Central Asian Round up

A SUPPLEMENT TO EUROMONEY – April 1997

Turkmenistan

Like many other former Soviet Republics this young Central Asian state was slow to embark on reforms. However since the beginning of 1996 the government has been seeking to implement an ambitious stabilization and reform programme in order to make up for lost time.

Although Turkmenistan has the fourth largest gas reserves in the world, access to the only pipeline to the west is restricted by the Russians. This has hindered the growth of the country, since 60% of its GDP comes from gas. Therefore the Central Bank issued a loan to raise the desired capital, but this lead to an increase in the money supply which in turn led to increased inflation. This meant that, unlike many of its neighbours, who by 1995 had reached some degree of stabilization, Turkmenistan still had a major hyperinflation problem (1360%).

Reforms

This lead to the adoption of a reform programme in 1996 which has helped to improve the situation. Prices were liberalized and a tight monetary and fiscal policy was introduced. The exchange rate was unified and the foreign exchange rate was revived. This lead to the reopening of the Turkmenistan Interbank Currency Exchange which had been closed for two years.

The manat was devalued many times between 1994 (Tm230 to the dollar) and June 1996 (Tm4200 to the dollar). In January 1996 the minimum capital requirement for commercial banks was raised to Tm100 million. This was raised again in October when the minimum was increased to Tm500 million and Tm1 billion for the country’s big three banks, Turkmenbank, Investbank and the Bank for Foreign Affairs of Turkmenistan. The minimum reserve requirement was set at 11% for all banks. To supply the commercial banks with liquidity the Central Bank holds auctions.

Banking sector

When Turkmenistan gained its independence, it inherited the old Soviet style banking system. In order to move forward with reform and growth, the government acted quickly and created a two-tier system ­ the Central Bank of Turkmenistan and a network of commercial banks.

The banking system consists of the State Bank of Turkmenistan, two state banks ­ Vnesheconombank (Foreign Affairs) and Sberbank (Savings Bank) ­ and 15 commercial banks, of which three are sectoral ­ Investbank (small investors) Turkmenbank (service, state budget and trade enterprises) and Dayhan Bank (agriculture).

Since the adoption of a Central Bank resolution in 1995 the minimum level of authorized funds held by commercial banks has been raised to Tm100 million. This policy was aimed at preventing the dispersal of financial resources and the centralization of credit and currency resources. It was also hoped that it would lead to the establishment of stable and reliable credit institutions.

Kyrgistan

Until 1991 the financial system of Kyrghyzstan was a component of the Soviet Union. In June 1991 the Central Bank of the Republic, the National Bank of the Kyrzhyz Republic, was established. In 1992 laws were introduced on the role of the National Bank and on banking and banking activity. In compliance with these a two-tier banking system comprising the National Bank and the commercial banks was legally established. These laws ensured the independence of the National Bank. In May 1993 a new national currency, the som, was introduced.

Currently there are 18 commercial banks that are registered and functioning with over 70 branches in the Republic. Two large commercial banks were established on the basis of former state owned banks, whilst the rest were established with the use of both foreign and private capital. Recently a payment saving corporation with 50 branches was established. Commercial banks are mostly owned by non-state organisations and individuals. In 10 of the banks the share of the state ranges from between 1% and 27% whilst the remaining eight are fully privately owned. All the banks have the legal right to make investments and to deliver services to the public as well as to enterprises in different economic sectors. Seven banks have licenses to conduct operations on the securities market but the inadequate development of these markets has not allowed them to conduct large scale operations in this sphere.

Tajikistan

Following the breakup of the Soviet Union, Tajikistan has experienced a drastic fall in economic activity. The country’s progress towards a free market has been hindered by a civil war which began back in 1991. Despite many attempts to stop it the fighting still continues. In addition to this, successive declines in productivity, a breakdown of inter-CIS trade ties and the loss of union subsidies culminated in a contraction of the Tajik economy in 1995 to 50% of its 1988 level, and inflation was running at over 60% per month.

On the back of this Tajikistan has been hesitant to adopt macroeconomic reforms. Legislation passed in the early 1990s on privatization, property, foreign trade and taxes has failed to achieve any real success. This stems from a lack of regulation or legal basis and a strong opposition of entrenched bureaucrats. This means that 95% of the economy still remains under state control.

In 1996 a stabilization programme was adopted, designed at bringing monthly inflation down. In addition to this a national currency, the Tajik rouble, was launched with a reasonable amount of success. However results of this change in strategy have not yet been significant.