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RR RUEHAG RUEHAST RUEHBI RUEHCI RUEHDF RUEHIK RUEHLH RUEHLN RUEHLZ
RUEHPW RUEHROV RUEHVK RUEHYG
DE RUEHAH #0615/01 1350946
ZNR UUUUU ZZH
R 140946Z MAY 08
FM AMEMBASSY ASHGABAT
TO RUEHC/SECSTATE WASHDC 0792
INFO RUCNCIS/CIS COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
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RUEKJCS/SECDEF WASHDC
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RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 ASHGABAT 000615 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR SCA/CEN, EUR/ACE, EEB 
TREASURY FOR BAKER/LANIER 
COMMERCE FOR HUEPER 
AID/W FOR EE/EA 
 
E.O. 12958: N/A 
TAGS: PGOV PREL EAID ECON EFIN TX
SUBJECT:  TURKMENISTAN:  IMF ACCEPTS "NEW DAWN" IN RELATIONSHIP WITH 
GOVERNMENT 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (U) SUMMARY:  On May 8, International Monetary Fund (IMF) Deputy 
Division Chief (Middle East and Central Asia) Peter Winglee briefed 
representatives of international organizations on the delegation's 
recently concluded mission.  In its official meetings, the 
delegation encouraged Turkmenistan's officials to look at policies 
that would sustain the unification and support of a stable exchange 
rate, such as open access to foreign exchange.  To avoid potential 
instability, the IMF encouraged the government to keep current rates 
fixed at least until next year when the currency is redenominated. 
The government has the funds to prevent a black market from emerging 
if it "kept its nerve."  Authorities were not looking for major 
increases in petrol prices for the rest of 2008, nor did the IMF 
expect food prices to increase further.  The government is willing 
to consider wage increases to offset increased inflation, but wants 
to see where inflation actually settles.  Overall, the IMF gave 
Turkmenistan a good report card after the visit.  END SUMMARY 
 
¶3.  (U) At a May 8 donor meeting organized by the UN Development 
Program (UNDP), IMF Deputy Division Chief (Middle East and Central 
Asia) Peter Winglee briefed assembled participants on the recently 
concluded annual Article IV consultations with the Government of 
Turkmenistan on economic and monetary policy issues.  (NOTE:  The 
Article IV Consultation is the vehicle for the IMF's surveillance of 
economic policy and exchange rate issues.  END NOTE.)  The latest 
discussions were an outgrowth of a dialogue that began in 2007 and 
focused on policies to sustain the recent currency unification, 
particularly in the context of higher inflation. 
 
OFFICIALS ENCOURAGED TO SUSTAIN THE UNIFICATION 
 
¶4.  (U) Winglee reported that officials told the delegation that 
inflation increased to "the middle teens" as of March 2008, which 
Winglee recognized as "quite a problem."  The delegation encouraged 
Turkmenistan's officials to look at policies that would sustain the 
unification and support a stable exchange rate.  First, the 
government should ensure open access to foreign exchange.  Next, it 
should promote trade liberalization, since high duty rates were not 
needed to restrain imports in light of the strengthened Turkmen 
manat.   Winglee reported that authorities were "receptive" to this 
suggestion. 
 
¶5.  (U) In spite of the strengthened manat, Winglee acknowledged 
that price decreases had not been realized.  High duties were a 
"major part" of this, but there was still a lot of uncertainty and 
hesitation on the side of the Government to reduce prices.  As a 
result, the IMF delegation stressed the importance of building 
confidence in fiscal policy and a ready availability of foreign 
exchange at the current level.  With regard to reserves, authorities 
acknowledged having the equivalent of twenty months of imports on 
hand, which was "quite high" and enough to support the unification. 
 
 
"WAIT AND SEE" APPROACH ON WAGE, PRICE INCREASES 
 
¶6.  (U) In terms of the fiscal policy, Winglee said the budget would 
be a major beneficiary from exchange rate unification.  Much 
spending for goods and services is already at the market rate 
because they are bought from local contractors, which would ease the 
price transition.  The IMF did not expect food prices to increase 
further.  The government was willing to consider wage increases to 
offset potential high inflation, but wanted to see where inflation 
settles.  In the meantime, it had adopted a "wait and see" approach 
in this regard. 
 
REDUCE BANKING CONTROLS VIA LIBERALIZATION 
 
¶7.  (U) The delegation discussed monetary policy and the importance 
of the Central Bank's focusing more on core central bank-related 
activities, including moving away from directed credits.  The 
Central Bank, for which a new chairman was recently appointed, saw 
the current situation as a "new start," and an opportunity to allow 
banks to access foreign currency.  This was a big step that would 
 
ASHGABAT 00000615  002 OF 003 
 
 
not happen overnight. 
 
