Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 21530 TM

MEMORANDUM OF THE PRESIDENT

OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ONA

COUNTRY ASSISTANCE STRATEGY

FOR

TURKMENISTAN

December 22, 2000

Central Asia Country UnitEurope and Central Asia Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EQUIVALENTS(as of November 1, 2000)

Currency Unit = ManatsUS$1 = 5,200 Manats (official rate)US$1 = 19,000 Manats (black market rate)

WEIGHTS AND MEASURESMetric System

ACRONYMS AND ABBREVIATIONS

ASBP Aral Sea Basin ProgramCAS Country Assistance StrategyCBT Central Bank of TurkmenistanCIS Commonwealth of Independent StatesDSR Debt Service RatioEBRD European Bank for Reconstruction and DevelopmentECA Europe and Central Asia RegionFDI Foreign Direct InvestmentFERF Foreign Exchange Reserve FundGDP Gross Domestic ProductIBRD International Bank for Reconstruction and DevelopmentIBTA Institution Building/Technical AssistanceIDA International Development AssociationIDF Institutional Development FundIFC International Finance CorporationIMF International Monetary FundLSMS Living Standards Measurement SurveyMIGA Multilateral Investment Guarantee AgencyMOEF Ministry of Economics and FinanceNEAP National Environmental Action PlanNGO Non Governmental OrganizationPER Public Expenditure ReviewSAFI State Agency for Foreign InvestmentTACIS Technical Assistance to the Commonwealth of Independent StatesUSEXIM United States Export Import BankUNDP United Nations Development ProgramUNICEF United Nations International Children's Education FundWBI World Bank Institute

TURKMENISTAN's FISCAL YEARJanuary 1 - December 31

Vice President: Johannes F. LinnDirector: Kiyoshi KoderaIFC Director: Khosrow ZamaniCAS Team Leader Tony CholstCAS Team Members Guijahan Kurbanova

Chandra PantMichael MillsGerhard BothaMark LundellAndriy StorozhukGorton De Mond, IFCJim Anderson, IFCJens Wandel, UNDP

FOR OFFICIAL USE ONLYTURKMENISTAN

COUNTRY ASSISTANCE STRATEGY

TABLE OF CONTENTS

EXECUTIVE SUMMARY ........................................ . i-iii

I. INTRODUCTION ......................................... 1

II. POLITICAL AND ECONOMIC ENVIRONMENT ......................................... ,.1A. Political Developments and Prospects ......................................... 1B. Economic Developments ......................................... IC. Near and Medium Term Economic Prospects ......................................... 2D. The Government's 10 Year National Program ......................................... 4E. Global and Regional Linkages ..... 6...................................6

III. KEY DEVELOPMENT CHALLENGES ...... ................................... 7A. The Foundation: Improving Living Standards in Turkmenistan ................................................7B. Strengthening Public Resource Management .................... .................................. 9C. Improving Health and Social Services ...................................................... 13D. Developing an Efficient Rural Economy ...................................................... 15E. Supporting Private Sector Development ...................................................... 16F. Protecting The Environment and Conserving Water ................................................ ...... 18

IV. WORLD BANK STRATEGY ...................................................... 18A. Lessons Learned from Past Bank Experience ...................................................... 18B. Bank Program for FYO1-03 ...................................................... 20C. IFC Program ...................................................... 25D. Other Bank Group Activities ...................................................... 26E. Partnerships with other Donors ...................................................... 27F. Program Performance Indicators ...................................................... 27

V. MANAGING RISKS AND UNCERTAINTIES ...................................................... 28

VI. CONCLUDING REMARKS ...................................................... 30

LIST OF TABLES AND CHARTS

Table 1: Key Economic Statistics ...................................................... 2Chart 1: Turkmenistan: Projected Economic Growth and Sources of Growth ...............................................3Chart 2: Distribution of Consumption in Turkmenistan ...................................................... 7Table 2: Comparative Health Indicators ..................................................... 8Table 3: Proposed Turkmenistan Country Program: FYO1-03 ..................................................... 22Table 4: Selected Performance Indicators ..................................................... 28

LIST OF BOXES

Box 1: Longer Term Governance Issues ..................................................... 13Box 2: Proposed National Economic Forum ............................................. 20Box 3: Budget and Debt Management Triggers for New Lending .................... ......................... 23Box 4: Proposed Base Case Loans ............................................. 24

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not be otherwise disclosed withoutWorld Bank authorization.

ANNEXES

Annex 1: Letter from the Government on the CAS .................................................. 31Annex 2: Status of Projects Under Execution .................................................. 34Annex 3: Round-Table Discussions with NGOs and the Private Sector .................................................. 35Annex 4: Key Reforms for Lending Beyond the Base Case ................. ................................. 38Annex 5: Turkmenistan's Growing Knowledge Base .................................................. 42

CAS TABLES

Table A2: Turkmenistan at a Glance .43Table B2: Selected Indicators of Bank Portfolio Performance and Management .45Table B3: Bank Group Program Summary .46

IFC and MIGA Program SummaryTable B4: Summary of Non-Lending Services .......................... 47Table B5: Turkmenistan Social Indicators .48Table B6: Key Economic Indicators .49Table B7: Key Exposure Indicators .51Table B8: Operations Portfolio .52Table B9: CAS Program Matrix .53Table B 10: CAS Summary of Development Priorities ....................................... 56

TURKMENISTANCOUNTRY ASSISTANCE STRATEGY

Executive Summary

i. Since independence in 1991, Turkmenistan has adopted a gradual approach to the transition to amarket economy, so as to improve the living standards of its people. Extensive consultations with theGovernment, civil society and the private sector during the preparation of the Bank's CountryAssistance Strategy (CAS) indicate that the prospects for a fundamental change in this policy stanceduring the next few years remain uncertain. Against this background, the Government and the Bankhave agreed on a CAS program for the next three years that focuses on improving the efficiency andtransparency of public resource management, including poverty monitoring and the targeting of socialassistance.

ii. Economic Performance: Turkmenistan has had a sharp economic upswing over the past fewyears and continued growth in the near term is likely in light of recent gas sale agreements. However,this growth is built atop an economic structure that may be unstable in the long term -- with a largedegree of state involvement, dependence on energy sales prone to fluctuation, and water-intensiveagriculture. Key reform goals to create a more solid foundation to achieve sustainable growth areoutlined both in the 1997 CAS and the Government's 10 year National Program for 2000-2010 -improved budget and debt management, trade and exchange rate liberalization, agricultural reform, andprivatization. Yet there has been limited progress in identifying and taking near term actions to meetthese goals. Public investments have been large (about 40% of GDP) and have been pursued in roads,construction, oil refining, textiles, electrification and food processing. However, most of this isfinanced through off-budget funds and external borrowings and does not appear to have beenadequately reviewed and prioritized against economic returns, factoring in opportunity and recurrentcosts and future debt service. There appears to be limited commitment to make far-reaching butnecessary systemic changes in the near term. If stronger reform is not achieved, the economy is likelyto face significant risk of economic disruption in coming years.

iii. The Government has recently raised the possibility of moving forward on key economic issuessuch as liberalizing the exchange rate regime and improving public resource management - includingstronger debt management, budget consolidation, and splitting the administrative and commercialactivities of Ministries. The Bank agrees that these are priorities. A critical element in making theserefortns work will be the more rational use of Turkmenistan's largest extra-budgetary fund, the ForeignExchange Reserve Fund (FERF), which now serves several functions with limited transparency andunclear allocation criteria. Progress on rationalizing the FERF, including defining rational andtransparent rules for a currency reserve to facilitate exchange rate management, an inter-generationalsavings fund to help offset future shocks, and public investments that are reviewed within the budgetframework would be an important step in improving exchange rate and public resource management.

iv. Living Standards: Absolute poverty in Turkmenistan appears low compared to other CIScountries, although this masks several important challenges. First, about half the population appearedto be living on less than the official minimum wage in 1998 (as measured by cash income), assisted byheavy subsidies on commodities and utilities. The Government is reluctant to eliminate subsidies outof concern that this would increase poverty. However, many of these subsidies do not target those whoare worse off, they reduce incentives for conservation and maintenance of water and energy, and theycreate distortions in the economy. Reducing subsidies, combined with a more transparent and targeted

i

approach to social assistance for the most needy, needs careful consideration. Second, Turkmenistan'shealth statistics were among the worst in the CIS in 1997, although official statistics show recentimprovement. A number of maj or health concerns exist, including limited access to potable water andsanitation. The need for deepening health system reformn in budgeting, staff training, and theavailability of essential pharmaceuticals and equipment is also high on the agenda. Third, there is awide disparity between the living standards of those in the capital city and those in rural areas. Most ofthe poor live in rural areas, and the lack of income opportunities and deteriorating irrigationinfrastructure pose key risks to them.

v. Bank Involvement: The 1997 CAS was designed around mixed signals from Turkmenistan,with an official gradual approach to reform and indications of the potential for stronger reform,particularly in agriculture, foreign exchange management, and price liberalization. However, sincethen reform progress has been weak. The Bank has sought to support reform through several pieces ofEconomic and Sector Work (ESW), but these appear to have had little visible impact on decisionmaking. The Bank has also struggled with portfolio implementation. All three on-going loans haveexperienced difficulties. During 1998-99, disbursements were suspended, due to procurementproblems. The suspension was lifted in June 1999, and the Bank has resumed implementation ofongoing loans and technical assistance. However, Turkmenistan is in violation of the Negative PledgeClause contained in its loan agreements with the Bank and has not met minimum debt reportingobligations to the Bank; and therefore it does not currently have access to new Bank borrowing. Manyinternational institutions and donors have pulled back their activities. These include the IMF, whichcould not get adequate basic macroeconomic data for Article IV consultation, the EBRD, whichprepared a country strategy early this year which does not contain public sector lending, and bilateralagencies, which have reduced their assistance considerably. All of this suggests the need for a morecautious and limited approach in the current CAS.

vi. In light of the above, the role of the Bank over the next three years is sequenced in three phases.

. Initial Phase: During the first phase the Bank will help Turkmenistan build a more solidfoundation of economic capacity and transparency, from which it can launch deeper reforms whenit is ready. Without this foundation, more direct efforts to strengthen the economy and improveliving standards are unlikely to prove successful. To this end, the initial limited role of the Bankwill be primarily to engage in policy dialogue and extend non-lending analytic support to (i)strengthen economic management capacity within the Government, (ii) increase transparencyof, and access to, economic and public resource information within Turkmenistan, and (iii)improve living standards monitoring and social assistance targeting mechanisms. The Bankwill also support strategy design in key national and regional issues (water, energy,environment). During this phase, on the overall issue of fiduciary accountability, the Bank willcontinue to stress the importance of transparent accounting and procurement procedures.Supervision of on-going projects will remain a top priority.

* Second Phase: Given the loan clause violation and Turkmenistan's limited reform progress, it islikely 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) theNegative Pledge Clause violation is resolved, (ii) performance of ongoing projects is improved,and (iii) progress is achieved on key budget and debt management areas, including the reform ofthe FERF. The envisaged lending will be on priority human needs (a health project) and disasterprevention and water management (a canal rehabilitation project). The improvement of services

ii

for the rural economy (a crop protection project) would also be supported, contingent onimproving 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 forwardon a deeper reform agenda, the Bank will consider additional support. Such support would beconsidered in light of progress in, and commitment to, reforms in key policy areas andachievements in near term CAS benchmarks including improvements in living standardsmonitoring and targeting. In this event, a CAS update will be prepared.

vii. The Board may wish to address the following issues during its discussion:

* Is the proposed strategy -- focusing initially on non-lending services until the Negative PledgeClause violation is resolved, performance of ongoing projects is improved, and progress isachieved on key public resource management areas, including the FERF -- an appropriate one?

* In the event that the lending triggeis are met for a small 1-3 loan program, are the areas for newborrowings identified herein - in health, canal rehabilitation, and crop protection - the rightpriorities?

* How can the Bank do more to move the reform agenda forward in an environment where some ofthe basic conditions that would support systemic reform may not be apparent?

..

MEMORANDUM OF THE PRESIDENT OF THEINTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCESTRATEGY FOR TURKMENISTAN

I. Introduction

1. This is the second Country Assistance Strategy (CAS) document of the World Bank forTurkmenistan. The first (R97-93/1) was discussed by the Board on May 27, 1997. To prepare theCAS, the Bank conducted four missions to Turkmenistan during the past year, and met withGovernment officials, parliamentarians, donors, NGOs and representatives from the private sector.The Government of Turkmenistan has added a letter with its comments on the CAS (Annex 1).

II. Political and Economic Environment

Political Developments and Prospects

2. The political landscape has not changed significantly since the previous CAS was prepared in1997, and does not appear likely to change much over the current CAS period. The President andPrime Minister since independence in 1991, Saparmurat Niyazov, plays a dominant role in thepolitical, economic and social life of the nation. The constitution was amended in December 1999 topermit the first President to remain in his post for life. Parliamentary elections were held inDecember 1999, but these were criticized by international organizations for the limited choiceamong candidates or parties. Official Turkmen policy recognizes the need for a gradual movetowards a multi-party system.

3. Political stability through the centralization of power has a price. There are few checks andbalances within the government and between the government and other institutions, a situation thatcan result in sub-optimal political and economic choices. Outside of the office of the President,government agencies and officials have limited authority to make key policy decisions. There iswariness of sharing information across institutional lines and with international organizations. Mostimportantly, policies and investment decisions which are not shaped through a participatory processare often less than optimal and lack the broad ownership to make them sustainable in the long run.

4. Turkmenistan maintains a foreign policy of "permanent neutrality" recognized by the UN, is asignatory to several UN conventions, is a member of the Economic Cooperation Organization(ECO), and is a member of the "six plus two" group seeking a resolution to the Afghan conflict.

