World Bank Group - Turkmenistan Partnership Program Snapshot April 2015           RECENT ECONOMIC AND 2014, increasing only by 3 percent, this is an SECTORAL DEVELOPMENTS improvement compared to the 0.1 percent growth in 2013. Large projects include intensive Growth and External investments in the transnational transit corridor, Performance including the Black Sea and Caspian Sea connection, a Middle-East–Iran–Commonwealth of Independent States (CIS) route by means of a The Turkmen economy expanded by 10.3 new railroad connecting Iran with Kazakhstan percent in 2014 and sustained this strong through Turkmenistan.1 However, in order for the growth performance largely on account of the Government’s objectives to be achieved, non-resource sectors. Turkmenistan had investments in infrastructure projects will need to another year of double-digit growth despite the be complemented by policies to develop logistics global oil price decline. Growth in the non- and trade facilitation services. extractive sectors (13 percent) outpaced the hydrocarbon sector’s expansion and became the The outcome of developments in 2014 and main driver of the overall economic dynamism in different dynamics during the first and second 2014. halves of the year demonstrate the sensitivity of the Turkmen economy to external factors. Public investments and exports also made a Turkmenistan remains significantly dependent on stronger contribution to growth during the external demand for its hydrocarbon resources first half of 2014 by expanding at 8.2 and 8.3 and on their price in the global market. In addition percent, respectively, but both experienced a to the global shock associated with hydrocarbon significant slowdown during the second half and price decline, the potential spillover effects of ended in moderate outcomes, 6 and 5 percent, Russia’s recession on the Central Asia region pose respectively, for the year as a whole. In addition to risks and challenges for Turkmenistan. The the import-substituting branches of the domestic medium-term outlook for the country is being economy (the production of beverages, cereals, adjusted to take into account these circumstances, dairy products, and processed foods), traditional and global oil prices are projected to remain low sectors such as textiles and cotton fabrics grew by until 2019. about 18–20 percent. The non-hydrocarbon mineral sector and some subsectors of the Although growth projections for 2015–16 still manufacturing industries, namely the production remain around 7–8 percent, they are sensitive of construction materials and fish processing, also to further developments in Russia and the CIS grew at higher rates. Overall growth in the region as well as to oil prices and their spillover agriculture sector was positive, aided by the good effect on the natural gas price. Turkmenistan’s vegetable harvest. Together with the further exposure to remittances is low, but exposure to expansion of the emerging services sectors investments from and trade with Russia is (telecom, banking) all of the non-tradable sectors significant. Despite the recent trade expansion to aided the high growth performance of the China and Iran, about 18 percent (10 billion cubic economy. meters [bn cm]) of Turkmen natural gas was imported by Russia. Recently, however, Capital investments from all sources of Gasprom/Russia announced a roughly 60 percent financing grew by 6 percent in 2014. This cut in the imported natural gas volume which, if growth was supported by especially strong not substituted by a commensurate increase of investment in social infrastructure—a 15 percent exports to China, will imply a net loss of export increase compared to the same period of 2013. revenues for Turkmenistan. Thus, the country will Investment in physical infrastructure facilitated be adversely affected by the trade channel and the further expansion of the exportable sector potential slowdown of foreign investments, which (especially natural gas). Although growth in was largely directed at the country’s extractive foreign direct investments remained modest in sectors until recently. However, compared with                                                              1 A new rail transport corridor connecting Kazakhstan and with Ashgabat, Mary, Turkmenabat, and Farab, as well as on Iran through Turkmenistan was inaugurated in November the Ashgabat-Dashoguz direction, which will facilitate the 2014. This railway will help develop social infrastructure in increased traffic of transit cargo through Turkmenistan. The the desert areas, the Caspian region, and the Northern total length of highways under reconstruction and Territory. Improvement works are currently under way on construction is 1,700 kilometers. the interstate highways connecting the city of Turkmenbashi     other countries in the region, the possible respectively. The export-to-import ratio remains implications of the current external shock on at 1.4:1. The hydrocarbon cluster continues to be Turkmenistan are estimated to be moderate— the main driver of economic growth and the core around a 3–4 percentage point slowdown of engine of export performance in 2014, including growth and a 16 percent reduction in current to nontraditional markets such as China. revenues, which can be substituted by the large fiscal buffer accumulated through savings from Fiscal Performance hydrocarbon revenues. The overall fiscal position strengthened The low level of inflation contributed to the further in 2014 and the fiscal balance remained overall positive macroeconomic performance. in surplus. In the background of strong fiscal Compared with end-2013, cumulative inflation buffers, in 2014 the Government increased public during 2014 was only 4.2 percent. It