Turkmenistan - Country assistance strategy public information notice

Report No. PIN63 Turkmenistan CAS: Public Information Notice World Bank Board Discusses Turkmenistan Country Assistance Strategy World Bank discusses Country Assistance Strategy for Turkmenistan On January 23 2001, the World Bank's Executive Directors discussed the World Bank Group's Country Assistance Strategy (CAS) for Turkmenistan covering the FY01-FY03 period, and broadly endorsed the program contained within. Country Context Following independence in 1991, the economy of Turkmenistan experienced a steep decline. Between 1992-97, it is estimated that real GDP fell cumulatively by about 50 percent, comparable to that experienced by other CIS countries. Over the past few years, however, the economy has experienced a sharp economic upswing and continued growth in the near term is likely based on Turkmenistan's significant hydro-carbon endowment and large public investments in roads, oil refineries, textiles, and construction. Nevertheless, there are significant risks embedded in the economy including dependence on energy sales prone to fluctuation and water-intensive agriculture. Much of Turkmenistan's large public investment and construction program (about 40 percent of GDP), has been carried out through off-budget accounts, and many of these investments do not appear to have been adequately reviewed or prioritized, factoring in opportunity and recurrent costs and future debt servicing. Turkmenistan's external public and publicly guaranteed debt has also risen significantly since the previous CAS period. Strategic Priorities Turkmenistan has adopted a gradual approach to the transition to a market economy and has outlined a number of reform goals in its 10 year National Program for 2000-2010 to achieve this including improved budget and debt management, trade and exchange rate liberalization, agriculture reform, and privatization. While the National Program contains many year-by-year production targets, there has been limited progress in identifying and taking near term actions to meet reform goals. Consultations with the Government, civil society, and the private sector during the preparation of the CAS indicate that the prospects for fundamental change during the next few years are uncertain. If Turkmenistan's reform goals are not achieved, the economy is likely to face significant risk of economic disruption in the coming years. The Bank and Turkmenistan have agreed that the priorities identified within the CAS be based on the extent to which they contribute to improving the living standards of the people of Turkmenistan. On this basis, the CAS identifies five key priorities: * Strengthening Public Resource Management * Improving Health and Social Services * Developing an Efficient Rural Economy * Supporting Private Sector Development * Protecting the Environment and Conserving Water  The CAS indicates that a critical element in any reform program will be the more rational use of Turkmenistan's largest extra-budgetary fund, the Foreign Exchange Reserve Fund (FERF), which now serves several functions with limited transparency. Progress on rationalizing the FERF, including defining transparent rules for a currency reserve to facilitate exchange rate management, an intergenerational savings fund to help offset future shocks, and public investments that are reviewed within the budget framework, would be an important step in improving exchange rate and public resource management. World Bank Experience to Date Soon after the previous country strategy was formulated in 1997, procurement problems led to a suspension of disbursements from early 1998 to June, 1999. The suspension has now been lifted, and activities resumed. As of the start of 2001, the Bank had extended three ongoing projects to Turkmenistan - in Water Supply and Sanitation, in Urban Transportation, and a technical assistance loan focused on budget modernization. However, not surprisingly after a long suspension, operations are generally under-performing. In the meantime, two additional issues have arisen which until resolved prevent the Bank, as a financial institution, from extending any new loans. First, Turkmenistan is in violation of the Bank's negative pledge clause. Second, Turkmenistan has stopped reporting its debt to the Debt Reporting System. The Government has indicated its intention to resolve these issues within a short period of time. To assist, the Bank has provided a small grant for debt management. World Bank Strategy for FY01-03 In light of the above, the Government and the Bank have agreed on a program over the next three years that will be sequenced in three phases: Initial Phase: During the first phase, the Bank will help Turkmenistan build a foundation of economic capacity and transparency, from which it can better achieve its development goals. To this end, the initial limited role of the bank will be primarily to engage in policy dialogue and extend non-lending analytic support. Within this phase, primary emphasis will be place on strengthening public resource management capacity and information transparency. Specific support will be provided for (i) budget modernization (through the ongoing technical assistance loan), (ii) debt management (through an ongoing debt management grant), and (iii) helping to host a National Economic Forum which would facilitate information sharing both within and outside the Government. The Bank would also foster international standards of financial accountability through (iv) support for bringing a public procurement law into operation and (v) support for introducing international accounting standards. The Bank stands ready to provide general macro-economic advice on other critical issues, such as the reform of the FERF. The Bank will also engage Turkmenistan on living standards monitoring, through support to Turkmenistan's statistics agency, on the environment, through support for a National Environmental Action Program (NEAP) and preparing a water strategy, and private sector development, through a downstream energy sector study. During this phase the supervision of on-going projects will remain a top - 2 -  priority. Second Phase: In light of policy and financial issues, it is likely to prove extremely difficult for the bank to extend new lending in the near term. However, the Bank will go forward with a small 1-3 loan program over 3 years for urgent priorities if (i) the negative pledge violation is resolved, (ii) performance of ongoing projects is improved, and (iii) essential progress is achieved on key budget and debt management areas, including the reform of the Foreign Exchange Reserve Fund (FERF). The envisaged lending will be on priority human needs (a health project) and disaster prevention and water management (a canal rehabilitation project). The improvement of services for the rural economy (a crop protection project) would also be supported, contingent on improving farmers ability to generate income, pay for the above services, and conserve water. Longer Term Agenda: If the government shows strong commitment to moving resolutely forward on a deeper reform program, the Bank will consider additional support. Such support would be considered in light of progress in, and commitment to, reforms in key policy areas including liberalization of the foreign exchange and trade regimes and reduction in the use of state orders in agriculture. IFC Strategy IFC has undertaken a number of initiatives over the past two years to develop an investment program. IFC has opened a liaison office, undertaken numerous missions to develop potential Small and Medium Enterprise (SME) projects and worked to build capacity in the financial sector. A major study, jointly with EBRD, to develop a supplier program to support the oil and gas sector was also undertaken. These initiatives, unfortunately, have produced few tangible results. There is a very difficult business environment. Although IFC has found it difficult to identify qualified sponsors, it has approved a small loan together with technical assistance to a private bank under its Extending IFC's Reach Initiative. IFC's role over the next three years can be divided into two phases. Initially, IFC will continue to focus on institution building in the financial sector, with an emphasis on technical assistance. Additionally, IFC will seek to support the development of the leasing industry, including undertaking a study of the market and regulatory environment for private sector leasing. IFC will also, when possible, work with private service providers in the oil and gas sectors. Support for development of private sector SMEs will also be provided. There is no specific set of reforms that will trigger a second phase of IFC activity leading to increased investment, but a liberalized foreign exchange regime and elimination of commodity exchange controls would be significant steps in this direction. Any such improvements should lead to increased private investment and thus a greater level of IFC investment and technical assistance. 08/16/01 1 of 3 -3-