Economic Developments

5. Following independence in 1991, the economy of Turkmenistan experienced a steep decline,caused by disruption in oil and gas exports, poor harvests, and weak economic management.Between 1992-97, it is estimated that real GDP fell cumulatively by about 50 percent, comparable tothat experienced by other CIS states. With the discontinuation of gas exports to Ukraine in 1997 theeconomy fell further, and the current account deficit rose to over 20 percent of GDP in 1997 and to

33 percent of GDP in 1998. Financing of such a sizeable external gap led to a 200 percent increasein external debt between 1996 and 1998. However, beginning in 1998 the economy started to grow,according to official statistics by 7 percent in 1998 and 17 percent in 1999, fueled in part by arecovery in agriculture output and (starting in 1999) energy exports. The prospects for 2000continue to be bright, and GDP is projected torise by 18 percent, powered by oil and gas I. Key Ecoinomic Statisticsproduction (particularly a resumption in gas 19E 19 19990*sales to Russia and Ukraine). 0GblJphkat*offcia2.7' 2.8 3f3x 43

itte)23 28 33 *

6. Apart from energy sales and agricultural metch tadAlias 640 550 660 70production, growth has also been spurred by a Real GDP growth,% -11 7 17 18

large public investment program (about 40 kfl0o 2 % 1 22 20 20 14

percent of GDP) in roads, railways, oil ttBU4t 'xpC tur 25 25 22 21

refineries, textiles, construction, electrification * fw2 25of S 22 21

and food processing. However, much of this B Dalime 0 -3 0 0

has been carried out through extra-budgetary 614 1,164DP37funds, and the financial and economic returns MR. $ Iof many of these investments do not appear to N p1an ;ise In0outa, g l0 4have been adequately reviewed and prioritized, ma. Sfactoring in opportunity and recurrent costs, and E xt 1e7a22l23 2.32

future debt servicing. According to official bin. Istatistics, inflation is in check and the official ran. $ 263 313 480 374state budget is in balance.4.6 5,0 520 2G

7. While these are important achievements, ; ; X5

there is need for caution in their interpretation. Suc:Vro*~W i~aet M,G~ a~~~t~

Fist, concerns remain about the reliability ofnational accounts and trade price/volume data.1 Limited access to full and reliable economic andfiscal data remains a major issue. Second, the deceleration in officially recorded inflation is to someextent due to the control of prices of utilities and some commodities, as well the availability of cheapimports from its neighbors due to an overvalued exchange rate. Underlying inflationary pressures arestill likely to be high, as reflected in the parallel exchange rate (which is over three times the officialrate) and growing money supply. Third, the balanced state budget represents only a small subset ofpublic revenues and expenditures, due to large extra-budgetary activities (see para. 28-31).

Near and Medium Term Economic Prospects

8. Economic Projections: In the near term, the economy is likely to continue to growsignificantly, even with limited policy reforms. The potential for this growth rests to a very largedegree on Turkmenistan's tremendous hydro-carbon endowment 2 combined with below fullutilization of currently available capacity in the gas sector. Turkmenistan's pre-independenceproduction level of natural gas has been estimated at 80-90 bcm. The resumption of gas exports will

l For example, while Turkmenistan's national accounts appear to be compiled in general accordance with internationalstandards, significant revisions in past data are not uncommon. Also about half of gas exports is conducted in barter andagriculture production is considered by some to be overstated.

2 Turkmenistan has the fourth largest gas reserves in the world, amounting to 2-3 trillion cm in known reserves (andpotential reserves are estimated to be much larger). This could allow Turkmenistan to maintain a production capacity of100 billion cm per year for the next 20-30 years.

2

raise Turkmenistan's gas production to about 45 bcm in 2000, and Turkmenistan has recently agreedto increase production levels further. Specifically, it has agreed to increase its supply of gas toUkraine from 5 bcm in 2000 to 30 bcm in 2001 and is negotiating an agreement to supply Russiawith 30-40 bcm in 2001 (up from 20-30 bcm in 2000). This, combined with smaller but rising levelsof gas exports to Iran and domestic use, will enable it to reach full utilization of existing capacityover the CAS period, with most of the production growth taking place in 2001. Earnings related toTurkmen gas are more dependent on negotiations as regards supply routes rather than fluctuations inworld energy prices (the price of Turkmen gas is estimated to remain at about $38-42 per 1,000 cmfor the CAS period). The oil sector also continues to attract foreign investor interest and is expectedto grow robustly, especially considering the relative transportability of oil compared to gas.

9. Prospects beyond the energy sector seem less bright given the limited commitment tofundamental reform, particularly as regards implementing agriculture liberalization and reducingbarriers to private sector development. Turkmenistan has planned for a significant growth inagriculture production, including cotton and wheat. However, such growth is unlikely to beachieved without giving farmers greater control over their production and creating incentives toconserve water. Growth in infrastructure and construction may continue, mostly supported bycontinued large public investments.

10. In sum, GDP growth is expected to be onthe order of 21 percent in 2001, after which it Chart 1h Turkmeeistan: Projected EconomicGrowth and Sources of Growth (1998 = 100)may level off to about 5 percent per year (see -- _

Chart 1). The source of this growth is expected S tn on 5% 3*

to be concentrated in the energy sectors. It 160 _ OH | 21* 5

should be noted that the impact associated with 160 JU _P

this growth is moderated due to the fact that 14m40-50 percent of gas exports to CIS countries is 207%payable in kind. In addition, unless part of 100energy sector proceeds are plowed back to 80

maintaining production facilities and pipelines, 60

energy production may not be sustainable over 40

the longer term. As noted, these projections 20

assume little reform progress. On the other 0hand, if Turkumenistan were to proceed with a 199S 199 2000 2001 2002 2003 2004

more systemic reform program, growth Source: Turknen authorities' historical data and World Bankprojections would be even higher. staff proiections

11. The Risk of Economic Disruption: This economic growth projection is, however, subject toconsiderable risk, as the economy is highly dependent on (i) oil and gas exports which mayfluctuate significantly due to price considerations, export route disruptions and payment difficulties3

and (ii) water intensive agriculture which is both dependent on regional cooperation and over thelong term contributes to the salinization of land and reduces yields. Turkmenistan's large publicinvestment and construction program, which often appears to be pursued without feasibilitystudies or proven financial and economic rates of return, represents another source of concern. Notonly is the current capital investment level (about 40% of GDP according to official statistics) highby international standards (South East Asia has averaged about 30%) but it locks Turkmenistan intohigh recurring costs to maintain these projects. Finally, Turkmenistan has relied heavily on public

3 For example, due to payment problems, gas exports to Ukraine were discontinued in 1997, resulting in a sharp declinein GDP. The various pipeline proposals to Turkey, Pakistan, Iran and China would reduce economic risk if realized.

3

and publicly guaranteed debt to finance public investments, and servicing this debt could beproblematic if oil and gas revenues are ever disrupted.

12. The risk of economic disruption can only be mitigated by (i) improving public resourcemanagement, (ii) accelerating market reforms which will permit more diversified private sector ledgrowth and investment and (iii) improving national water management. However, Turkmenistan'sefforts on these fronts have been limited. Budget and debt management are strongly in need ofimprovement (see paras 27-37), 'although the Government has recently indicated interest in movingforward in this area as well as in foreign exchange market liberalization. Barriers to private sectordevelopment, including limited access to foreign exchange and trade restrictions, are quite high (seeparas 48-53). Agriculture policies are still predicated on the state order as well as excessive waterusage and drainage (including the creation of a new large collector lake in the Karakum Desert)rather than conservation (see paras 42-47).

13. Therefore, unless greater reform progress can be made, growth outside of the energy sectorwill be hard to sustain and the potential for a significant economic downturn caused by a disruptionin gas supply routes will remain. Sensitivity analysis indicates that a suspension of natural gasexports to Russia and Ukraine would result in an immediate GDP drop of over 20 percent, and amarked slowdown in growth thereafter. Such a downturn could have a significant impact on theliving standards of the people of Turkmenistan. In this event, the large external debt burden mayalso limit the availability of further external financing to help manage the impact of a downturn.Even if growth is maintained, Turkmenistan runs the risk of becoming an energy enclave, withlimited benefits trickling down to the bulk of the people, especially those living in rural areas.

The Government's 10-Year National Program

14. The Government's goals are articulated in the National Program "Strategy Of Socio-EconomicDevelopments in Turkmenistan For The Period Up To 2010" (hereafter referred to as the NationalProgram) published in December 1999. The National Program identifies four primary goals. Theseare: (i) Economic Independence (including increasing economic growth through private sector andforeign investment), (ii) Food Safety (including increasing domestic food production andpromoting food exports), (iii) Social Security (including labor rights, employment opportunity, anda social safety net), and (iv) Ecological Safety (including preventing disaster in the Aral Searegion; providing high quality drinking water, and reducing soil salinity). The National Programdevotes considerable attention to meeting these goals by establishing production targets. Forexample, by 2010, cotton and wheat production would both double to 3 million tons each, sugar beetwould triple to 900 thousand tons, and the number of sheep and goats would double to 16 million.There are production targets for eggs, melons and berries as well. Gas production is targeted to tripleto 120 bln cubic meters and oil production to rise five times by 2010. There are similar details abouteach branch of the economy.

15. The National Program also describes in broad terms some of the public policies by whichthese objectives will be met, albeit without specificity of detail nor implementation time frame:

(i) Fiscal and Monetary Policy: The budget should be expanded to cover all governmenttransactions and to eliminate all extra-budgetary accounts. Tax policy will aim at reducing theburden on enterprises, and promoting import-substitution and exports. The budget deficit and

4

monetary policy will be tightly controlled to reduce inflation. Directed credits will be eliminated,and positive refinancing rates will be phased in, supported by a market for government securities.

(Qi) Foreign Exchange and External Debt Management: A market based exchange rate willbe introduced. External debt management is to be strengthened to ensure a reasonable volume ofborrowing and its efficient utilization.

(iii) Investment Policy: Investments will be maintained at a high level to achieve thegovernment's ambitious growth objectives. State commercial banks will be encouraged to extendlong term credits and new financial institutions are to be created as well. Remunerative yields willbe offered to mobilize household savings. Foreign investment and joint ventures will beencouraged. With the strengthening of their financial positions, enterprises will begin to rely ontheir own funds for investment purposes.

(iv) Private Sector and Financial Sector Development: Bureaucratic obstacles to privatebusinesses and small enterprises will be reduced. Privatization through auctions or corporatizationwill be continued but in ways that ensure that living conditions are not worsened. In agriculture, thetransfer of land ownership to private farmers will continue. In the financial sector, the developmentof a stock market and an insurance market will be encouraged.

(v) Social Welfare: Efforts noted above to stimulate economic activity will help generateincreased employment. In addition, the Government will continue to provide free gas, electricity,water and salt (up to a fixed limit) at least up to 2005, as well as free health and education services.Reform of the pension system and allowances is envisaged to make these more effective.

16. Analysis of the Program: The National Program contains many of the goals related to atransition to a market economy, and the Bank can therefore in principle find a match between manyof the government's stated goals and the policies it regards as necessary to build sustainableeconomic growth and poverty reduction. However, there are some serious concerns. A criticalconcern is that there is an inherent contradiction in the National Program between the aim ofcreating a market economy and conserving the environment on the one hand and on the other handmandating large growth targets for output of various commodities up to year 2010 that isreminiscent of a centrally planned economy. For example, enforcement of targets for everincreasing cotton sales would reinforce the state-order system and undermine the ability of farmersto freely choose which types of crops to grow. Water conservation could also be undermined by thesignificant growth in land under irrigation needed to meet projected agriculture production.

17. Other general concerns exist. First, the National Program has a strong emphasis on importsubstitution. While understandable as a reaction to the narrow specialization of Turkmenistan duringthe Soviet era, state-sponsored protectionary policies ultimately can be very costly as experience inother countries has shown. Second, the government policy of providing free commodities andutilities up to set limits, including water, electricity, flour, and gas can undermine its own goals ofpromoting water and energy conservation and environmental protection. The provision of these freegoods also undermines the potential for commercialization of providers of these goods. Finallythere are some important issues that are likely to arise during the transition that have not beenadequately addressed. These include, for example, the restructuring of state banks and stateenterprises.

5

18. Beyond these general concerns, within each sector, the National Program does not spell outspecific priority actions and time frames within which they should be implemented. In fact, thereappears to be a disconnect between the government's stated goals in the 10 year National Programand activities being pursued in practice. Therefore, the Bank's CAS seeks to identify priority sectorson the basis of improving the living standards of the people of Turkmenistan, and then to helptranslate many of the Government's long term goals in these priority sectors into near term policyactions necessary to achieve these goals and enable Turkmenistan to transition to a well functioningmarket economy (see section III).

Global and Regional Linkages

19. Following independence, Turkmenistan has focused on building its national identity.However, Turkmenistan is a country of only about 5 million people and is geographically distantfrom many of the advanced economies. The speed at which it develops is likely to depend on howwell it can (i) participate in global knowledge sharing and initiatives on key development issues and(ii) cooperate with its neighbors on key regional issues.

20. Global Knowledge Sharing: The most important global public good that Turkmenistan needsaccess to is knowledge - particularly knowledge about best practices in areas such as taxation,debt management, budget reform, exchange rates, privatization, pensions, health reform, energycontracts, water conservation in agriculture, etc. There are many ways to do this including training,learning forums, and the internet. To maximize its ability to participate in global knowledge transfer,Turkmenistan needs to increase its support for training of officials and provide permission forprivate internet providers to operate. The benefit related to such knowledge transfers will likely bedirectly proportional to how widely it is made available within Turkmen society. Numerous globalinitiatives exist, such as the Consultative Group on International Agriculture Research (CGIAR), theGlobal Water Partnership, Distance Learning Networks, and the Global Gateway which canfacilitate such knowledge transfer. Participation by Turkmenistan in such initiatives could yieldpositive results.

21. Regional Cooperation: The most important regional issue is water. Turkmenistan isdependent for both drinking and agricultural water on the flow from the Amu Darya - which travelsfrom Afghanistan and Tajikistan through Uzbekistan and Turkmenistan to the Aral Sea. There arelimited rules governing how each country treats the water and there are few incentives to conservewater, reduce contaminants, or assist in infrastructure maintenance. As a consequence the overallwater quality and flow of the river has deteriorated. To ensure long term viability of this regionallifeline, the first priority is for all states in the region to improve water management. Beyond this,the international community supports the Aral Sea Basin Initiative to improve regional water use.Turkmenistan currently holds the rotating Chair of the Executive Committee of the InternationalFund for Saving the Aral Sea (IFAS). At the same time, it has recently announced the developmentof a new drainage collector reservoir which falls outside the Aral Sea Basin Program parameters,and this needs to be carefully reviewed against financial, regional and environmental concerns.Beyond water, there are other critical areas in need of regional cooperation such as energy supplyroutes, the ecology of the Caspian Sea, and trade that would benefit from a regional approach.

6

III. Key Development Challenges

22. The Bank and Turkmenistan have agreed that the priorities identified within the CAS be basedon the extent to which they contribute to improving the living standards of the people ofTurkmenistan. In light of this strategic foundation, and taking into account the Government's 10year National Program, the CAS identifies five focus areas noted below and specific actions neededwithin each in order to implement the Government's program and improve the living standards ofthe poorest parts of the population.