was relatively spending by about 12 percent while revenues went mute, as inflationary pressures stemming from the up by only 8 percent. Compared with the expansionary fiscal policy during the second half approved budget, actual revenue collection was up of 2013 eased in 2014. In spite of price increases by more than 21 percent, whereas the for utilities and transport services, inflation Government contained public expenditures at remained in low single digits, helped by declining below the 96 percent level. Tax revenues remain international food prices and the high import dominated by proceeds from hydrocarbon content of fiscal spending. exports. The growth pattern in public investments changed in 2014 in favor of a substantial increase One of the important policy changes was the (30 percent) for social sector infrastructure. exchange rate devaluation in January 2015. A fixed exchange rate of the Turkmen manat was Average wages grew 10.1 percent, leading to a introduced in 2009 and has been maintained real increase in incomes in a relatively low unchanged and pegged to U.S. dollar since then. inflationary environment. The Government However, relative price dynamics in Turkmenistan maintains a large portfolio of social transfers and and its trading partners have led to real exchange budget subsidies. Currently, all 17 subsidies have a rate appreciation throughout the years. These universal character and are guaranteed until 2030, pressures have intensified especially since the though the Government may revisit this decision second half of 2014, when external demand for and decide to move earlier to a more targeted Turkmen exports declined and exports proceeds public transfer policy. In the current context, it is fell. Against this background and the weakened especially relevant to reconsider energy subsidies Russian ruble and Kazakh tenge, the authorities that are among the largest in the world and that do devalued the Turkmen manat by 18 percent to not contribute to the efficient use of resources. support the national currency’s external competitiveness and compensate for declining Medium-Term Outlook and Challenges fiscal revenues from natural gas export. Despite the currency devaluation, Turkmenistan holds a The medium-term outlook is still positive but strong international reserves position, and dependent on developments in the external external buffers amount to more than 22 months environment and the international price for of import coverage. Turkmen hydrocarbon products. The baseline growth projection has been adjusted to 7–8 The current account balance turned positive percent for 2015–16, down from the 10–11 in 2013 and remained in balance in 2014. percent projected earlier. With the hydrocarbon During the first half of 2014, exports increased by sector accounting for about 35 percent of GDP, 8.3 percent while imports grew by 9.3 percent, 90 percent of exports, and 80 percent of fiscal which was associated with the large import of revenues, the decline in demand for investment goods. However, during the second Turkmenistan’s hydrocarbon exports is the key half of the year, the growth rate for both imports risk to growth projections.2 and exports decelerated and led to modest outcomes for the year of 3.4 and 4.9 percent,                                                              2 According to International Monetary Fund (IMF) estimates, balance and US$54 to keep the balance of payments in the breakeven level of the oil price for Turkmenistan is positive territory. US$51.9 per barrel of oil to maintain the fiscal position in     Natural gas export requires a specific time- promote the growth of the non-resource and investment-intensive infrastructure, sectors of the economy and thus enhance which makes it difficult to substitute lost markets Turkmenistan’s competitiveness. In with new destinations in a relatively short period addition, investing in human capital and of time. In this context, if Russia does not revisit strengthening institutional capacities will its recent decisions to cut natural gas imports, be essential to facilitating private sector– Turkmenistan may face a challenge. led development. It is expected that in the medium term,  The improvement of public financial inflation will stay at around 4–5 percent, down management and governance practices is from 6 percent in 2013. It will be fuelled by a critical to ensuring the efficient utilization further liberalization of utility and transportation of hydrocarbon revenues. In addition to services in Turkmenistan, as well as by the institutional reforms, it will be necessary inflationary pressures expected from the price to develop a strategic framework to guide transfer of imported foodstuffs. public investment decisions and ensure the efficiency of capital investments. Staff The diversification of export routes to China capacity will also need to be improved to diminished the risk of a spillover effect from ensure that they are able to carry out the the CIS and Eurozone crises. However, the in-house appraisal, screening, and projected slowdown of economic growth in China selection of priority public investment and the economic recession in Russia pose projects. challenges to Turkmenistan. With the aim of further diversifying its trade partners,  A more equitable allocation of budget Turkmenistan is accelerating the construction of a resources may require amendments to the new pipeline to supply gas to Pakistan and India current principles of public spending through Afghanistan (the TAPI project), to start policy. The cost of the budget subsidies in 2017. There are a number of issues to be currently provided and the state aid addressed, however, including security concerns, programs may become