Turkmenistan - Interim strategy note for the period FY14-15

 Document of The World Bank FOR OFFICIAL USE ONLY Report No. 78530-TM INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION INTERIM STRATEGY NOTE FOR TURKMENISTAN FOR THE PERIOD FY14-15 June 26, 2013 Central Asia Country Unit Europe and Central Asia Region International Finance Corporation Eastern Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  The last Country Assistance Strategy was discussed by the Board on January 23, 2001 Currency Equivalents Currency Unit: Turkmen Manat (TMT) US$1: TMT 2.85 TMT1: US$ 0.35 (June 15, 2013) Government Fiscal Year January 1—December 31 Weights and Measures Metric System ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank CAS Country Assistance Strategy CBT Central Bank of Turkmenistan CEP Caspian Environment Program CAREC Central Asia Regional Economic Cooperation CIS Commonwealth of Independent States EBRD European Bank for Reconstruction and Development EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product ICP International Comparison Program IsDB Islamic Development Bank IDF Institutional Development Fund IFC International Finance Corporation IFI International Financial Institution IFRS International Financial Reporting Standards IMF International Monetary Fund MDG Millennium Development Goal MoF Ministry of Finance NPSD National Program for Socioeconomic Development, 2011-2030 RDP Rural Development Program SF Stabilization Fund SIO State Insurance Organization SSC State Statistics Committee RAS Reimbursable Advisory Services TICA Turkish International Cooperation Agency UNDP United Nations Development Program USAID United States Agency for International Development WBG World Bank Group WDI World Development Indicators WTO World Trade Organization  TURKMENISTAN INTERIM STRATEGY NOTE, FY14-15 TABLE OF CONTENTS EXECUTIVE SUMMARY ........................................................................................................................... I  I.  COUNTRY CONTEXT ....................................................................................................................... 1  A.  SOCIO-POLITICAL CONTEXT .................................................................................................................. 1  B.  LIVING STANDARDS, GENDER & MILLENNIUM DEVELOPMENT GOALS ................................................. 2  C.  RECENT ECONOMIC DEVELOPMENTS ..................................................................................................... 2  D.  MEDIUM TERM OUTLOOK ...................................................................................................................... 4  E.  TURKMENISTAN’S DEVELOPMENT STRATEGY ....................................................................................... 5  II.  BANK GROUP INTERIM STRATEGY............................................................................................ 6  A.  BACKGROUND ........................................................................................................................................ 6  B.  INTERIM STRATEGY AND PROGRAM, FY14-15 ....................................................................................... 7  C.  PROGRAM DESCRIPTION......................................................................................................................... 7  D.  CONSULTATIONS AND PARTNERSHIPS .................................................................................................... 9  III.  RISKS AND RISK MANAGEMENT ............................................................................................... 10  ANNEX A1: COUNTRY AT A GLANCE ................................................................................................ 12  ANNEX B1: TURKMENISTAN—REIMBURSABLE ADVISORY SERVICES ................................. 14  ANNEX B2: BANK-FUNDED STRATEGIC ANALYTICAL STUDIES ............................................. 16  ANNEX B3: SELECTED DEVELOPMENT AND SOCIAL INDICATORS ....................................... 17  ANNEX B4: SELECTED MACROECONOMIC INDICATORS .......................................................... 18  ANNEX C: MILLENNIUM DEVELOPMENT GOALS ........................................................................ 19  ANNEX D: CONSULTATIONS WITH STAKEHOLDERS .................................................................. 20  ANNEX E: WORLD BANK AND TURKMENISTAN—PAST ENGAGEMENT ............................... 22  AND LESSONS LEARNED ....................................................................................................................... 22  ANNEX F: TURKMENISTAN: DEVELOPMENT PARTNER COOPERATION.............................. 24  IBRD IFC Vice President Philippe Le Houérou Dimitris Tsitsiragos Country Director Saroj Kumar Jha Tomasz Telma Country Manager Alexander Kremer Moazzam Mekan Task Team Leader Serdar Jepbarov Iulia Mironova  EXECUTIVE SUMMARY i. With growth averaging 11 percent annually since 2007, according to official data, Turkmenistan has recently been one of the fastest expanding economies in the world. Its economy is dominated by hydrocarbons which, including related gas processing and oil refining, are estimated to account for over half of GDP. The 2008-09 global economic downturn affected Turkmenistan mainly through lower external demand for its oil products and natural gas exports. After slowing to a still acceptable 6.1 percent in 2009, GDP growth recovered to 9.2 percent in 2010 and, as a result of increased gas exports especially to China and sustained public investment, to 14.7 percent in 2011 and 11.1 percent in 2012. ii. While the medium-term outlook is broadly favorable, it largely depends on external demand for, as well as the price of Turkmenistan’s oil and gas. The baseline growth projection of 10 percent in the medium-term (2013-15), in line with recent outcomes, is explained by the expected continued high growth of natural gas exports to China. However going forward, Turkmenistan will need to be prepared to address vulnerabilities associated with the downside risk of declining gas prices, in particular improve the framework for managing and effectively using its abundant hydrocarbon resources. To achieve sustainable, inclusive growth in the long-term, it will need to enhance governance and macroeconomic management, implement its strategy to encourage growth in job-creating sectors, develop its banking system, and expand the role of the private sector. This will involve inter alia: strengthening public financial management; eliminating directed or policy lending by the central bank; implementing market-oriented structural reforms; and bringing national statistics into line with international standards. These challenges will require sustained commitment by the authorities, as well as substantial investments in human capital and institutional capacity. iii. The strategic goal of the government’s long-term National Program for Socioeconomic