* 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 Foundation: Improving Living Standards in Turkmenistan

23. A growing literature exists on living standards and poverty in Turkmenistan, including the UNHuman Development Report, reviews of the education and health sectors, and a World Bankanalysis of one of the poorest regions, Dashowitz. Most recently, a Livings Standards Survey wasconducted by the Statistics Agency in 1998 and has been further analyzed by the Bank.4 While theabsolute incidence of poverty appears low, about half the population appeared to be living on lessthan the official minimum wage in 1998 (as measured by cash income). 3 Most of these aresupported by heavy subsidies on rt 2: Distribution of Consumption in Turkmenistancommodities and utilities. It also revealsa large level of inequality, with almost (1998)half the national consumption being IS _consumed by only 10 percent of the 16 90 percentof

population (see Chart 2). There is a E 14 population 10 percent population consuming 44R 1 2 consuming 56 percent of national total consumption

particularly stark difference between n to percent of

those who live in Ashgabat, where 8 0 total national

almost no poverty is recorded, and the | 6 -

rest of the country, particularly in the 4

rural areas. Beyond geography, the 2

most distinguishing features of the 0poorest group are their high numbers of

Manat (100) per capita per day, 1998children and their low access to someinfrastructure (such as piped water).

4 "A Profile of Living Standards in Turkmenistan" (World Bank, Jan. 2001)

5The measurement of poverty has proven difficult in Turkmenistan. The results of the 1998 Living Standards Surveyindicated that 7% lived below the $2.15 poverty line using purchasing power parity. However, this data should be usedwith caution as it depends on calculations of purchasing power parity based on uncertain price indicies. As noted, theincome of about half the population fell below the minimum wage in 1998, if only cash income is counted. However, itis uncertain what the impact of recent increases in wages and economic growth over the past few years has been onliving standards. Turkmen authorities have recently suggested using another measure - the share of population withincomes below 50% of the median per capita income. According to government statistics, only 1% of the populationcurrently falls below this level. Additional work on developing a common and appropriate poverty line is needed.

7

24. Key Areas in the Battle Against Poverty: The Profile of Living Standards identifies thefollowing areas as being in urgent need of attention to improve the level and sustainability of livingstandards of the poorest segments of the population:

* Improving the Effectiveness of Public Support for the Poor: While the policy of providing goodsand services (eg. flour, salt, gas, oil, water, electricity) free or at very low prices has served toalleviate the conditions of those with limited incomes, it has also reduced incentives to conserve,maintain and improve services. Further, these subsidies are only partially paid for explicitlyfrom the budget and farmers both have to sell their crops to the state-order and obtain subsidiesin return, which makes it difficult to determine net benefits. Hidden subsidies distort the abilityof enterprises supplying and receiving such commodities to operate on a market basis. Finally,there is evidence that such subsidies are not well targeted, and much of the benefit may beabsorbed by those better off.6 To improve long term financial sustainability and the quality ofservice, increased charges for commodities and public utilities combined with a targetedbenefits program transparently provided by the budget should be phased in. A reduction insubsidies without an approach to increasing income generating opportunities and a safety net forthose left behind is likely to hurt living standards, at least in the short term. A holistic approachis therefore needed to address these issues together.7 A central element in such an approachought to be transparency and accountability, to ensure adequate support is provided to thosemost in need.

* Improving Health Care: In terms of human Table 2: Comparative Healthdevelopment indicators, health is a top priority. Indicators (1997/98) (1Turkmenistan has historically had some of the Life Infantlowest life expectancy rates and highest infant Expectancy Mortalitymortality rates in the CIS (see Table 2), although (yrs) (#/1000official statistics suggest that there have been some births)improvement recently. These issues affect the poor Turkmenistan 66 33 (2)

in particular, as they tend to have more children Kyrgyz Rep 69 24

and more limited access to piped water, and cannot Bulgaria 71 18afford unofficial payments to health care workers. Albania 73 33There are three key components that impact health Kazakhstan 68 24indicators: (i) poor water quality and sanitation (1) Statistics are from the Bank's live data base or from

the UNDP's "Human Development Report," 1999.which leads to infectious and parasitic diseases, (2) Recent government reports indicate this may have

particularly in infants, (ii) life-style factors fallen to as low as 26/1000

(including consumption of fat, smoking, drinking) which increases the incidence of heart diseaseand related ailments, and (iii) the quality of the health care system. On the last, Turkmenistanhas initiated some improved policies including better family planning services, some staffretraining, and a stronger emphasis on primary care. It is critically important that these initialreforms be supported and deepened, including through changes in the budgetary and incentivesystems.

6 Although there are eligibility criteria for subsidized flour (children, elderly, veterans, disabled), in practice over 60% ofthe population receive this. Also, many of the poorest do not receive piped water and have few electric appliances.There are official limits to free utilities, but meters and taps are scarce and there are few incentives for conservation.

7 In late 1999 the Government introduced a new system to provide one-time grants of assistance to the most needy. Localcommissions are being formed at the etrap and town level to identify those that require assistance. The system is still inits infancy, and its effectiveness is not yet known, but it could be a foundation to build on.

8

* Supporting Education: While basic education continues to provide near universal literacy, thereare worrying signs of deterioration, particularly as regards the time spent in primary andsecondary grades, the content of the curriculum, and access to higher education. The linkbetween education and employment also appears weak at present, and this will become moreimportant as the move towards a market economy progresses. It is critical for the Ministry ofEducation to address these systemic issues facing the sector.

* Strengthening the Rural Economy: The vast majority of those in the lowest income quartile livein the rural areas. In 1998 all of the surveyed residents of Ashgabat lived above the level of 50percent of mean consumption, and in each of the five regions, there is a higher incidence ofpoverty in the rural rather than urban areas.8 The best way to address income inequality andimprove the living standards of the poorest is therefore to improve the efficiency and marketorientation of the rural economy (including the elimination of the state order), providing the poorwith both increased income and greater employment opportunities. Preventing the breakdown ofthe poorly maintained irrigation infrastructure is equally important. But the two go hand-in-hand. Providing farmers with greater income potential will enable them to pay for, and maintain,water and irrigation services.

25. Poverty Monitoring: A key element in moving forward with poverty focused development is astrong poverty monitoring system and reliable statistics on key indicators. Turkmenistan has astatistics agency which takes the lead in most such efforts, including the preparation of the 1998Living Standards Survey, but there is a significant need to improve its capacity and train its staff toproduce and analyze reliable statistics that meet international standards. A number of governmentand donor-sponsored reviews now exist on key social sectors (education, health, living standards,employment, human development etc) but continuing work on these is needed. The statistics agencyhas requested Bank support for improving its capacity to monitor living conditions.

26. Gender Issues: Turkmen society involves both traditional roles for women as well as supportfor modern equality rights which are embedded in the constitution. Although available informationon gender issues is limited, there do not appear to be large differences in women's and men's accessto basic education or other social services. The UN's gender-related human development index andGender Empowerment Measure (measuring participation in parliament, public administration) alsodo not indicate significant inequality, although there is some indication that women may beunderrepresented in some key ministries and higher education opportunities. Maternal mortalityfigures are high but official statistics suggest they may be decreasing, as with the case of infantmortality. Looking towards the future, the Bank will emphasize the need to deepen Turkmenistan'sknowledge base on gender issues, particularly in the context of its planned support for monitoringliving standards statistics. In the Bank's round-table discussions with NGOs (see Annex 3), trainingfor potential women entrepreneurs was suggested as an important development tool. It will also beimportant to factor in the role of women in agriculture reform, both in terms of land ownership andworking conditions.

Strengthening Public Resource Management

27. The living standards profile highlights the importance of a transparent budget-based approachto transfers to the poor, and the weak connection currently between the extensive funds made

8 The Living Standards Survey may, however, exaggerate somewhat the real difference in living standards betweenurban and rural areas, since rural residents may be able to grow some food for themselves, and have a stronger level ofcommunity support.

9

available for public investments on the one hand, and critical unmet needs in basic health andeducation on the other. At the root of both of these concerns is a public resource managementsystem that requires serious systemic improvements in investment review and allocations, intransparency, and accountability. In light of these considerations the top development priority ofTurkmenistan is to put in place a transparent system of public resource management that can directpublic resources to priority uses. With a better system in place, Turkmenistan could use itsconsiderable natural resource wealth to address the large level of income inequality and improvebasic living standards with its own resources. Without such a system, more direct assistance tostrengthen particular sectors of the economy and reduce poverty are unlikely to have a lastingdevelopment impact.

28. Budget Management and Transparency: At present the Ministry of Economy and Financeprovides allocation management and oversight over only a small portion of government revenuesand expenditures through the state budget. The rest is managed by autonomous extra-budgetaryfunds and ministries that follow their own sectoral priorities. There are five major extra-budgetaryfunds (the Oil and Gas Fund, the Transport Fund, the Agricultural Fund, the Health Fund and theForeign Exchange Reserve Fund) as well as smaller funds and off-budget ministerial activities.9

This makes it difficult to ensure that public spending as a whole reflects the government's prioritiesand is used effectively. Inclusion of many state enterprises within the Government also misdirectsscarce budget funds for activities that ought to be done by the private sector. The non-transparencyof key operations makes accurate measurement and analysis of investments across sectors difficult.For example, self-financing ministries appropriate after-tax surpluses from enterprises under theircontrol to fund other operations (including capital expenditures and cross-subsidized services to thepopulation) without considering investments elsewhere.

29. In the 1997 CAS, the Bank indicated that fiscal discipline, including consolidating all fiscalfunds into the budget, would be the linchpin of reform. The government's 10 Year National Programhas also established strong goals in this area. All extra-budgetary accounts are to be eliminated, andall investments are to be included in an investment budget with an appropriate analysis of rates ofreturn. Also selected government companies are to be separated from ministries to facilitateprivatization. Very limited progress has been made since then, although some progress was made inFYOO by presenting planned revenues and expenditure outlays of most extra-budgetary funds in thestate budget document.

30. The World Bank has made a number of concrete suggestions to the government to promote atransparent, rational and efficient utilization of scarce public resources.1 0 An importantrecommendation is that budget coverage must be made more complete by progressively eliminatingthe funds and integrating their activities in the budget. A transparent process should be put intoplace to evaluate and prioritize investments within a common framework, and with adequatereview by sector specialists. The commercial activities of the self financing ministries must beseparated from the non-commercial ones and the latter incorporated in the budget. Quasi-fiscaloperations such as subsidized credit should also be included in the budget. Until such time as thesemeasures are implemented, regular reporting to the MOEF of all expenditures and revenues of thefunds and self-financing ministries, including the Foreign Exchange Reserve Fund, should be

9 It has been estimated that the expenditures under the state budget which are allocated by the Ministry of financerepresents only about 20 percent of all public expenditures.

10 Turkmenistan: Improving the Management of Public Expenditure, World Bank, October 1998.

10

enforced." Consolidated budget information should be widely available. These efforts should besupported by procurement reform, the introduction of international accounting standards, and areduction in netting (non-cash offsets between institutions). The Bank is supporting themodernization of the budget process through its on-going IBTA loan (see Annex 2), although theeffectiveness of this will depend on progress on the more fundamental reforms noted above.

31. The Bank has recently advised the Government of Turkmenistan that a central element in goodbudget management will be establishing improved and transparent rules for the largest extra-budgetary fund, the Foreign Exchange Reserve Fund (FERF). Only limited information isavailable on the size, rules, and transactions of the FERF. However, it is estimated to be on theorder of about $1.7 billion (equal to about 14 months of imports) held abroad. A large percentage offoreign currency earnings (possibly on the order of 30% - 50%) on exports of energy, cotton, andpossibly other transactions are transferred to this fund each year, and large public investmentexpenditures are made out of it. The FERF also may include elements of a foreign reservemanagement function (though the Central Bank has only limited control) and an inter-generationalsavings fund to cover future shocks. If public resources are to be managed transparently, it istherefore essential that the rules governing these FERF functions should be carefully considered inlight of international experience. This will be a critical element in exchange rate management aswell (see Annex 4). The Bank is prepared to provide advice to the government on the reform of theFERF based on international experience during the CAS period.

32. Debt Management: Currently, there is no clear system to consolidate all external debtobligations, and ensure that debt service is monitored and paid when due. Part of the external debt ismanaged under the Central Bank and part under the State Bank for Foreign Economic Affairs.Further the process of making public investments and contracting foreign debt are often separated.Many investments appear to have been undertaken on an ad-hoc basis and without consideringfuture debt service obligations, and recurrent costs of investments.12 This has resulted in large levelsof external public debt and debt service payments which could limit Turkmenistan'screditworthiness and future access to external capital if poor debt management persists.'3 Facedwith an increase in foreign debt, a Presidential decree was issued in 1999 seeking greater control onthe project formulation and loan approval process. Accordingly, all investment projects must beevaluated by the State Agency for Foreign Investment (SAFI). The Deputy Chairman of the Cabinetof Ministers in charge of the national economy must personally sanction all new projects above acertain threshold. It is unclear, however, how effective these procedures are.

33. The rising level of external debt was flagged as an important creditworthiness issue in the1997 CAS. The government's 10 Year National Program also establishes improved external debtmanagement as a key goal, with the targets of increasing its credit rating, improving the efficient useof borrowed funds and establishing a reasonable level of total borrowing and government control. Italso proposes a central process for external debt repayments under the government budget.

11 In the past, audited accounts of extra-budgetary funds were not made available to the MOEF. It is reported that as ofJuly 2000, MOEF has had access to such accounts. Such access will need to be carefully verified and monitored.

12 The MOEF maintains an overall plan for "centralized investments" which are largely funded in domestic currency andimplemented through ministries. However, foreign borrowing generally falls outside this framework.

13 Turkmenistan's stock of debt has increased from $1.7 billion at end 1997 (66% of GDP) to about $2.3 billion in March2000 (about 50% of GDP). Debt service payments are now about $400 million annually (about 15% of exports). Giventhe expected rise in exports and GDP, this level of debt, although large, is not unmanageable with appropriate review ofnew debt proposals and public investments, and greater economic diversification.

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34. The government needs to take a number of near term steps to meet its goal of strengthening itsdebt management. Appropriate limits should be placed on all new external borrowing (includingpublicly guaranteed debt) and borrowed resources should be used only for priority investmentprojects with high economic rates of return. Appropriate institutional arrangements to manageexternal debt need to be put in place. These include (i) a high level policy making body that setsstrict borrowing ceilings for each year, approves external borrowing proposals of the governmentand specifies the responsibilities for debt service, etc; (ii) a debt management unit that isresponsible for the daily management of all external debt, collecting information on foreign debtcontracts, and preparing periodic status reports and projections on debt; and (iii) a debt law thatclearly sets out debt management limits, procedures and responsibilities. In addition, internationalexperience suggests that providing access to external debt information is an essential element inbuilding relationships with external investors and donors. The Bank is supporting these effortsthrough an IDF grant for debt management, which has placed an international debt advisor with theGovernment.