too high and for the successful and sustainable operation of this fiscally unsustainable over time. Thus the important regional infrastructure project. current practice of universally providing budget assistance to the entire population Even with the revised growth outlook, should be replaced with targeted social Turkmenistan may reach high-income assistance programs only to those in need. country status within the next decade. However to sustain the growth momentum in the Turkmenistan will need a reliable and medium to long run, Turkmenistan will need to comprehensive set of statistics to inform its implement strong structural reforms and face policy decisions. The introduction of several important challenges: international standards in statistics and the continuous improvement of the quality and  The overreliance on hydrocarbons makes reliability of the statistics it does produce will be the country vulnerable to a drop in prices required to better inform public policy decisions. for these resources on the global market. The Turkmen authorities should take the Although Turkmenistan runs a fiscal necessary steps to make the existing statistics on surplus and has been able to build a the country’s economic and social development comfortable fiscal buffer, the readily available to the public. To facilitate this diversification of skills, human capital, process, staff capacity will need to be improved and other assets, products, and services as and new methodologies introduced in line with well as trade partners is needed to address international practice. fiscal vulnerabilities. The diversification of development options will be necessary to sustain growth in the long term.  The necessary steps for a successful diversification strategy involve the development of market institutions. The creation of an effective financial and banking sector will be required in order to     WORLD BANK PROGRAM IN cooperate with Turkmenistan in support of TURKMENISTAN reforms in the country for the period from July 2013 through June 2015. Past Engagement (1995–2004) The purpose of the Interim Strategy, which At the request of the Government, the World does not involve lending, is to assist the Bank has prepared a number of studies and Government in addressing selected priority extended three loans to Turkmenistan (for issues related to the country’s development details, see box below). The Bank has made efforts goals. This will be accomplished through the to help Turkmenistan with reforms in areas such provision of analytical and advisory services in the as public resource management, through an selected areas identified through extensive Institution Building and Technical Assistance consultations with key stakeholders, including (IBTA) loan that closed on December 31, 2003; government ministries and agencies, private sector financial transparency, through Institutional representatives, civil society organizations, and Development Fund (IDF) grants on Public development partners. Procurement, International Accounting Standards, and External Debt Management; the The ISN consists of two components: public transport system, through an Urban Transport Project; the energy sector, through a sector • first, a Reimbursable Advisory Services (RAS) review in 1999–2000; and the water and sanitation program, financed by the Government and sector, through a Water Supply and Sanitation Project. focused on macroeconomic statistics, financial sector development, and private sector Recent Activities (2005–12) development. This program is arranged, managed, and supervised by the World Bank Group. Recent Bank activities in Turkmenistan • second, complementing the RAS program, a set included the World Bank trust fund to finance the of strategic analytical studies undertaken by the Statistical Capacity Building Project, which closed on Bank and IFC on economic diversification, access April 15, 2012, and the Civil Society Fund to finance, the investment climate, privatization, Program, which is now being transformed into a and World Trade Organization (WTO) accession. Global Partnership for Social Accountability These studies will be financed by the World Bank Program. The Avian Influenza Control and Human Group and implemented in line with standard Pandemic Preparedness and Response Project was internal procedures for analytical and advisory another recent project that closed with a services. satisfactory rating on December 31, 2010. At the Government’s request, the Bank also provided advice on a number of other issues, including but Reimbursable Advisory Services Program not limited to, national wealth funds, an Accounting and Auditing Report on the On September 30, 2014, the World Bank Group Observance of Standards and Codes (ROSC), the and the Ministry of Finance of Turkmenistan modernization of the Hydromet agency, an anti- signed a Reimbursable Advisory Services (RAS) money-laundering/combating the financing of Agreement, which is a two-year program that is an terrorism (AML/CFT) legal framework together integral part of the interim strategy for with the International Monetary Fund (IMF), Turkmenistan. transport and logistics issues, and international experience in the ports sector. The activities under the RAS agreement are financed by the Government of Turkmenistan Current Partnership Program FY14–15 and focus on areas proposed by the Turkmen authorities, namely, macroeconomic statistics, financial sector development, and private sector On July 25, 2013, the Interim Strategy Note development. The entire program under the RAS (ISN) for Turkmenistan was discussed by the is arranged, managed, delivered, and supervised by World Bank Board of Executive Directors. the World Bank Group in line with international