¶8.  (U) Other banking reform, such as measures to increase 
competition, develop the market and financial infrastructure like 
the payment system, and strengthening supervisory capacity, were 
also discussed.  The IMF encouraged Turkmenistan to accelerate the 
introduction of International Financial Reporting Standards, which 
UNDP and USAID have been working on with the Central Bank.  Winglee 
stressed that the dual exchange rate has been a major problem in 
gaining proper accountability in banks, and so unification was a 
good step forward. 
 
DATA QUALITY STILL A CONCERN 
 
¶9. (U) Before breaking for questions, Wingless said that data issues 
and improving the data quality remained a challenge.  The 2007 GDP 
growth rate of 11.6% was "more realistic" than the rate in the high 
teens reported in previous years.  Although the current figures were 
lower than past reported levels, this did not reflect a slowing of 
growth, but better methodology in determining the rate.  Current 
estimates of nominal GDP was "not too bad."  A part-time IMF advisor 
just finished an initial three-week consultation, and identified 
deflators as a problem to work on in the future. 
 
QUESTIONS ON INFLATION, SOCIAL IMPACT OF UNIFICATION 
 
¶10.  (U) In response to a question, Winglee said the 2008 forecast 
for inflation was 12-14%, subject to increased availability of 
imports and decreased duties.  As for 2007 inflation figures, the 
government reported 6% inflation for 2007, but inflation in February 
and March pushed the rate to 8.8%.  Although the delegation did 
informal research to check these figures, Winglee stressed the IMF 
did not have an alternate measure.  Rather than make recommendations 
on controlling government expenditures, the IMF encouraged improving 
the quality of expenditures.  The IMF doesn't view budgetary 
spending as a particular issue.  The IMF was not involved in 
improving the quality of public spending, but encouraged the 
government to bring expenditures on budget.  Winglee acknowledged 
that the IMF did not ask the government to restrict spending, but 
did encourage it to reprioritize. 
 
¶11.  (U) On the possible development of a black market exchange rate 
developing since the current rate was perceived to be artificially 
set, Winglee said the best way to stop the development of a parallel 
market was to supply lots of foreign currency at the official 
exchange rate.  The government had the funds to prevent a black 
market from emerging, if it "kept its nerve" and followed standard 
policies.  The issue is that many oil exporting countries have found 
it convenient to appreciate foreign exchange rates to increase real 
incomes.  There was real income increase since 2000 in this country, 
so some appreciation of the market rate would be appropriate.  To 
improve the business environment and competitiveness, however, they 
needed broader based reforms to accompany unification measures.  At 
current exchange rates, general manat wages were not excessive, but 
whether they were sustainable depended on other factors. 
 
¶12.  (U) Replying to a question about government awareness of 
hardships on the population, including difficulties in buying basic 
food commodities, Winglee said that the government was aware of the 
much higher cost of food.  There was an ongoing debate in the 
government on how to address it.  The old-school approach was to 
import subsidized products.  However, higher agricultural prices 
were actually beneficial for farmers, so they may have to increase 
wages and pensions to compensate. 
 
EXCHANGE RATE EXPECTED STABLE FOR ONE MORE YEAR 
 
¶13.  (U) Given potential instability and risk of capital outflows, 
the IMF encouraged the Government to keep current rates fixed at 
least until next year when the currency is redenominated.  Actually, 
there was a possibility of inflows, and hence pressure for further 
appreciation.  Due to the appreciation of the foreign exchange rate, 
nominal GDP substantially increased, but if converted to U.S. 
dollars at the new unified rate, it would be reduced.  The 
 
ASHGABAT 00000615  003 OF 003 
 
 
preliminary calculation for 2007 per capita GDP was $4,300, but at 
the new rate was approximately $3,000.  The IMF has not restated the 
2007 GDP at the new exchange rate, but it would be in the range of 
$2,500-3,000. 
 
¶14.  (U) Although the time necessary to build confidence in the 
banking system was hard to predict, Winglee said that it could be 
restored quickly with an outspoken Central Bank Governor.  If it 
kept macro-economic policy reasonably sensible, Turkmenistan had the 
reserves to back it up.  Previous rationing was a physical shortage 
of manat rather than a question of U.S. dollar supply or wavering 
commitment to following policies.  This was envisioned as the first 
of many reforms, and other countries, like Poland, had taken several 
years to effect similar changes. 
 
¶15. (SBU) COMMENT:  The IMF gave Turkmenistan a generally good 
report card after its most recent Article IV consultations. 
Government officials reportedly told the delegation that they did 
not want to talk about the past, and that they see the current 
situation as a "new dawn."  Given its limited ability to engage in 
the past and the tentative relationship it is rebuilding, the IMF 
has accepted this approach.  END COMMENT. 
 
HOAGLAND