35. Good Governance and Transparency: There is a strong need to improve informationtransparency and information sharing in Turkmenistan. As noted, there is limited information on thebulk of government spending and on debt. Most enterprises do not operate using internationalaccounting principles and there is a heavy use of non-cash transactions. During CAS consultationswith civil society and the private sector, many participants indicated that the main issue is notthe existence of good laws, but the transparent application of laws.14 The basis for good publicmanagement has to be access to appropriate information, both information generated withinTurkmenistan and outside information (best practices etc). Limited transparency can also lead to alack of accountability and is often a leading ingredient in rent seeking. Limited transparency is ofcourse primarily an internal issue, but also prevents a more robust cooperation with foreign investors

15and international institutions

36. Inadequate and non-transparent accounts also hamper control over improper practices andcorruption (bribes, kickbacks, favoritism, etc). Levels of corruption are hard to measure given thenon-transparent nature of public investment activities, but are generally considered to be significant.In this light, it is essential to build a system of public financial accountability and control.Turkmenistan has taken initial steps in this regard by drafting a Public Procurement Law, which isexpected to be submnitted to Parliament over the coming year with the support of the Bank.Turkmenistan is also beginning to introduce International Accounting Standards, also supported bythe Bank, which should help improve accountability over expenditures. Looking towards the future,these specific activities need to be institutionalized in a way that facilitates implementation andmakes them sustainable.

37. Good governance involves many aspects besides information sharing and transparency. Forexample, it requires establishing rules and institutions that separate regulatory and businessfunctions and other forms of checks and balances. Transparency in public resource managementshould therefore be considered as a first step, which will help to (i) reduce incentives for officials to

14 The one area where the civil society roundtable did, however, indicate a need for a new law was in the legal status andregistration of NGOs themselves, without which they face restrictions in carrying out their activities. The enactment ofan effective legal framework for NGOs would be an important step in enhancing the delivery of social services.

15 For example, adequate information on the full budget, extra-budgetary funds, and debt will be an important element indetermining the extent of Bank activities. A recent IMF Mission in November, 2000 was also unable to obtain theinformation it needs to prepare the ground for an Article IV Consultation.

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engage in inefficient or corrupt activities in the absence of checks and balances and (ii) set a goodfoundation for future work in improving governance. However, a longer term governance agendashould be recognized and begin to be discussed as well (see Box 1).

Box 1: Longer Term Governance Issues

Given the large role of the Government in the economy, and the centralized decision-making process, the levelof checks and balances within the system will require considerable enhancement. Beyond increasingtransparency, some longer term challenges include:

* Separation of Government from Commercial Activities: In most sectors, Ministries act as both regulatorof commercial activities, and as the operator of enterprises. This leads to a conflict of interest. Theseparation of commercial and non-commercial activities within ministries would both lead to greaterfinancial discipline in enterprises and permit the Government to concentrate on supervision and regulation.

* Reduction in Government Controls Over Normal Transactions: High levels of Government control overnormal transactions, such as trade and exchange activities, can provide an opportunity for rent seeking.Similarly, registration requirements for most business transactions with the State Commodity Exchangeprovides scope for harassment of the private sector and for corruption. The liberalization of trade andexchange regimes w3uld therefore be particularly effective in eliminating the opportunity for corruption.

* Improvement in Procurement/Auditing Practices: Turkmenistan is readying itself for the adoption ofinternationally acceptable procurement and accounting principles. And yet, it needs to be recognized thatmuch of the economy continues to operate on non-cash transactions and on informal arrangements.Strong banking and auditing institutions are needed if there is to be substance behind these procurementand accounting practices.

* Public Accountability of Officials: Many countries are adopting disclosure laws and monitoringmet,hanisms to prevent nepotism, corruption, and conflict of interest. Given the small population, andtendency for individuals to handle multiple positions, it will be important for Turkmenistan to consider anappropriate approach to this important issue.

* Independent Legal Institutions: In discussions with the civil society and the private sector, the single mostimportant issue mentioned was not the lack of good laws, but the transparent and objective application ofthese laws. There is also a need to develop appropriate institutions to enforce private contracts.

* Greater Level of Participation in Informing Decision-Makine: Experience has indicated that the greaterthe level of participation in the government decision making process, the more sustainable those decisionsare, and the more likely that they will be effective.

Improving Health and Social Services

38. Health Services: The Living Standards Survey indicates that there is a strong need tostrengthen health services, and that the development of the health care system is a main priority forTurkmenistan. Turkmenistan' s health indicators (such as life expectancy and infant mortality) werehistorically among the worst in the FSU countries. According to the official data, however, therehave been improvements in recent years in the maternal and infant mortality rates. It will beimportant to test the accuracy of the official statistics after the results of the recent demographic andhealth survey have become available. In addition, there has been a reported decline in several typesof infectious diseases (such as blood circulation diseases, respiratory diseases and genital-urinarydiseases). Despite these improvements, life expectancy (at 66 years) and infant mortality (reported

13

by the government at 26/1000 in 1999) remain of major concern.

39. The 1997 CAS recognized the critical priority of improving health indicators, and proposed animmediate pilot health reform project. The government's 10 year National Program establishessignificant long term goals in the health services area. These include maintaining free medicalservices, raising the amount spent on health to 7% of GDP, vaccinating up to 99% of children, andthe intensive development of the domestic pharmaceutical industry. It also recognizes the need tostimulate the development of private services in health care. The Government has recentlyintroduced a system of medical insurance for employed citizens.

40. There are many health challenges to address, including life styles and environment. However,two critical issues that should be tackled as a priority in the near term are the quality of drinkingwater and sanitation, and the health care system:

Drinking Water and Sanitation: Many of the poor do not have a piped water supply, but ratherhave to obtain water from wells or canals (which are often polluted). Few have adequatesanitation. For those with piped water, there are additional concerns relating to the poor state ofrepair of the pipes aid pumps, as well as the quality of water, much of which comes from theKarakum Canal or downstream Amu Darya and also has contaminants. These problems havecontributed to the still high incidence of infectious and parasitic diseases, particularly in infants.The Government, with donor support, is working on addressing these water supply issues.Participants in the NGO Roundtable agreed that the top sectoral priority is water supply.Introducing improved management of water supply systems, including charging for water, canassist in ensuring sustainability and improving service. Of course, such an approach also needsto ensure access to safe water by those most in need and unable to pay for services. The currentBank project in Water Supply and Sanitation is playing a critical role in helping to improve theprovision of water supply in one of the poorest regions of Turkmenistan (see Annex 2).

* The Health Care System: A critical element in need of reform is the manner in which the healthcare system is organized, funded, and staffed. Basic medicines and medical equipment (such assyringes) are in severe shortage, and patients often have to buy them themselves in order to getservices, despite the newly introduced insurance policy. There is therefore a need to ensure thatthe poor have adequate access to care. A fundamental reason for the inefficiencies in the healthcare delivery system is the poor system of budgeting. The overall health budget may beadequate, but a high proportion of it goes to funding tertiary level facilities. Further, reforms arerequired in the continued reliance upon the use of outdated norms to determine service andresources, and more attention needs to be paid to the quality of care provided. Someinstitutional reform towards a more quality oriented primary care system, appears to beunderway. It is critically important that these reforms be supported and deepened. Theproposed Pilot Health Project would play a critical role in this regard (see Box 4).

41. Other Social Services: On general social support, the Government's 10-year National Programprovides for free access to water, gas, electricity and salt up to fixed limits. At the same time, theLiving Standards Profile has identified the need to move away from general subsidies through amore targeted approach to social protection. A small program to provide one-time support paymentsthrough local communities has recently been initiated, and could provide a foundation for a largereffort. Beyond this, a deteriorating education system (including reduced time in secondary school, asub-standard curriculum, and limited access to higher education) is a key concern, althougl. there

14

appears to be only limited commitment to addressing these systemic issues at this time.

Developing An Efficient Rural Economy

42. The dynamic growth of the agriculture sector is especially important to address the incomeinequality between the urban and rural areas and reduce poverty. First, the sector accounts for asubstantial share of GDP and is a source of livelihood for a major part of the population.Agriculture contributed 26 percent to GDP in 1999 and it employs more than 45 percent of the laborforce. Agricultural growth will therefore have a significant impact on the overall economy and theliving conditions of the population, both in rural and urban areas. Second, most of the poor, asearlier noted, live in rural areas. Growth in agriculture and the generation of employmentopportunities in the rural areas is the most effective way to lift the living standards of the population,including those that are poor. According to the Living Standards Profile, the elasticity of povertywith respect to economic growth is about 1.75. That is, a 5% growth in income of the populationclose to the poverty line is likely to reduce poverty by about 9%.

43. The 1997 CAS highlighted the substantial progress on changing the status of most farmers into"lease-holders" at that time, and reported on government intentions to give efficient lease-holdersprivate title to their land (albeit with some restrictions) within a few years. It was in fact, envisagedthat by 1999 half of the land would be privately owned. However, progress since then has beenlimited, and only a very small portion of lands has been transferred to private ownership. Further,both lease-holders and private farmers access to critical inputs, storage facilities, marketing facilitiesand credit is limited unless they fulfill state orders.

44. The government's 10 year National Program envisions rapidly expanding agriculturalproduction, including a doubling of wheat and cotton production. At the same time, it indicates thatby 2010 57% of all agricultural production will be under private ownership. The programme alsorecognizes the importance of developing the agro-processing industry and the development of newhydro facilities and pumping stations.

45. The near term challenge to increase rural income should be to stimulate market based growthin agriculture. An environment must be created in which agricultural activity is not discriminatedagainst and private farmers are induced to increase their productivity and adopt best cultivationpractices. About 75% of arable farmland is used for cotton and wheat. At present virtually all ofcotton and wheat sales are carried out through the state order system. State procurement prices forcotton and wheat paid to farmers in local currency average about 50%-60% of world prices valued atofficial exchange rates, and less than 20% when valued at the parallel (street) rate. It has beenestimated that these prices, net of subsidized water, fertilizers, and other inputs, resulted in a realtransfer of resources from agriculture to the rest of the economy equal to as much as 15% of GDP.16

A further significant burden is that farmers would likely be able to obtain even greater benefits ifgiven the opportunity to grow and market alternative crops.

46. These restrictions on farmer income will have to be reversed if agricultural growth is to bestimulated. For this, the scope of the state order system should be progressively reduced and farmersshould be able to sell their produce freely in the domestic market or export it. At the same time,input subsides should be phased out to prevent wasteful use, and in particular user charges for water

16 "Turkmenistan - The Burden of Current Agricultural Policies" (IMF Working Paper, June 2000)

15

must be gradually raised to recover costs (see Annex 4). Introducing payments would beparticularly important in order to (i) help maintain rapidly deteriorating agriculture irrigationand other infrastructure, and (ii) help provide the incentives for water and other inputconservation, vital to building a sustainable approach to water management. These are bothurgent needs. On the first, there are increasing reports of the deterioration of the Karakum Canal,putting millions of people at risk of a serious health and environmental disaster. On the second, it isestimated that water loss on the Canal approaches 50% due to evaporation, over-use and poormanagement. The Bank's proposed Karakum Canal Rehabilitation project would seek to addressthese concerns (see box 4).

47. Removing restrictions on farmers without giving farmers access to alternative input and salesopportunities is also not likely to produce significant improvements. To alleviate this problem, thegovernment must encourage private sector investment in marketing, storage and cotton ginningfacilities and accelerate the privatization of agro-industries. The government has already begun toimprove its pest control services to farmers, and the Bank's proposed Crop Protection project wouldhelp to ensure that these were provided on a commercial service-oriented basis (see box 4).

Supporting Private Sector Development

48. Private sector development is critical to stimulate the income and jobs necessary to provideopportunity to the population of Turkmenistan. A vibrant private sector is also essential to providean alternative to public investment, to diversify the economy, and to create a favorable atmospherefor foreign investment, in and outside the energy sector. The roundtable with Civil Society inparticular highlighted the importance of strengthening the private sector environment to bothimprove social services and generate additional income in poor communities, including amongwomen entrepreneurs. Although estimates of the extent of the private sector in Turkmenistandiffer'7 , there is general agreement that its contribution to the economy remains well below itspotential.

49. The government's 10 year National Program recognizes the importance of the private sector andseeks to raise the non-Government share in GDP to 67% by 2010. It also advocates the liquidationof bureaucratic obstacles to private businesses and continuation of the privatization process forselected governmental companies. The program also establishes the goal of moving to a marketbased exchange rate system.

W0. The 1997 CAS notes the Government's emphasis on private sector growth (particularlythrough land reform - see previous section) and privatization, particularly of small scale enterprises.In 1996/97 the government had issued a decree on small enterprise privatization and was preparingregulations for the mass privatization of medium and large enterprises. However, after privatizingabout 2000 small scale enterprises, mostly in the field of trade and catering, since the end of 1998the privatization process has essentially stalled.18 A key reason for this is the poor environment forprivate sector enterprises to flourish. Further progress on privatization, while important, is unlikelyto be successful until the overall environment for private sector development and foreign investmentis improved.

'M The government claims the private sector accounts for 30-40% of GDP. Other estimates are in the range of 20-25%.

At the same time, the Government has indicated its intention to draw up a list of larger enterprises for privatization.

16

51. Consultations with the private sector identified two key constraints that dampen privateactivity, particularly in the SME sector, and provide a breeding ground for rent seeking andcorruption. These should be addressed with some urgency (see Annex 4 for a fuller discussion):

* Limited Access to Foreign Exchange at a Single Exchange Rate: The foreign exchange regime ofTurkmenistan is highly distorted, with a restrictive exchange rationing system and a widedifference between the black market and the official rate. Participation in foreign currencyauctions is carefully screened, and the inter-bank market was closed in 1998. Since then thegovernment has imposed significant additional restrictions. More recently the government hasindicated its intention to unify its official rate and the black market rate, and is piloting a lower-than-official rate in a few public enterprises. The Bank has indicated that the first steps towardssustainable currency reform should be to provide the Central Bank with adequate foreignexchange to support the exchange rate, to reduce restrictions on participation in auctions, and tore-open the inter-bank market.

* Excessive Trade Restrictions: While import tariffs are at minimal levels, there remainsignificant trade barriers including rationing of foreign exchange (noted above), export licensingrequirements, and a requirement that all exported goods be pre-paid (In the case of imports toothere is a requirement that they be paid for only on delivery.) But by far the most egregiouscontrols are implemented through the State Commodity Exchange (SCE), for which almost alltrade must be registered. Such registration can be time-consuming and costly. Differences over"appropriate" prices have limited legitimate transactions, led producers to import inferiorproducts, and provided opportunity for rent seeking.

