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PP RUEHAG RUEHAST RUEHBI RUEHCI RUEHDF RUEHIK RUEHLH RUEHLN RUEHLZ
RUEHPW RUEHROV RUEHVK RUEHYG
DE RUEHAH #1353/01 2850841
ZNR UUUUU ZZH
P 110841Z OCT 08
FM AMEMBASSY ASHGABAT
TO RUEHC/SECSTATE WASHDC PRIORITY 1702
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCNCIS/CIS COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 4395
RUEHBJ/AMEMBASSY BEIJING 2207
RUEHKO/AMEMBASSY TOKYO 2072
RUEHIT/AMCONSUL ISTANBUL 2643
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHDC
RUEKJCS/JOINT STAFF WASHDC
RUEKJCS/SECDEF WASHINGTON DC
RUEHVEN/USMISSION USOSCE 2968

UNCLAS SECTION 01 OF 03 ASHGABAT 001353 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EPET AORC SOCI TX
SUBJECT: EBRD PREVIEWS TURKMENISTAN TRANSITION REPORT; 
DISCUSSES INFLATION FIGURES 
 
REF: ASHGABAT 1352 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  The head of the European Bank for 
Reconstruction and Development's (EBRD) Ashgabat office gave 
a preview of the Bank's annual Transition Report on 
Turkmenistan and discussed the consumer price index and 
inflation figures with representatives of EBRD's 
shareholders.  EBRD developed its inflation figures -- 
valuable data in Turkmenistan since the government does not 
release any reliable economic data -- through market checks 
and in-house analysis.  According to the EBRD, the Transition 
Report is a unique source of information on developments in 
the EBRD region, including country-by-country macroeconomic 
tables and key data on liberalization and privatization, 
enterprise reform, infrastructure, financial institutions and 
social reform.  END SUMMARY. 
 
INFLATION FIGURES FOR 2008 
 
¶3.  (SBU) On October 9, the Head of the EBRD's Resident 
Office in Turkmenistan, Neil McKain, held the first quarterly 
lunch meeting for shareholders to discuss economic issues of 
interest in Turkmenistan.  Representatives from the French, 
Georgian, German, Japanese, Turkish, UK and U.S. Embassies 
attended the lunch.  The theme of the first meeting was 
EBRD's Turkmenistan Consumer Price Index and EBRD's draft 
Turkmenistan "Transition Report."  Inflation figures are as 
follows: 
 
-- Inflation rate over the last 12 months (October 
2007-September 2008):  19.4 percent 
-- Foodstuffs:  6 percent (60 percent weighting) 
-- Non-food grocery:  11 percent (15 percent weighting) 
-- Transportation and energy:  129 percent (10 percent 
weighting) 
-- Services:  44 percent (15 percent weighting) 
 
INFLATION FORECASTS:  REDENOMINATION WILL CAUSE A SPIKE 
 
¶4.  (SBU) McKain said the EBRD inflation figure represents a 
one percent increase over the previous year.  EBRD forecasts 
that by the end of December, Turkmenistan will have had 16 
percent inflation for the calendar year 2008.  McKain also 
noted that the Government of Turkmenistan revised its 
inflation target for 2008 from 9 to 12 percent.  McKain added 
that, per historical experience in other countries around the 
world that have revalued currency, inflation is expected to 
increase with the redenomination of the Turkmen manat that is 
expected to occur on January 1, 2009.  EBRD also projects 
that inflation may again spike at 17 percent at the end of 
¶2009.  McKain noted that all inflation figures mask actual 
inflation due to the prevalence of subsidies available to 
Turkmenistan's consumers.  However, he suggested that 
Turkmenistan may be less inclined to continue gasoline 
subsidies as the country begins to charge world market prices 
for gas and oil exports, thereby earning more than in the 
past. 
 
EBRD'S DRAFT TRANSITION REPORT FOR TURKMENISTAN 
 
¶5.  (SBU) According to EBRD's draft Transition Report, the 
key developments and challenges for Turkmenistan are: 
 
-- The business environment needs to improve further if 
private sector activity is to increase. 
-- Heavy investment is needed in education and health care to 
stimulate the development of human capital. 
-- Exchange rate unification was an important development and 
should encourage/enable foreign direct investment. 
 
 
ASHGABAT 00001353  002 OF 003 
 
 
¶6.  (SBU) Turkmenistan has made progress in its structural 
reform: 
 
-- Privatization is not high on the Government of 
Turkmenistan's agenda. 
-- Focus is on small and medium enterprise development. 
-- Establishment of the Supreme Audit Chamber is a positive 
move forward. 
-- New Constitution offers protection for entrepreneurs. 
 
¶7.  (SBU) The business environment and competition issues are 
still difficult but some improvements offer some cause for 
optimism: 
 
-- New legislation allowing property and land ownership and 
the repatriation of profits, changes which ease market entry 
for foreign investors. 
-- Break up of the state's monopolies over Internet provision 
and mobile telephones. 
-- Exchange rate unification that occurred in May 2008, and 
opening up of exchange offices and abolition of limits on 
foreign exchange transactions. 
 
¶8.  (SBU) Several items were noted regarding Turkmenistan's 
financial sector: 
 
-- The sector is small and state controlled, with only one 
majority privately owned bank (Senagat Bank). 
-- Before exchange rate unification, the distorted foreign 
exchange market and direct monetary controls led to a low 
level of monetization and constrained the role of banks in 
the economy. 
-- New foreign exchange regulations in June 2008 allow the 
Central Bank to provide banks with ready access to foreign 
exchange. 
-- The new regulations also allow commercial banks to open 
correspondent accounts. 
-- A large portion of commercial bank lending is still 
directed to state-owned enterprises at below market interest 
rates. 
 
¶9.  (SBU) Although EBRD's focus is not on social factors, the 
organization does follow relevant developments, especially in 
Turkmenistan where education and health are areas that need 
significant assistance. 
 
-- Turkmenistan adopted a new social welfare code in July 
¶2007. 
-- Inflationary pressures have all but wiped out wage and 
pension increases. 
-- The Rural Development Plan is "patchy" but does address 
the serious lag in health and education. 
-- The reinstatement of the eight-year basic education system 
and the target of attaining "Commonwealth of Independent 
States standards" in education. 
 
¶10.  (SBU) EBRD noted the following about macroeconomic 
performance: 
 
-- Turkmenistan experienced strong gross domestic product 
growth of 7.5 percent in the first half of 2008. 
-- Despite an increase in imports, the current account 
surplus remains strong at 15.4 percent. 
-- The 2007 budget surplus is 4 percent. 
-- Off-budget activity remains significant. 
 
¶11. (SBU) EBRD made predictions on economic outlook and risks: 
 
-- Strong hydrocarbon-driven growth will continue. 
-- Internal and external inflationary pressures will also 
continue to have an impact. 
-- Increasing the activities of the private sector -- outside 
 
ASHGABAT 00001353  003 OF 003 
 
 
of oil and gas -- would be a key factor in improving 
Turkmenistan's economy. 
 
¶12.  (SBU) COMMENT:  EBRD's inflation figures are important 
data as the Government of Turkmenistan does not publish any 
reliable figures.  EBRD will release the final version of the 
Transition Report in November, and requested that recipients 
not distribute this information until the document's release. 
 The group at this meeting proceeded to discuss economic 
trends and how the international community could encourage 
improvement of the business environment (reftel).  END 
COMMENT. 
CURRAN