that the parliament must hurry with legislations to encourage the private sector. Creation of favourable business environment, protected by sound legislation, is necessary for step by step transition toward market economy, he said.

Development of the immense hydrocarbon resources would naturally remain a priority for the government, said the president. He underlined that the Caspian sector of Turkmenistan alone holds some 12 billion tons of oil and 6 trillion cubic meters of gas. An international audit in 2008 would help accent the exact potential, he said.

Speaking of diversification of economy, Berdymuhamedov said that the north-south trade and transportation corridor and the free tourist zone Avaza at the Caspian coast were just two examples of how the government was probing possibilities unrelated to the hydrocarbon sector. He said that there were many other promising areas such as chemical industry, textiles, and agriculture.

Three Goals for Financial Reforms

Berdymuhamedov said that creation of a solid base for market economy was not possible without financial reforms. He identified three critical areas for financial reforms:

1. Strengthening of national currency and eliminating the gap between the bank and commercial exchange rates for Manat; bank and commercial rates must equalize before the end of this year in readiness for introduction of redefined national currency.
2. Encouraging the people to put their savings in circulation in the state financial system such as high liquidity bonds, backed by the state and compatible with international share markets
3. Development of banking and insurance sectors and promotion of investment funds

Five Year Plan

The president said that the ministry of finance, ministry of economy and development, the institute of strategic planning and economic development and other state structures should prepare a five year plan for development.

$ 5 Billion Investment in Hydrocarbon Sector in 2008

Ministry of oil and gas will invest US $ billion in the hydrocarbon sector in 2008. It was not clear as to what portion would come from own sources and what percentage would be contributed by foreign investors.

Procedure for Obtaining Free Quota of Fuel

Some banks, as authorized by the Central Bank of Turkmenistan, would issue coupons to the owners of the vehicles for obtaining their free entitlement of fuel from the fuelling stations. The owners must present their passport, registration certificate of the vehicle and certificate of its road worthiness to obtain the coupons. One person can claim free coupons for only one vehicle registered in his/her name in six months.

The free entitlement of petrol and diesel covers all kinds of vehicles including cars, trucks, buses, tractors, and motorcycles.

Free gasoline would be available with effect from 11 February 2008.

Free coupons, if not redeemed within the calendar year, would expire automatically.