52. A well run financial sector is another essential element in creating a positive environment forprivate sector development. The financial sector in Turkmenistan has recently undergone someconsolidation with the merger of several insolvent banks with other institutions in 1998, but there isneed for further improvement. At present the banking sector operates largely as a conduit forchanneling state funds for designated activities to large state owned enterprises rather than as anevaluator of risk and financial return on market-based investments. There are only two privatecommercial banks operating in the financial sector, and these are subject to continuing governmentinterference. A wide range of interest rates and directed credits for different categories of customersexist. Finally, the central bank is developing an electronic inter-bank payment system, althoughthere continues to be significant use of non-cash transactions between enterprises. The IFC hasapproved a small loan to a private bank to help provide a best practices model for the banking sector(see paras 71-73)

53. Beyond these urgent issues, other factors dampen private sector activity including (i) thelimited state of internet access, which is an essential business tool, (ii) continued non-transparency,conflict of interests, and bureaucracy in licensing and application of regulations, (iii) harassment ofprivate sector enterprises by various government agencies, (iv) the required majority stateparticipation in joint ventures, (v) limited vocational learning opportunities, and (vi) heavyrestrictions on travel including leaving the country (eg requirement of an exit visa), travel within thecountry (eg checkpoints) and for foreign businessmen visiting Turkmenistan. All of the aboveissues are critical for foreign investors as well as local businessmen. If the investment climate isimproved, MIGA's online information systems, IPAnet and PrivatizationLink, can help attractinvestment in key sectors such as mining, oil, and gas (see para 74).

17

Protecting the Environment and Conserving Water

54. Turkmenistan faces serious environmental problems in both the industrial and the agriculturalsectors which affect the living standards of the population. In industry, oil refineries are majorsources of pollution. Pollution occurs also from the burning of associated gas from oil fields as wellin the processing of gas to reduce its sulfur content. Industrial pollution is particularly a concernaround the Caspian Sea area. In agriculture, groundwater and the soil are contaminated bypesticides and fertilizers. But perhaps the primary environmental issue facing the country is theoveruse of water to irrigate cotton fields and a lack of incentives for individuals and businesses toconserve water. This overuse has increased the salinity of the soil with a resultant reduction in cropyields. The overuse of water is also a source of regional environmental concern. The recent plans tobuild a large reservoir from drainage water should be reviewed further against such concerns.

55. The government's 10 year National Program identifies Ecological Safety as a key goal,including ensuring environmental considerations in industrial development, insuring a high qualityof drinking water, the reduction in harmful chemicals in agriculture, and the prevention of ecologicaldisaster in the Aral Sea region. The Government has signed important international conventions onbio-diversity and climate change, and currently holds the Chairmanship of the Executive Committeeof the International Fund for Saving the Aral Sea (IFAS). It has also published a "Red Book" onflora and fauna, and is in the middle of preparing a National Environmental Action Plan (NEAP),supported by the Bank.

56. While there are many environmental actions needed, the government's policy of providingfree water and energy for domestic and agricultural uses requires priority attention as a large amountof water is being wasted. As mentioned, it is necessary to introduce user charges, and othermeasures (including taps and meters) to encourage wiser, economical use of water and energy. Thiswould both promote conservation and help mobilize the necessary funds to maintain irrigation andwater supply equipment. Of course, in implementing this, care needs to be taken to ensure that thosemost in need are not adversely impacted by such charges. The institutional capacity forenvironmental management needs to be strengthened to prevent fragmentation of responsibilities, todevelop appropriate strategies, and tighten enforcement.

IV. World Bank Strategy

Lessons Learned From Past Bank Experience

57. Policy Reform: The 1997 CAS presented a program designed around mixed signals on thepace of reform. On the one hand it indicated that the Government preferred a more gradual pace ofreform implementation than the Bank thought warranted. At the same time, it observed that therewas agreement on overall development goals and that there was some indication that theGovernment might be willing to accelerate the reform effort, including the potential forimplementing an IMF-supported program that would unify the exchange rate and reduce pricecontrols. The government had indicated that a significant proportion of land would be privatized

18

within a few years and regulations for privatizing medium and large enterprises had been prepared.The results since 1997 indicate that this later view was too optimistic. The key priority goalsoutlined in the 1997 CAS - budget and debt management, rural development, trade and foreignexchange liberalization, and privatization of larger enterprises - remain outstanding issues.58. As a result of this experience, the current CAS scales back both the Bank's expectation ofmore rapid reform and the extent of Bank support, particularly as regards lending. For the FY01-03period, the Bank will concentrate on building a stronger foundation of shared approaches with thegovernment, and providing practical, non-lending support to build the Government's capacity tomove forward at its own pace.

59. Lending: The Bank has extended three projects to Turkmenistan. These are the InstitutionalBuilding Technical Assistance (IBTA) Loan approved by the Board in FY95, and the UrbanTransportation Loan and the Water Supply and Sanitation Loan approved by the Board at the time ofthe 1997 CAS. No further lending was extended from FY98 to FY00 due to (i) a misprocurementissue which took more than a year to resolve and suspended both new lending and disbursements onexisting loans (this suspension was lifted in June 1999) and (ii) a negative pledge clause violationwhich was identified in 1998 and continues to prevent new lending. All three ongoing projects haveexperienced problems due to (i) procurement and implementation difficulties and (ii) failure toachieve adequate institutional change. Annex 1 provides the specific status and plans for eachproject.

60. On the overall issue of fiduciary accountability, the Bank must continue to heighten theawareness of the importance of good accounting and procurement, including helping theGovernment to bring the public procurement law into being and providing training in internationalaccounting (both supported by IDF grants).'9 Continued use of PIUs will, however, be necessary forthe near future. Supervision of on-going projects will remain a top priority. New loans will need tobe stricter on confirming Government commitment to both technical activities and policy reforms,regularly monitoring progress and providing for more hands-on support for implementing reformmeasures. It is also recommended that the Government strengthen its own capacity to help reviewprojects and resolve key issues.

61. Loan Covenant Violation and Debt Reporting: Turkmenistan is in violation of the Bank'sNegative Pledge loan covenant. It has also not met its debt reporting obligations to the Bank. Untilthese issues are resolved, the Bank can not extend any new loans. On the first, Turkmenistan hasrecognized the problem with collateralizing other lenders over the Bank and has issued a PresidentialDecree prohibiting such practices. The Government has indicated that since then, similar operationshave not been entered into. However, it has been unable to renegotiate the pertinent clauses of theoffending loan.20 In the absence of being able to address the issue directly, the Bank is ready toexplore ways of meeting the loan clause provision through obtaining equal and ratable collateral. Asregards debt reporting, Turkmenistan has not submitted any debt reports to the Bank's DebtReporting System in over one year. However the Bank has supported the placement of a debtadvisor with the Government and the Government has indicated that it would provide debt statisticsby the end of the first quarter of 2001.

19 These efforts will assist both on the immediate tasks of passing the public procurement law and providing training inaccounting, as well as the development of longer term institutional structures to make these efforts sustainable

20 The violation is related to a 1996 loan provided by a consortium of German banks, for the rehabilitation of theTurkmenbashy Oil Refinery. Proceeds of oil sales are collected in an overseas collateral account to repay the loan.

19

62. Non-Lending Experience: To date, the bulk of the Bank's non-lending work has been in theform of major policy papers. Other donors have also contributed to this knowledge base includingvarious papers on private sector development by USAID, a 1997 Education Review by UNDP, andthe annual UNDP Human Development Report (Annex 4 provides a list of major studies undertakenrecently). More recently, the Bank has also begun to provide hands-on policy advice through theplacement of a debt advisor in the Government, and a review of a draft tax code. It is, however, toosoon to tell whether these hands-on efforts will yield better results. The Government has alsoexpressed a strong interest in such hands-on support, most recently requesting a grant to helpintroduce international accounting principles. Ultimately, the effectiveness of ESW may depend lesson how it is delivered, and more on whether there is continual follow-up by the Bank and theborrower, since change is likely to be a long term process.

Bank Program for FY01-03

63. Initial Phase: Over the next 1-3 years the Bank will largely limit its focus to strengthening theimplementation of existing projects and helping Turkmenistan build a stronger foundation forpursuing reform through non-lending activities. Any such support would depend on adequateaccess to basic information necessary to complete individual tasks.

64. Within this non-lending phase, primaryemphasis will be placed on improving public Box 2: Proposed National Economic Foruresource management and governance. e p N Eo F wouldSpecific support will be provided for (i) budget :modernization (through the IBTA Loan), (ii) -- Be prepared with the Government, Donors, civildebt management (through the IDF Debt society, and other partiesManagement Grant) and (iii) helping to host a"National Economic Forum", which would -- Focus on bringing best practice information fromnfiate io Enformationsri whihi wuand outside of Turkmenistan as well as disseminaigfacilitate information sharing both within and existing information generated within Tuwk -eitan.00 outside the Government (see Box 2). The Bank e itawould also foster international standards of -- Have a public event where participants could presentfinancial accountability through (iv) support key studies and activities, as well as pivate meet*ifor bringing a public procurement law into with decision-makers on key topics.operation and (v) an international accounting -- Identify how to continue such information flowsstandards IDF grant. As noted in para 62, the (annual event, standing secretariat, internet page etc)effectiveness of such efforts depends on Icontinuing follow-up. Thus, these efforts would support both specific immediate actions as well asbuilding institutions to enable these efforts to be sustainable over the long term.

65. The Bank will also engage Turkmenistan on poverty monitoring (through a Living StandardsMonitoring and Targeting IDF grant), the environment (eg the NEAP, comprehensive waterstrategy), and private sector development (a downstream energy sector study). The Bank alsostands ready to engage in shorter policy advice on various issues including the FERF and agriculturereform. Given the importance of fostering transparency (see paras 35-37), in all these efforts theBank will seek to encourage and facilitate as wide dissemination of information as possible.

66. Second Phase: Given the weak reform progress and the loan clause violation, it is likely toprove extremely difficult for the Bank to extend new loans in the near term. However, the Bank

20

would provide a small 1-3 loan program over three years of $10-20 million per year if (i) the loancovenant violation is resolved, (ii) performance of ongoing projects is improved, and (iii) substantialprogress is achieved on budget/debt management and transparency, including improvedmanagement of the Foreign Exchange Reserve Fund. Possible lending operations fall into the areaof priority human needs (e.g. a pilot Health project) and disaster prevention and watermanagement (e.g. the Karakum Canal Rehabilitation). This latter project would be important inimproving water management, from both a national and regional perspective. The Bank would alsoconsider a project to support the improvement of environmentally friendly services for the ruraleconomy (e.g. a Crop Protection and Animal Health Project), contingent on improving farmers'ability to generate income to pay for the proposed services as well as conserve water.2 ' The need forand commitment to these potential loans are described further in Box 4.

67. Longer Term Agenda: There are many challenges to be addressed in Turkmenistan. The keyelement to moving forward on them is the commitment of the Government to take concreteactionable steps. The CAS lays out a longer term agenda in agriculture reform, foreign exchangeand trade liberalization, and improving the environment for private sector development. Continuedimprovement in public resource management and governance beyond the measures taken in theinitial stage would also be important. The Bank will consider additional loans and non-lendingsupport in these areas in light of progress in, and commitment to, reforms in key policy areas --access to foreign exchange at a single exchange rate, substantial reduction in the state-order, andreform of the State Commodity Exchange -- and achievements in near term CAS benchmarks (seeTable 4) including improvements in living standards monitoring and targeting. In this event, theBank will prepare a CAS update outlining progress on reform programs and identifying specificBank interventions.

68. Field Presence: Given overall resource constraints and the limited reform progress by theGovernment, it would not be cost-effective to upgrade the Liaison Office to a ResidentRepresentative Office at this time. Using the limited budget to support a more continuous ESWeffort, with follow-through, might be more effective. However, implementation of agreed activitieswould be facilitated by a second national professional in the country office to help with operationssupervision, collection of information, external affairs etc. It should also be noted that theGovernment has indicated an interest in having a Resident Representative. This issue will bemonitored over the CAS period and could be reconsidered in light of Turkmenistan's reformprogress and available resources.

21 The primary role of the Bank in these projects would be on project design. Because of creditworthiness concerns, thelevel of Bank lending would be kept limited and significant cofinancing from the Government and other donors wouldbe sought. In this light, even if the conditions for Bank lending are not fully met, the Bank could consider thepossibility of designing these projects for the Government and other donors, without direct Bank financing.

21

Table 3: Proposed Turkmenistan Country Program: FY01-FY03

Non-Lending Services

Oning FY01 !Oo2-03-- Debt Management -- Downstream Energy Study -- Water Strategy

Grant (IDF) -- Macro/Sector Reform Dialogue -- Living Standards-- Public Procurement -- Int'l Accounting Principles (IDF) Monitoring (IDF)

Grant (IDF) -- Country Economic-- Living Stand. Profile Memorandum-- NEAP (PHRD) -- National Econ. Forum

On-Going Lending

-- IBTA Project ($9 million undisbursed - closing date 12/01)-- Urban Transport Project ($13 million undisbursed - closing date 12/01)-- Water Supply Project ($28 million undisbursed - closing date 2/04)

New Lending. . 7 r-- -7: 77 E S - : T--:----7777 70.77}ij ... ,...

TriggersFY20

Basic -- resolution of loan covenant violation Pilot Health ProjectNeeds -- significant improvement in the number of ($10 million)

on-going loans rated satisfactory Karakum Canal

-- Progress in budget/debt management and Rehabilitation Projecttransparency (see Box 3 for details) ($20 million)

Base Case -- Satisfactory performance as above plus Above loans plus

-- Approve an acceptable time-bound actionplan, with immediate first steps, to reduce Crop Protectionthe state order on cotton and wheat and Projectincrease the ability of farmers to process ($15 million)and export crops on a market basis.

-- Institute at least 20% cost recovery on acash basis for agriculture water supply

Stronger Reform -- Satisfactory performance as above plus Additional Lending to

--Progress on near term CAS benchmarks be Determined(table 4) including improved approach to (CAS Update Would bepoverty monitoring and targeting Prepared)

-- Reduction in foreign exchange and tradecontrols including: (i) substantially openaccess to foreign exchange at a singleexchange rate, (ii) substantial reduction inthe state-order, and (iii) significant reformof the State Commodity Exchange.

