Turkmenistan strategy overview

Full strategy  (0.5Mb) Approved 15  Jun 2006

Türkmenistan üçin baş ugur  (0.8Mb) (TM)

Summary of public comments  (0.1Mb) Comments from International Helsinki Federation for Human Rights  (0.1Mb)

The Bank is seriously concerned by Turkmenistan’s continued failure to take any measures which would indicate a willingness to make progress towards multi-party democracy, pluralistic society and a market-based economy. Since the adoption of the last Strategy for Turkmenistan in July 2004, there has been no evidence of improvement in the authorities’ commitment to the principles of Article 1 of the Agreement Establishing the Bank.

Turkmenistan remains a one-party state, dominated by President Saparmurat Niyazov, who exercises power in a highly centralised, authoritarian manner.  Opposition groups are forced to operate from abroad and have little influence inside the country. Lack of independent media, free speech and political pluralism contributes to the environment in the country which is not conducive to any criticism of government policies. The government’s human rights record remains very poor. Small steps undertaken by the authorities failed to adequately address concerns raised by the OSCE, the UN and human rights groups. Deterioration of educational standards goes unabated and is an area of serious concern. Civil society is weak and independent NGOs cannot operate freely.

Realistic economic estimates

In the economic sphere, there are continued doubts over the accuracy of official statistics, but official data suggest that real output grew by 17 per cent and 21 per cent in 2004 and 2005 respectively. However, a more realistic estimate of GDP growth is about 10 per cent for 2005. This increase in output reflects in large part hydrocarbon exports and public investment programmes. Inflation has increased from 3 per cent in 2003 to approximately 10 per cent in 2005. Export revenue has risen sharply, mainly because of higher hydrocarbon prices and the level of external debt has been reduced.  Meanwhile, foreign direct investment (FDI) remains limited to a few sectors, reflecting the poor business environment. The official foreign exchange rate remains fixed, while the exchange rate determined at the parallel foreign exchange market continues to be nearly 5 times the official rate. Export earnings, supported by oil and gas revenues, mainly accumulate in extra-budgetary state funds, especially in the Foreign Exchange Reserve Fund (FERF). The spending and investment operations of these funds are under the discretionary control of the President without appropriate regulation and transparency. While there are near-balanced budgets officially, the government recently reduced resources for the health and education sectors and stopped or reduced pension payments.

Over the latest strategy period Turkmenistan has made very limited progress in liberalisation and structural and institutional reforms, but registered some improvements in the tax system and agricultural land reform. State policies remain guided by central plans and state control over investment, production, distribution and key prices. Enterprise privatisation has been slow, particularly for large-scale enterprises, while the vital energy sector is formally excluded from privatisation. Private sector development is still at an initial stage. The financial sector continues to allocate funds in support of state-directed investment programmes.

Alternative scenarios

In light of the above developments in political and economic spheres, the Bank maintains three alternative scenarios as a graduated response to domestic circumstances, referred to as a Baseline, an Intermediate and a Regular scenario.

This approach, consistent with that adopted in 2000, 2002 and 2004, tailors the Bank’s response to the reform commitment of the authorities and their willingness to implement concrete improvements. The scenarios below clarify the benchmarks on which the Bank would base its decision to expand operations.

Baseline scenario

If the authorities do not move forward with democratic and critical market reforms, the Bank will not be able to move beyond the Baseline scenario. In this scenario, the Bank’s activities will be focused on the promotion of private sector activities, particularly in the SME and micro-finance areas, provided it can be shown that the proposed investments are not effectively controlled by the state or by state entities and government officials will not personally benefit from such investments and that selected financial intermediaries will run SME and MSE programmes on a commercial basis. New investments in the public sector, as well as those in the private sector that are directly related to the FERF, will be excluded until the authorities can demonstrate stronger reform commitment in the critical areas outlined below.  The Baseline scenario thus recognises the link between the promotion of entrepreneurial initiative at the grassroots level and the consequent emergence of a civil society, which could underpin the move towards stronger political and economic reform.

The Bank’s operational priorities in the Baseline scenario include:

• Portfolio monitoring and management of existing investments in Turkmenistan.

• Appraisal, implementation and development of a replacement SME credit line with direct exposure to some of the local banks.

• Appraisal, implementation and development of a micro-finance programme including intensive capacity building and potentially a framework MSE finance facility.

• Selective direct investments in domestic, joint venture and foreign-owned private enterprises by direct lending or through the Direct Investment Facility (DIF).

• Further development of the trade facilitation programme with inclusion of new participating banks.

Because of the distortions introduced by the multiple exchange rate regime and subsidised or under priced inputs such as electricity and gas, any new investments will need to demonstrate clearly that they generate real economic returns. Any projects that are non-transparent or that are structured to make contributions to the FERF or other state funds will be excluded.

Intermediate and Regular scenario

If substantial progress is made in democratic reforms and if the authorities embark on a consistent programme of economic liberalisation and reform, the Bank would be in a position to conduct a broader range of operations either on an Intermediate or a Regular Scenario. As in the past, the Bank will employ a number of benchmarks in gauging political and economic progress. These benchmarks are explicitly described in the Strategy and the respective operational priorities.

Core approach

The core of the Bank’s approach in Turkmenistan is, and will remain, support for the private sector, and dialogue with the government and civil society on ways to improve the investment climate for private entrepreneurs. The Bank’s strategy is in line with the approach by the IMF, the World Bank and the Asian Development Bank as well as other IFIs and bilateral donors. Close cooperation with the entire international community will remain a pillar of the Bank’s approach.