The ISN prepared jointly by the World Bank best practices. Group and the Government of Turkmenistan serves as a platform for the World Bank and International Finance Corporation (IFC) to     Results In early April 2015, the CEN team, comprised of representatives of several of the World Most ISN-RAS activities and outputs were Bank’s Global Practices, will hold consultations delivered as planned and the results considered with government partners, development partners, broadly satisfactory by both the Turkmen the private sector and civil society organizations, authorities and the World Bank Group. Overall, and other stakeholders to identify specific the level and quality of the authorities’ activities for inclusion in the engagement note for engagement in RAS-funded tasks was higher and FY16–17. timelier than in the Bank-financed advisory studies, except for the RAS program’s International Finance Corporation privatization component, where planned IFC support for individual privatization transactions Turkmenistan became a member of IFC, the did not materialize. Nonetheless, the Bank-funded private sector arm of the World Bank Group, advisory studies were important in facilitating an in 1997. Since then, IFC has worked with the initial policy dialogue on structural issues, such as Government on a number of activities. As part of banking system reform and private sector the ISN, IFC is joining the efforts of the World development. Bank to assist the Government and may explore potential opportunities for support to small and The New Country Engagement Note medium-sized enterprises, either through a FY16–17 financial intermediary or through direct investments in private enterprises. Currently, the World Bank Group and Turkmenistan are in the process of preparing Multilateral Investment Guarantee a new Country Engagement Note (CEN) for Agency the period covering FY2016–17. The CEN will continue to focus on the sectors identified under The Multilateral Investment Guarantee the Interim Strategy Note (ISN) for the period of Agency’s (MIGA) portfolio in Turkmenistan FY14–15 and may include follow-up activities in consists of one project, issued to a Turkish the areas of current engagement as well as investor in support of the country’s manufacturing potential additional activities in several new areas sector to expand and modernize a soft drink such as: (i) support to competitive industries; (ii) bottling facility in Ashgabat. In 2012, MIGA financial sector modernization; (iii) improved issued an additional guarantee to the same skills in support of innovation; (iv) support for investor. competitive agriculture; (v) climate change/water resource management; and (vi) the connectivity A MIGA team visited Ashgabat in March 2015 agenda (information and communications for an evaluation mission and also researched technology [ICT] and transport). opportunities to expand its operations in Turkmenistan.     SUMMARY OF PROJECTS IN TURKMENISTAN Loans to Turkmenistan  Institution Building and Technical Assistance Loan (IBTA) (IBRD, US$24.9 million) (2003)  Urban Transport Project Loan (IBRD, US$34.2 million) (2001)  Water Supply and Sanitation project Loan (IBRD, US$30.3 million) (2004) Analytic and Advisory Services Public Sector Management  Public Expenditure Review (1998)  Comments on Draft Tax Code (2000) Social Sector  Living Standards Survey (2000)  Dashoguz: Regional Development Priorities (1998)  Rationalizing the Health Sector (1997)  Water Supply and Sanitation: Needs Assessment (1995) Rural Development  Agricultural Sector Review (1997)  Farm Survey (2000) Energy and Infrastructure  Energy Sector Study (1995)  Energy Export Prospects (2000)  Energy Taxation (2000) Banking and Accounting  Introduction of International Accounting Standards Grant (2004)  Advice on Modernizing the Payment systems (2008)  Accounting and Auditing Module of the Reports of Standards and Codes (A&A ROSC) (2010) For more projects, please visit: www.worldbank.org/tm     Turkmenistan: Turkmenistan Coca-Cola Bottlers Project ID: 11662 Fiscal year: 2012 Guarantee holder: Coca-Cola Icecek A.S. Investor country: Turkey Gross exposure: US$8.7 million About the project: On June 25, 2012, MIGA issued a guarantee of US$8.7 million to cover an investment by Coca-Cola Icecek A.S. (CCI) of Turkey in Turkmenistan Coca-Cola Bottlers (TCCB). The coverage is for a period of up to seven years against the risks of expropriation, transfer restriction, and war and civil disturbance. The project consists of the continued expansion and modernization of a soft drink bottling facility in the city of Ashgabat. TCCB bottles, distributes, and sells soft drink products throughout the country. Results achieved: MIGA has supported this project since 1999. Since then, TCCB has continued to grow and meet rising local demand by installing three additional production lines. TCCB has widened its reach by increasing its distribution and warehousing network. TCCB’s expansion and modernization contribute to the strengthening of local businesses through the procurement of raw materials. Eighty percent of plastic preforms are sourced from a local supplier, and TCCB procures pallets and propane from the local market. The project’s investment in human capital has continued to grow—from 185 jobs in 1999 to approximately 360 jobs in 2011, with wages and benefits 10 percent higher than the country-wide standards; additional staff is also expected to be added. Workers also benefit from the substantial transfer of technical and managerial expertise. There is anticipated employment growth among local suppliers of goods and services as TCCB’s production increases. The project is aligned with MIGA’s strategic priority of supporting South-South investments.