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Box 3: Budget and Debt Management Triggers for New Lending

Each of the actions described below would need to be acceptable to the Bank:

Debt ManagementObiective: to strengthen the management and transparency of external borrowing and to ensure timelyrepayment

Basic Actions Necessara:(i) Submit an acceptable consolidated debt report regularly to the World Bank Debt Reporting System, as

required by Bank regulations.(ii) Establish tight borrowing ceilings and monitoring mechanisms consistent with the budget and macro-

economic framework.(iii) Establish institutional arrangements with clear terms of reference and action plans to:

a) regularly affirm debt statistics, decide on annual borrowings in the context of the budget, approveexternal borrowing proposals of the government (and other public organizations), specify theresponsibility for debt service, and establish other rules for sound debt management.

b) have day-to-day responsibility for the management of external debt (such as registering all foreigndebt contracts and loan information, preparing reports on debt and projected debt, issuingborrowing guidelines, and analyzing the impact of borrowings on the budget and debt structure).

(iv) Submit a debt law to Parliament providing the legal process for debt management.

Budget Management:Objective: to consolidate revenues and expenditures in a single framework and make this more transparentso as to facilitate conformity of spending decisions with national priorities.

Basic Actions Necessara:(i) Approve a time-bound action plan, with inmmediate first steps, to separate and clarify the functions of

the FERF - with the assignment of adequate foreign currency reserves and management to the CentralBank, the establishment of a contingency and/or savings fund operating under clearly defined andtransparent rules, and the integration of the public investment function fully into the budgetframework.

(ii) Enforce detailed quarterly reports of revenue and expenditure of all extra-budgetary funds to theMOEF, including the FERF, and inclusion in the overall budget framework.

(iii) Prepare a plan for the dissemination of the full budget each year after parliamentary passage.(iv) Establish institutional arrangements to prepare and agree with Ministries a list of enterprises to be

separated from Ministries and time-table for implementation. In this context, establish a secretariat tobe responsible for the day to day management of this activity (such as maintaining an updated list ofenterprises to be separated, preparing status reports on such enterprises, & establishing methods ofseparating such enterprises.)

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Box 4: Proposed Base Case Loans

In light of the overall weak commitment to reform and the poor experience to date in projectimplementation, it is essential that any new project have both a strong developmental impact anddemonstrated commitment from the Borrower in working with the Bank to introduce change. In all threeproposed loans, the Bank's financial contribution would be quite small, and would be used to leverage bothmore systemic reform, and Government and other donor funding. Also, each would need to be preparedand supervised with careful financial diligence (see para. 66).

Pilot Health ProjectHealth has been identified as a top social development priority for Turkmenistan, and is one of the fewareas where the Government has started to introduce some reform, with the assistance of the Bank (whichprepared a Health Sector Report in 1997), WHO and UNICEF. The pilot project would help to deepen thiseffort by allowing the Government to test specific reforms in a single district including the consolidation ofhealth services, tying budgets to performance, and introducing new protocols of care. It would also supportefforts to strengthen the training of health workers, rehabilitate peripheral facilities, and adequately fundbasic supplies and equipment. The proposed project would include a monitoring component so that thelessons learned through this pilot effort could be later scaled up in a systemic manner. The Bank couldplay a critical role in ensuring that health reforms, now ongoing, are deepened and extended in line withinternational approaches.

Karakum Canal Rehabilitation ProjectInternational experts have indicated that the unstable canal alignment, rapid sedimentation, anddeteriorating and under-sized control structures could take the Canal out of operation. This would seriouslyaffect the living conditions within Turkmenistan, as close to half the population depend on it as their aorsource for both drinking water and irrigation. But beyond this disaster concern, better water management inthe Amu Darya river basin is also a top regional priority, as the over-use of wateri in upnver structures likethe Canal can lead to a worsening of conditions downriver. By repairing key structures, impringcommunication along the canal to better regulate flows, and piloting efforts to reduce water use in farmsboth of these concerns would be addressed. Turkmenistan has identified this as their top priority for Banklending. Several other lenders such as the Kuwait Fund and the Islamic Development Bank have alsoindicated to the Government that they would be interested in cofinancing such a project. Bank involvementwould ultimately be critical to ensuring that any rehabilitation and reform of Canal management isrittowards using less water rather than more.

Crop Protection and Animal Health ProjectThe project will assist the Government in making a first step in reforming the agriculture service sector.Prior to independence, Turkmenistan had an extensive system of environmentally friendly crop protectionusing insects to combat bollworm, a major cotton pest. This system deteriorated on independence butimprovement has begun. However, in the event that farmers are given more choice in inputs and sales (acordition of this loan), there is concern that farmers might turn to more pesticide use without reform of thiskey service. This project would support the rehabilitation of insectories into fee-based and service-orientedcommercial providers, improve pesticide detection, and help develop a pest management policy. It wouldalso support the introduction of private veterinary services, and the provision of essential vaccines toenhance animal health, a key limiting factor. Since most livestock is now privately held, this would furthersupport rural income. The Government has already begun rehabilitation efforts even without Bankinvolvement. Bank involvement would, however, be critical to ensuring that such efforts are sustainable,generate income for service providers, and provide cost-effective inputs to farmers.

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69. Choice of Lending Instrument: Turkmenistan is currently an IBRD-only country.Turkmenistan's GNP per capita ($660 in 1999) has fallen below the IDA operational cut-off ($885in 1999) as calculated using World Bank Atlas methodology for the past four years. However, thisdrop below the cut-off appears temporary, resulting from disruptions in natural gas exports, poorharvests, and economic mismanagement. With the resumption of significant gas sales to Russia andUkraine, Turkmenistan's Atlas GNP per capita is projected to rise over the IDA operational cut-offduring the CAS period, even allowing for limited reform and some depreciation of the exchangerate. In view of this, it is appropriate for Turkmenistan to remain an IBRD-only country.

70. IBRD lending to Turkmenistan is constrained by creditworthiness concerns related to theirhigh debt and continuing weak economic management (see paras 80-84). As a result, the Bank willonly extend new IBRD loans if there are improvements in debt and budget management, and even inthis case such lending would be tightly limited in size. At the same time, Turkmenistan'screditworthiness and economic growth - and hence its potential for IBRD lending - would rise ifTurkmenistan pursued a stronger reform path. Both IBRD creditworthiness and IDA-eligibilityindicators will be carefully monitored during the current CAS period.

IFC Program

71. The IFC has undertaken a number of initiatives over the past two years in order to develop aninvestment program. These initiatives have included: the hiring of a fulitime local field officerstationed in the IBRD Ashgabad Office; utilizing outside consultants on four extended missions tosurvey the market and identify potential projects and sponsors; technical assistance to projectsponsors for business plan preparation; over 20 missions by IFC headquarters and regional staff tothe country for both promotion and evaluation of potential projects; organizing training seminars forprivate businesspeople as well as trade finance seminars for staff of the only two local private banksin the country; and the preparation of a study by Petroconsultants-MAI, together with EBRD, todefine market needs and a proposed strategy for development of the oil and gas support servicessector. These initiatives, unfortunately, have produced little in the way of investment opportunitiesfor IFC due to the difficult environment for private sector development as well as continuinggovernmental bureaucracy and interference in private enterprises as described in paragraphs 48-53.

72. IFC has approved a small loan to a private bank under its Extending IFC's Reach Initiative.This investment, while small, is the first foreign investment in a local financial institution and isdesigned to serve as a best practices model for the banking sector. As part of its investment in thebank, IFC is providing institution building technical assistance financed by Dutch Trust Funds.Another approved investment in the dairy industry was subsequently cancelled.

73. IFC can envisage a more active investment program in Turkmenistan once the businessenvironment becomes more conducive to private sector development and foreign investment, thoughthis is not expected in the near term. As a result, IFC' s role over the next three years covered by thisCAS can be divided into two phases.

* Initial Phase: During the current phase, IFC will continue to focus on institution building in thefinancial sector, including institutions to serve micro-enterprises, with an enhanced emphasis ontechnical assistance and institution building rather than direct project lending. It is anticipated thatIFC will, when possible, work with private service providers which have the capacity to support the

25

oil and gas industry as the lynchpin in private sector development. As part of IFC's institutionbuilding role, it will also seek to support the development of the leasing industry. IFC believes thatleasing is one of the most effective means of channeling capital investment funds to local SMEs. Aspart of this initiative, IFC will undertake a study of the market and regulatory environment forprivate sector leasing as well as identification of a potential technical partner for establishment of thefirst private joint venture leasing company in the country IFC will also look into providing financialsupport for micro-enterprises through one or more intermediaries. Total lending under the firstphase scenario is likely to remain below $3 million over the coming three years.

* Second Phase: Should major reforms take place in the country, such as unification of exchangerates and free access to foreign exchange, removal of trade restrictions, a reduction in governmentalcontrols and bureaucracy, and elimination of state orders in agriculture, then IFC would see astronger investment program and move into the second phase. This scenario would therefore requiredeeper reform, particularly on issues affecting the private sector, than the IBRD's triggers for itssecond phase (basic lending) scenario. In its second phase, the IFC would play a more active role inthe financing and development of larger financial intermediaries that could play a significant part infinancial intermediation of medium and long-term financing to SMEs. IFC could look at investmentin larger projects as foreign investors become more attracted by a more liberal private sector regime,particularly those in construction materials, infrastructure as well as the oil and gas productionsector. With the removal of state orders in agriculture and the privatization of the cotton and foodprocessing industries, IFC could also play a role in the development of processing projects in thisarea, both in terms of technical assistance and investment.

Other Bank Group Activities

74. MIGA Activities: MIGA operations in Turkmenistan have been relatively modest. Not manyinvestors have applied for MIGA coverage. However, in fiscal 1999, MIGA signed its first contracton Turkmenistan in the manufacturing sector for US$8 million, and this is operating successfully.Currently, MIGA has one active application and a number of preliminary applications targetingprojects in mining, oil and gas, and manufacturing in Turkmenistan. MIGA's online informnationsystems, IPAnet and PrivatizationLink, feature information on the investment climate andprivatization investment opportunities. These programs cannot be accessed in Turkmenistan due tounderdeveloped internet systems. However, information about Turkmenistan's developingbusinesses can be disseminated via these information services, which also serve as tools for outreachto attract investment in key sectors such as mining, oil, and gas.

75. WBI Activities: WBI has prepared a number of regional seminars, but has not been veryactive in Turkmenistan to date. Part of this relates to the fact that the Government has thus farprovided only limited funds for public officials to travel and attend regional seminars. Given theneed for capacity building and training, WBI is exploring the possibility of providing increasedtraining support, provided the Government also increases its support. Such WBI assistance, if itmaterializes, could support both in-country and external training.

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Partnerships With Other Donors

76. Selectivity and Partnership: In light of slower than anticipated reform progress, manyinternational institutions and donors have pulled back their activities. These include the IMF whichhas withdrawn its Resident Representative, the EBRD which has recently prepared a countrystrategy which does not contain public sector lending, and USAID which has reduced its assistanceconsiderably. Turkmenistan has just become a member of the Asian Development Bank, which willbe considering its focus in the coming months. Given the current focus of the EBRD, TACIS, andthe IFC on private sector development, there is arguably a greater role for the Bank to play in publicresource management.

77. Nevertheless, many of the activities that the Bank intends to focus on - improving capacitywithin the government, information transparency, and deepening poverty monitoring and analysis -are generally considered to be high priorities for the donor community. Rather than splitting ourassistance, it would be better to pool each institutions limited capacity and focus together on the toppriorities. Specifically, we intend to work closely with the following partners:

* IMF on budget, macro-economics, and tax codes* USAID on budget improvement, and the water strategy- UNDP on debt management, NEAP, and the water strategy- UNICEF on health and the water strategy- TACIS on tax codes, training, and international accounting- UK possibly on living standards and statistics- Japan and Switzerland on the NEAP- EBRD is collaborating closely with IFC on several private sector studies- AsDB possibly on the water strategy and public procurement

78. The proposed "National Economic Forum" would be developed in close collaboration with theGovernment and all other donors, providing them an opportunity to bring their expertise to theforefront. Since there is no Consultative Group for Turkmenistan, this would help to build a sharedunderstanding between the Government and donors of the challenges ahead, and provide amechanism to deepen coordination.

Program Performance Indicators

79. The Government has developed a set of long term goals, as expressed in their 10 year NationalProgram. Based on this, and an analysis of living standards, the Bank has compiled a set of fivepriority challenges outlined in Chapter III, and identified a number of near term performancebenchmarks for each that are listed in Annex Table B9. Table 4 below extracts some of the keygovernment goals and near term performance benchmarks to be monitored over the CAS period.Since there is limited data available, these benchmarks concentrate on the establishment of goodinformation and plans as a first step. It should be noted that while the Bank can supportTurkmenistan in achieving some of these near term goals, the Bank will have limited avenues ofsupport over the CAS period; most of them will depend more on the commitment of theGovernment. For the Bank's own portfolio, new lending is conditioned on raising the number ofprojects rated satisfactory. The Bank will continue regular consultations with the Government,donors, and civil society, as was done as part of this CAS (see Annex 3), to gain further feedback.

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Table 4: Selected Performance Indicator:

Governent Long Term Goals a/ Bia Near Term Bechmarks-- Eliminate all extra-budget accounts -- Adoption of an effective plan to rationalize the

Publk -- Include all investments in budget with FERFResource analysis of rates of return -- Wide dissemination of the full budgetManagement -- Centralize debt repayment under budget -- Submission of debt reports to Debt Reporting

-- Introduce internat'l accounting standards Service-- Adoption of a Public Procurement Law-- Improved dissemination of macroeconomic data

-- Education expenditures to reach 10% of GDP -- Improved country approach to povertyHealthnd 5 -- Teaching to meet world standards monitoring and targeting.

sociai -- Health care expenditures to reach 7% of GDP -- Increase in % of population with access to safeSekes -- Vaccinate up to 99% of children water. Build a framework for introducing

-- Water, gas, electricity to be free up to a limit water charges for conservation & maintenance.from 2000-2005

An ffcient -- 57% of land to be under private ownership -- Gradual increase in % of private farmersRural -- Double cotton and wheat production -- Gradual reduction in % sold via state orders.Economy2 0 -- Construct new hydro/pumping stations -- Cost recovery for agriculture water at least 20%

-- Establish market based foreign exchange -- Improved access to foreign exchange at a singlePrivate S system rate

Sec 0 tor : -- Liquidate bureaucratic obstacles to private -- Exemption of most private sector transactionsDevelopment -- businesses. from registration in the commodity exchange.