Development, 2011-2030 (NPSD) is to diversify the country’s economy. It incorporates four guiding principles, namely: high rates of growth; macroeconomic stability; private sector development; and improved living standards. The program also anticipates future growth being generated more and more by the private sector, with increasing use of market mechanisms to facilitate structural reforms and promote private savings. Improved living standards—a primary goal of social development—would be achieved through a mix of economic and social policies, with the latter incorporating two objectives: an increasing middle-class through new, more attractive private sector jobs, expanded employee training and re-training, and higher incomes; and, a declining number of disadvantaged and vulnerable people through increased and better targeted social assistance and higher quality social service delivery. Final NPSD outcomes by 2030 would include: a more diversified economy less reliant on the extraction and export of hydrocarbons and other minerals; more agricultural and other products processed domestically; increasing use of alternative, renewable sources of energy; and main- streaming of modern methods for protecting the country’s ecology. i iv. Though a member since 1992, Turkmenistan’s engagement with the World Bank Group (WBG), including with IFC which it joined in 1997, has been limited. In 2011, pursuant to efforts underway since 2007 to broaden and deepen Turkmenistan’s relations with the international community, the authorities signaled their interest in further developing their relationship with the Bank Group; and in May 2012, the principles of a reimbursable advisory services program—the core of this interim strategy—were agreed with the government. The purpose of this interim strategy is thus to help the government address selected issues related to the country’s development priorities. It consists of two components: first, a small, reimbursable advisory services program narrowly focused on activities in three areas proposed by the government—macroeconomic statistics, financial sector development, and private sector development; and second, a modest agenda of strategic studies that would provide an analytical foundation for addressing reform priorities in the country’s long-term development strategy selected by the government. The reimbursable services program would be implemented and supervised by the Bank and IFC; and the strategic studies would be financed and executed by the Bank and IFC in line with standard internal procedures for such activities. Bank lending has been neither requested nor is contemplated. Likewise, IFC has no specific investment proposals or plans at this stage, although it remains open to providing financial support for small and medium-sized private enterprise development and foreign direct investment. v. The interim strategy and program’s effectiveness would be measured by qualitative criteria defined and agreed with the Turkmen authorities a priori for each activity, rather than a conventional CAS-type results framework. Overall, the key benchmark of success would be its completion in full to the mutual satisfaction of the Turkmen authorities and the Bank Group by end-FY15. This low-key, measured approach reflects the lessons of past experience, as well as the preference of the government, and is judged appropriate in this particular case. From the Bank Group’s perspective, it provides a novel, albeit narrow entry point for renewed engagement, as well as a potential learning opportunity that may, or may not lead to broader involvement in the future. Program implementation would be closely coordinated with the ongoing and planned activities of other development partners in the country. vi. Despite its narrow focus and small size, the interim strategy and program pose at least three risks that will need to be monitored and, if needed, managed. First, significant political commitment as well as enhanced institutional capacity will be required. Second, the Bank Group’s renewed and visible involvement in Turkmenistan—a country ranked low on most governance quality indicators—may be judged to pose reputational risks. Third, a relationship based upon specific reforms of a mainly technical nature may be deemed to have limited value-added absent a broader economic dialogue; its effectiveness will also depend on the timely availability of robust data. The interim strategy addresses these risks which, given the modest commitment envisaged, are considered manageable. ii  I. COUNTRY CONTEXT A. Socio-Political Context 1. Landlocked and mainly desert, with a population of about 6.3 million and a GDP per capita of about US$5,587 in 2012,1 Turkmenistan is an energy resource-rich country. With natural gas reserves estimated to be the fourth largest in the world— exported to Russia, Iran, and since 2010 increasingly to China as well—its economy is dominated by energy resources, primarily gas and oil. Including related gas processing and oil refining industries, they account for over half of GDP. Though agriculture, mostly irrigated cotton and wheat, now accounts for only about 10 percent of GDP, less than half its share in 1990, it still employs a significant portion of the country’s labor force. 2. Following independence in 1991, Turkmenistan adopted a gradual approach to economic and political reforms and, more than twenty years later, the state still plays a leading role in most aspects of the economy. The president, who is both head of state and government, chairs the Cabinet of Ministers and appoints its members. The new constitution introduced in 2008 permits the formation of political parties; and, in August 2012, a new party―the Union of Industrialists and Entrepreneurs―ended the monopoly of the ruling Democratic Party of Turkmenistan. This and the possible creation of an agrarian party may be intended to broaden the political base and presage greater private participation in the economy. However, despite these and other gradual trends towards more openness, most governance quality indicators describe public accountability as weak and participation in economic and social policy dialogue as limited. 3. The availability and quality of economic, financial, and social data remain a major challenge. While the authorities are undertaking steps to enhance the efficiency and effectiveness of public administration and services at all levels, this will need to be supported by better access to basic economic, financial, and social data. In this regard, efforts are underway to improve the quality of macroeconomic and other statistics, align them with international conventions and standards, and make them more publicly accessible. Examples include: the recent publication of a statistical yearbook; measures to improve the country’s national accounts and financial and monetary statistics, with technical assistance from the International Monetary Fund (IMF); implementation of various “e-government