Non-government share of GDP to rise to 67% Creation of a list of public companies to be-- Private housing share to increase to 90% separated from ministries and commercialized

Protection of -- provide quality drinking water and reduce -- Publication of an effective National:Environment 0 harmful chemicals in agriculture Environmental Action Plan (NEAP)

-- Prevent disaster in Aral Sea regionPortfolio 0 0a -- Improvement in the number of on-going loansPerformane ;rated satisfactory

a/ goals for 2010 as stated in the 10-Year National Programme

V. Managing Risks and Uncertainties

80. Creditworthiness: Turkmenistan has an unusual position among developing countries asboth a major debtor and a major creditor. In January 2000 Fitch IBCA confirmed Turkmenistan'slong-term sovereign rating of B- . Moody's has given a rating of B2 to Turkmenistan's long termforeign currency bonds. These ratings both indicate significant risk and are below investment grade.They reflect on the one hand a rising debt service burden and limited debt management capacity buton the other hand large foreign exchange reserves. Reserves are estimated at $1.7 billion, equal to 14months of exports, although part of the reserves may not be freely available. However, while theshort term outlook for oil and gas sales remains strong, Turkmenistan's failure to be transparentabout public investments and its debt (about 50 percent of GDP) and debt service (about 15 percentof exports) could hurt its creditworthiness. At this level, debt is worrisome, but not unmanageablewith appropriate borrowing controls, adequate reserves, and growing exports. However, in theabsence of good debt and public investment management, payment difficulties to severalinternational creditors have arisen in the past, and may continue to occur periodically. Turkmenistanalso faces several investment disputes with foreign investors.

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81. Turkmenistan contends that its debt situation should be considered in light of the fact that it isa large creditor of other CIS countries with claims of around $1.2 billion22 for gas deliveries as wellas uncleared balances dating back to the collapse of the Soviet Union. However, much of this is notcurrently being serviced, or is being paid in-kind at inflated prices. Turkmenistan has thus farresisted participating in Paris Club relief efforts for countries where it has outstanding loans.

82. Risk: Turkmenistan has large potential for exports of oil and gas which if properly managedcan boost economic growth and generate sufficient foreign exchange resources to service debt. Thehigh growth rates achieved in 1999 and projected for 2000 were in fact triggered by increasedexports of gas. If agreement is reached and maintained between Russia and Turkmenistan on a longterm gas delivery contract, if public resources are well managed, and if progress continues towardsaddressing the major constraints to private sector development, the prospects for growth and foreignexchange earnings appear to be good. The main risks to the economy are:

(i) Heavy Reliance on Energy Exports: Oil and gas export earnings could fluctuatesignificantly because of price changes or because of demand changes, pipeline deliverydisruption or payment difficulties in key markets (such as Russia, Iran and Ukraine). Thepotential for disruption can be mitigated by accelerating market reforms which will permitmore diversified private sector led growth. Especially important in this regard are agriculturalreforms, liberalization of the trade and exchange rate regime, and elimination of variousregistration/licensing requirements that inhibit the private sector.

(ii) Heavy Reliance on Water Intensive Agriculture: Beyond energy, the most importantsector for Turkmenistan is agriculture, in which about half the population is employed. Sincerainfall is limited, Turkmenistan relies on an extensive irrigation infrastructure inherited fromthe former Soviet Union. However, over time, water intensive agriculture will act to reduceyields by increasing salinization. It will be important for Turkmenistan to begin to reducewater usage, which should be feasible with appropriate incentives and support. Waterintensive agriculture also increases the need for greater cooperation with other users of theAmu Darya (Tajikistan, Uzbekistan).

(iii) Weak Public Resource Management: As already noted, public resource management isin need of significant improvement. The state budget managed by the Ministry of Economyand Finance covers only a small fraction of public resources. The rest is managed throughextra-budget funds and ministries that follow their own sectoral priorities and often supportuneconomic investments. There is still no effective system for external debt management anddebt and debt service levels appear to have reached worrisome levels. Lack of reliableinformation on basic economic parameters such as the full budget and external debt furtherundermines efficient economic management and confidence. Measures to bring abouttransparency and rationality in the budget and debt management process are critical.

(iv) Slow Transition to a Market Economy: Growth prospects also will depend on howquickly market oriented reforms are implemented. Price controls remain for manycommodities, services, and utilities; trade and foreign exchange controls are still significant.Privatization beyond small companies has stalled, and the general business environment hasnot yet attracted significant foreign investment nor national private sector growth. Inagriculture, there has been some transfer of land ownership to private farmers, but state ordersfor wheat and cotton are still prevalent. Many public enterprises continue to operate to a large

22 Most of them on Ukraine, Georgia, and other CIS countries.

29

degree through non-cash transactions, and benefit from large scale subsidies, explicit andhidden. To obtain the benefit of private sector growth, the environment for private sectordevelopment must be improved, and the state needs to focus on non-commercial activities.

83. As far as the Bank is concerned, notwithstanding periodic short term arrears due to poor debtmanagement, risk is limited by the low level of debt. The Bank's share in total debt is currentlyextremely small (about $29 million outstanding) in comparison to Turkmenistan's total debtoutstanding (estimated at about $2.3 billion), and is expected to remain below 3 percent even iflending is resumed. New lending is contingent on resolving the Negative Pledge Clause violationand agreed actions to better manage public resources and debt. In such a scenario, the debt serviceto export ratio is expected to level off at about 15%, which, while grounds for caution, is withinlimited creditworthiness parameters.

84. Finally, Turkmenistan's economic development is closely linked to other Central Asiancountries. Regional cooperation in water usage, in power generation, in trade, in pipelinedevelopment, in knowledge sharing, and in environment will have a large impact on development inTurkmenistan as well as other Central Asian countries. Bank supported activities will, therefore,need to be considered against regional issues and concerns, as well as national priorities.

VI. Concluding Remarks

85. With good near term growth prospects, but also an economy with substantial risks,Turkmenistan now has an important window of opportunity to accelerate reform while avoiding thesocial disruption that has plagued other CIS countries. The Government has a National Programwhich includes a number of important goals, but it has yet to translate these goals into appropriateconcrete action plans. The Bank will therefore match its program of assistance to Turkmenistan'sprogress on reform, and assist Turkmenistan in the near term mainly by providing non-lendingsupport for building economic capacity within the government, improving information flows, anddeepening living standards monitoring and analysis mechanisms.

86. Although moving beyond this role is likely to prove extremely difficult, the CAS sets out aroad-map of first-step actions necessary to jump-start the reform process, and enable the Bank toresume lending. A central element of this is improved public resource management, includingstrengthened budget and debt management, and the rational reform of the Foreign Exchange ReserveFund (FERF). If basic conditions for lending are met, the Bank would extend a small lendingprogram aimed at priority human development needs, disaster prevention, and rural development.This approach should help establish a stronger foundation for a more ambitious Bank program ofsupport in a few years, if the government decides to move forward at a faster pace.

James D. WolfensohnPresident

By: Sven Sandstrom

Washington, D.C.December 22, 2000

30

ANNEX 1:

CABINET OF MINISTERSTURKMENISTAN

Reference No. 13-2252December 19, 2000

Mr. Kiyoshi KoderaDirectorCentral Asia Country UnitThe World Bank

Dear Mr. Kodera:

I would like to express my appreciation to you and to your team for your intensive work during thelast few months to prepare a new Country Assistance Strategy for Turkmenistan that will determinethe future direction of our mutually beneficial cooperation.

We view the World Bank as a reliable partner that provides necessary technical assistance andfinances priority areas in the development program of Turkmenistan. In the process of preparingthe CAS we had the opportunity to discuss in a productive manner the main parameters of economicpolicy and challenges that we face in the period of transition to a market economy. Despite the factthat we pursue common development objectives - the rational use of public resources, theliberalization of exchange rate and trade regimes, speeding up the privatization process andagricultural reform - we do not always agree on the issue of how best to achieve these objectives.We think that a gradual approach in addressing these issues is the most reliable path in making thedifficult transition from our recent past to the sustainable productive development of our state. Weare very interested in continuing constructive cooperation with the World Bank; however,unfortunately, we should note that the World Bank's lending is small. I would also like to note thatthis CAS does not quite objectively reflect the current situation and the long term developmentstrategy of the Government of Turkmenistan.

Immediately after Turkmenistan became independent, the country declared and started to implementwith the utmost priority a policy of social protection for its people and guarantees against poverty,which has allowed us to ensure social and political stability and build confidence in the reformpolicy being pursued. Turkmenistan, in addressing the challenges of transition, is taking significantsteps to promote economic growth and to improve the well-being of its people. I would like to sharewith you several examples of the results of these efforts.

a From January to October 2000 the growth of GDP was 17% over the same period a year ago.There was a significant improvement in performance in the main sectors of the economy.Industrial output increased by 23% in comparable prices, including the electric-power complex(by 11%), energy/fuel sector (by 71%), chemical industry (by 19%), and the textile industry(17%). Agriculture output rose by 18%.

31

* As a result of positive trends in the real sector of the Turkmen economy and an increase in theincome of economic entities, the state budget of Turkmenistan for January-October 2000 had asurplus in the amount of over 205 billion Manats.

• The income of domestic enterprises and organizations during 10 months amounted to 2.4 trillionManats, 2.5 times higher than last year's figure for the same period.

* From January to October 2000, capital investment in economic development was 8% higher thanin the similar period last year. This increase in capital investment has been mostly brought aboutby relatively high growth rates of public investment (130%), foreign investments (111%) andother investments (175%).

(We have provided additional comments regarding several indicators in the CAS tables:Turkmenistan at a Glance, Poverty and Social Indicators).

With your permission I would like to focus your attention on the future development program of theGovernment of Turkmenistan. As stated in the CAS, the further development of social andeconomic policy is reflected in the National Program of the President of Turkmenistan "Strategy ofSocio-economic Development of Turkmenistan for the period up to 2010". It envisages continuingthe priority policy of social programs, taking into consideration economic realities which haveformed during the years of independence. In the next ten years economic reform will be directed atintensifying the structural reform process; further introduction of market relations; improvement ofeconomic management mechanisms; development of progressive forms of ownership, modes ofproduction and methods of administration; as well as the creation of a favorable environment forinvestments. Economic growth by itself cannot guarantee the well being of the people, it can onlycreate the necessary conditions and prerequisites for this. Hence, significant attention is given tostrong and systemic efforts to address social issues. The key objective of our social policy up to2010 is to increase living standards and improve health care, to increase the educational level ofpeople, as well as to provide targeted social protection to the most vulnerable groups. In the courseof reforms, the non-public sector of economy will be further developed. The number of privateenterprises will significantly increase. These changes will be brought about by the development ofprivate and mixed forms of ownership, speeding up of the privatization process and improvement ofthe environment for the efficient development of the private sector.

I would like to cover several issues that impede new lending by the World Bank - the negativepledge clause and foreign debt reporting. As to the first issue, we have made numerous efforts toresolve this problem with the representatives of concerned banks. These efforts have not been quiteeffective; therefore we are in the process of identifying other mutually acceptable ways to solve thisproblem. We understand your concerns about delays in providing information on foreign debt. Butthis is related to purely technical problems and an inadequate system for collecting and analyzingdata. As we have already discussed, we are taking steps to strengthen our foreign debt managementsystem with the assistance of an adviser financed by the World Bank. I can assure you that aforeign debt report will be presented to you by the end of the first quarter in 2001.

32

I would like to assure you again that the goal of the Government of Turkmenistan is to makeTurlnenistan a prosperous country, a secure home for everyone. All the government programs ofindependent Turkmenistan have been developed with the objective of achieving a continuousincrease in the welfare of its people and the inviolability of their rights. In view of this, we welcomethe preparation of new Country Assistance Strategy for Turkmenistan and hope that it will become acornerstone for our further cooperation.

Sincerely,

Seitbay KandymovDeputy Chairman

Cabinet of Ministers

cc: Mr. M. Meyer, Executive Director, the World Bank

33

ANNEX 2:

STATUS OF PROJECTS UNDER EXECUTION

Institution Building/Technical Assistance (L 3791).Loan Amount: US$25 million; Effectiveness Date: July 20, 1995; Closin' Date: December 31, 2001Status: Implementation under this project was curtailed in March, 1998 due to the suspension ofdisbursements in Turkmenistan. During this period, the bulk of the funds were cancelled. The Bank liftedthe suspension on disbursements for this Loan in June, 1999. Subsequently, the Bank and the Governmentagreed to extend the closing date, to re-instate funds and refocus these funds on improvement andcomputerization of the budget, tax and pension systems.Strategv for Implementation: This project, as refocused, is considered to be of vital importance to improvingpublic resource management (a key goal of the current CAS). USAID assisted the Government in submitteda detailed plan to refocus the funding on budget consolidation and computerization in March, 2000, as a resultof which the Bank extended the closing date to December 31, 2001. After some modest adjustments to theplan (including the inclusion of funding for a PIU Unit), in August the Bank agreed to re-instate $9.2 millionof earlier cancelled funds for this purpose. The Government has appointed a PIU Director and is in theprocess of hiring a budget/treasury expert to help guide the process. USAID may provide parallel technicalsupport.

Water Supply and Sanitation Project (L4171)Loan Amount: US$30.30 million; Effectiveness Date: August 15, 1997: Closing Date: February 28, 2004Status: The Bank suspended disbursement on all Bank-financed projects on March, 1998. The suspensionwas lifted in June, 1999. Since then, the Bank has agreed with the Government to restructure the civil workscomponent into two parts: (i) urgent rehabilitation carried out through government's force account; and (ii) alarger main civil works contract to be redefined with more precise detailed engineering. The first phase of theurgent rehabilitation has been completed and the government is preparing the bidding documents for thesecond phase. Consultants for the institutional and policy studies have been hired. The undisbursed balanceis currently about US$28 million.Strategy for Implementation: The project is considered to be of vital importance in addressing a key cause ofTurkmenistan's serious health problems (poor water quality and supply). In the past, it has suffered fromboth procurement difficulties, as well as limited progress towards increased water pricing. In August, 2000the Government changed PIU staff as well as decentralized some decision making to improve procurementimplementation. The project is also funding the preparation of a strategy to achieve improved watermanagement and pricing, necessary to ensure that pumps are well maintained. This process should befacilitated by a parallel effort, the Water Strategy.

Urban Transport (L 4170)Loan Amount: US$34.20 million; Effectiveness Date: August 19, 1997; Closing Date: December 31, 2001Status: Implementation of the investment part of the project has made good progress since the suspension ofdisbursements on all Bank projects was lifted in June 1999. Two major contracts for the purchase of 100urban buses and 46 trolley-buses were signed. All the buses have been delivered now as well as 16 trolley-buses with the completion of that contract expected soon. In addition, about US$1.0 million of spare partshave been, or are being, procured. However, almost no progress has taken place regarding urban transportsector policies and institutions, and the financial framework under which the sector operates. Mostproblematic are the poor cost recovery (about 20% excluding depreciation), the absence of sound institutionto manage the sector, and the lack of policy to involve private operators in the provision of urban transportservices. The undisbursed balance is currently about US$13 million.Strategv for Implementation: In July, the Bank communicated to the Government that in order to proceedwith the project, an acceptable action plan necessary to address the above noted issues would need to beprovided to the Bank. While Turkmenistan has responded with an action plan, it is not clear at this time if theGovernment's plan is sufficient and a mutually agreed approach is achievable. Disbursements have beensuspended as of December 31, 2000, pending resolution of outstanding issues.

34

ANNEX 3

ROUND TABLE DISCUSSIONS WITH NGOS AND THE PRIVATESECTOR

Minutes of Round-Table Discussion with NGOs(Held in Ashgabat on the 17 th of May, 2000)

The Purpose of the Roundtable discussion was to hear the view of the civil societyorganizations on the issues they consider of priority in Turkmenistan, in order to take account ofthese issues in the World Banks new Country Assistance Strategy. The agenda focused on issuesrelevant to the field of each NGO as well as crosscutting issues such as constraints faced in theiractivities.

Points Raised:

- Private Sector Participants generally expressed a belief that the development of the privatesector in Turkmenistan is key in improving the situation of ordinary people, but pointed to anumber of issues which need to be addressed:

1. The conditions for starting business are difficult, generally entrepreneurs needsupport to understand the legal requirements, and women in particular are ill-informed about the opportunities and their right to engage in business. Inadequateapplication of existing legislation hampers private sector development

2. The private Sector can supply services in the interest of the public which at presentare not adequately provided by government, such as private medical care, but moreneeds to be done to support the development of enterprise in this sector

3. Private sector development increases need for consumer protection

* Registration: Some participants emphasised the problems that arise from the absence of clearlegislation on NGO activities, and the failure to obtain legal status as organisations.

1. Many NGOs are functioning without registration, because though they have applied forlicenses their cases have stalled within the relevant ministry.

2. The government does not directly interfere with the activities of the NGOs but on the otherhand does not register them, thus preventing them from engaging in a number of activitieswhich would benefit people and enable the NGOs to raise funds.

3. The absence of legal status makes it difficult for NGOs to lobby the legislative assembly andother government organs for their issues.

* Legislation:1. Many participants stressed that Turkmenistan has an adequate legal framework but the laws

are not consistently applied.2. There are inconsistencies in the legal framework between regulations, laws, and decrees3. Civil Servants do not seem to know how to apply the legislation4. People are often not familiar with the law and therefore do not know their rights

* Media Coverage:1. Participants raised the issue of problems in obtaining coverage for NGO issues (ranging from

ecology to consumer rights) in the media (which is state-controlled)

35

2. Getting material on relevant issues to the public in a language they can understand as muchmaterial distributed for public information is distributed in Russian (which is not perfectlyunderstood by the whole population)

* Suggestions of the participants:1. Consolidating the legal framework, removing the contradictions in the existing legal

framework.2. Training civil servants and users of the law together to bring clarity into the application of the

law.3. The establishment of a centre by the government to support entrepreneurs with legal advice4. The establishment of a clear law on NGO activity5. Pushing for the legal status which will enable NGOs to conduct activities for general and

fundraising purposes6. As regards the problem of obtaining public coverage of NGOs special fields on participant

suggested co-operation amongst NGOs themselves might overcome this issue, through takingadvantage of economies of scale in publication and writing of materials.

7. Greater consolidation among NGOs would boost their impact and fund-raising abilities.8. Greater attention should be paid to activities taking place outside Ashgabat9. Water quality and supply should be a top sectoral priority10. Income-generating community efforts should receive more attention11. It would be beneficial to have support from the international community through further

conferences or roundtables for dissemination of information.

All participants agreed that the meeting had been useful but suggested that perhaps in thefuture more would be gained by providing a more clearly defined agenda developed by NGOsthemselves. Furthermore, it was suggested that in the future such consultations should be dividedby area of interest/work to enable more NGOs to participate and provide more detail on theirspecial areas.

Round-Table Discussion with the Private Sector(Held in Ashgabat on the 19'* of May, 2000)

The purpose of the Private Sector Round Table was to hear from different people, who work asentrepreneurs, what the environment is for the private sector activity in the country, what majorobstacles they face from the state authorities, banking sector, how they are protected bylegislation, and what they would like to change in future. This information would be used as partof the World Bank Country Assistance Strategy.

Topics discussed:1. Financial issues (banking, finance, taxation)2. Trade (import, export, money investment)3. Legal issues (licensing, inspection, standards)

* Finance and Trade: In terms of financial issues there is a problem of conversion.- Lack of hard currency and limited access to the currency auctions of the CBT;

36

Exchange rate;The procedures to obtain currency are too onerousRegistration by State Commodity Exchange and Customs are time consuming andinconsistent with current laws;The State Commodity Exchange and the CBT limit the rights of investors to utilize thecapitalThe Custom Agency requires a quality certificate, which is not easy to obtain fromGosstandards

* Registration and Licensing: Some participants raised the problems faced in obtaining licensesand registration for a private company.

- The private sector needs to understand the legal issues.- Many private companies are operating without registration. They have applied for

licenses but still have not received appropriate response from relevant ministries;- The absence of the necessary licenses hampers the commercial activities ( to

as from obtaining credits for investments and restructuring their businesses.)

* Legislation:- Many participants noted that Turkmenistan has an adequate legal framework, but the

application of laws in practice is not clear either to state authorities nor entrepreneurs;Entrepreneurs expressed frustration at the lack of accountability of the civil servantsmaking decisions.There are contradiction between newer legislation in support of private activity and olderrules and regulationsThere is considerable duplication of documentation in the legal processes, placing aexcessive burden on businesses.

- People do not seem to know the legislation therefore they do not know their rights;

Suggestions from the participants:1. Consolidation of the legislation related to the private sector in one place;2. Timely publication of all new laws;3. Application of existing laws in a transparent manner in legislation;4. Training of government officials on the new legislation and its practical application;5. Documentation: submission and registration processes to be reduced and simplified;6. Allocation and conversion of currency and obtaining licenses should be a more transparent

process, including knowing why one is turned down7. Importers should be able to obtain and hold foreign currency to open up letters of credit8. Exporters would like grater knowledge of trade preferences provided to them by developed

countries9. Trade registration should be with customs not the State Commodity Exchange10. Local governments should be authorized to make sure State bodies help entrepreneurs

All participants agreed that the Roundtable was very useful. It was suggested that in the futurerepresentatives from the Cabinet of Ministers, Central Bank, and Customs should also be invited,to create a dialogue between the private sector and the State. The importance of creating apositive investment image for Turkmenistan also stressed. Furthermore, they thanked WorldBank for organization of the Roundtable.

37

Annex 4

KEY REFORMS NEEDED FOR LENDING BEYOND THE BASE CASE

1. Exchange Rate Regime

BackgroundTurkmenistan has had convertibility restrictions since independence in 1991. Several attempts toeliminate the restrictions and unify rates ended in reversals. The latest attempt was in 1998. Adevaluation of the official exchange rate from 4,165 to 5,200 Manat/$ on April 17 eliminated thegap between the official and market exchange rate, and was accompanied by the elimination ofsome controls. A reference exchange rate for the use by commercial banks, which was about 20%lower than the official rate, was replaced by a maximum percentage limit by which comnmercialbanks could deviate from the official rate. Foreign exchange market stability was maintained forthree months with the Central Bank intervening to keep the official exchange rate at 5,200Manat/$. However, following the Russian financial crisis in 1999, other CIS countries sharplydevalued their currency and there was market pressure on Turkmenistan as well. Turkmenistanresisted this pressure, keeping the exchange rate fixed by tightening access to the official rate.This allowed Turkmenistan to keep inflation down, but also resulted in a large Manatdepreciation in the curb market.

Current Status of ConstraintsWhile Turkmenistan maintains a single official exchange rate, this has been accompanied by alarge gap with the curb market and the imposition of severe foreign exchange access restrictions.In December 1998 currency trading between commercial banks was suspended. Domesticenterprises and individuals can now purchase foreign exchange only at weekly auctions at theCentral Bank currency exchange (ICE).

Enterprises regardless of their form of ownership are allowed to purchase foreign exchange atICE auctions exclusively for the following purposes: (i) repayment of publicly-guaranteed loans,(ii) repatriation of foreign direct investments and related profits, (iii) import of medicines, rawmaterials, and other production inputs, (iv) purchases of machinery and inputs under foreigncredit lines, and (v) import of consumer goods (except alcohol and tobacco products) providedthe goods will be sold in Turkmenistan marked up no more than 30% over the official priceconverted into Manat at official rate. Individuals can purchase foreign exchange only for: (i)medical treatment abroad, (ii) studies abroad, and (iii) official travel abroad. The CBT andForeign Currency Committee carefully screen bids submitted for the auctions to enforce theabove regulations.

In January 2000, in an attempt to stem capital flight, additional requirements were imposed.. Tohave access to foreign exchange, enterprises and individuals should demonstrate that, in additionto meeting the above conditions, they: (i) have no tax arrears in Turkmenistan, (ii) are current ontheir loans received from Turkmen banks, (iii) have no wage arrears and arrears to extrabudgetaryfunds in Turkmenistan, (iv) comply with currency circulation regulations, including compliancewith limits on cash in safe and daily reporting of cash flows, and (v) have a contract directly withthe producer of goods to be imported.

Exporters face additional restrictions. Currently most state enterprises except cotton and gasexporters are required to sell 50% of their export earnings in hard currency through commercialbanks at ICE auctions at an official rate. Gas exporters are required to surrender 25% of theirexport earnings at Central Bank auctions, and also pay another 50% of their foreign exchange

38

earnings without conversion as a transfer to the Foreign Exchange Reserve Fund. Oil exportersalso transfer a portion of their earnings to the Foreign Exchange Reserve Fund and the Oil andGas Fund. Earnings of cotton exporters are taxed and/or sold at the auctions on an annual basis,normally resulting in about a 33% transfer to the Foreign Exchange Reserve Fund.

Privately-owned enterprises are not subject to surrender requirements but they are at adisadvantage when trying to buy foreign exchange at the auctions. Enterprises can hold and usewithout restrictions foreign currency in their bank accounts after all the currency surrenderrequirements have been met. This acts to place importers at a disadvantage as compared toexporters. Without assured access to foreign exchange, importers are unable to open letters ofcredit. In addition, a Presidential Decree of March 29, 2000 states that preference must be givenin allocation of foreign exchange to those involved in import substitution activities.

Recently, Turkmenistan has indicated its intention to begin to unify the exchange rate, and hasstarted to pilot the use of an exchange rate between the official and black market for a few stateowned energy enterprises.

Reform Program SuggzestedThe Foreign Exchange Reserve Fund is substantial, with an estimated level of about $1.7 billion,

about 14 months of exports. However, while administratively under the Central Bank, it hastraditionally been used as a tool for extra-budgetary public investments rather than as a tool forthe Central Bank. To move towards a more market based exchange rate, a first step would be forthe Central Bank (CBT) to have management control over an adequate level of foreign exchangereserves for use in exchange rate management.

Second, the auctions conducted by the CBT needs to be liberalized by terminating the screeningof bids (other than through a small negative list) and allowing universal access to the auctions. Inparallel, the inter-bank market for foreign exchange should be re-opened and restrictions oncommercial bank forex transactions with enterprises (both exporters and importers) andindividuals be lifted to attract transactions that are currently carried out in the black market.Together with tight financial policies, the parallel rate and the adjusted official rate will movecloser and stabilize the exchange market.

2. State Order System in Agriculture

Backg.roundFollowing disastrous harvests in 1996, the authorities initiated a program of significant landreform. Under the reform, members of farners' associations (former kolkhoses) by the end of1998 physically received plots of land, normally between 2 and 20 hectares, on a 10-year lease.After the lease expiration, the land was to be transferred to private ownership of the leaseholders(although land transfers outside of the immediate family would still be restricted). During theleasing period the farmer officially has freedom to make crop decisions, but in practice mosttransactions continue through the state order which provides farmers with subsidized inputs suchas fertilizer and bank credit, but buys crops from farmers at below-market prices.

By 1999 over 80 % of arable land has been leased under the land reform program. Further, theleasing period after which a farmer could receive private ownership rights for the plot wasshortened to 2 years provided the farm has performed satisfactorily during the leasing period andthe farmer has demonstrated skills required to run a private farm. After getting private ownershiprights for the land, farmers have been promised full independence to choose the crops to begrown and prices at which to sell them. However, private ownership does not include the right to

39

sell land outside of the family nor to use the land as collateral for bank loans.

With the 2-year probation leasing period coming to an end for most farmers, only a limitednumber of leaseholds have been given private ownership certificates. Authorities have beenreluctant to convert leaseholds, especially those growing cotton, into private property. Theauthorities cite reasons like failure to meet government production targets during the probationperiod or lack of experience in private farming in rejecting the applications for private ownershipcertificates. Lengthy procedures to obtain the required application clearances from a multi-layerhierarchy starting with management of the farmers' association and all the way to the StateCommission for Land Reform has also been a deterrent.

Current Status of ConstraintsAlthough private farms and leaseholds that produce their crops without government subsidies canformally sell their output outside the state order system at market prices, the government canaffect their decisions through land reallocation (revoking of leases), input supplies (curtailingaccess to farm machinery), or limiting financing available through state banks. In practice,leaseholds producing cotton, grain, and sugar beets (which cover 75% of arable land) continue tooperate almost exclusively within a state order system.Under the system, the government provides subsidized inputs, low-interest (0-2% per year) bankfinancing through the specialized state agricultural bank Daykhanbank, and virtually free waterwhile purchasing harvested crops at procurement prices that are 50-60% of the world prices andless than 20% when valued at the black market rate. Some have estimated that these prices, net ofsubsidized water, fertilizers, and other inputs, resulted in a real transfer of resources fromagriculture to the rest of the economy equal to 15% of GDP. The fact that state order systemkeeps farmers from growing and marketing alternative crops which have higher margins serves asan additional significant hidden burden on farmers and leaseholds.

Reform P dgram SugkestedThe reform agenda should include phasing out of state order system combined with the gradualelimination of input subsidies and admninistrative interference with production decisions. Promptconversion of leaseholds into private farms with minimum red tape will also be critical. With thelifting of the state order, private traders, including international concerns, must be allowed intothe market. Beyond this, an acceleration of the agro-industrial privatization and private sectorinvestment in new marketing, storage and cotton ginning will ensure that the growth of privatefarming is not constrained by state-owned agricultural infrastructure.

3. State Commodity Exchange

BackR roundThe State Commodity Exchange (SCE) was established in 1994 to help match buyers and sellersin the economy. In 1995-1996 the powers of the State Commodity Exchange were substantiallyexpanded to include the regulation of all the domestic and international trade transactions,including those that are not concluded at the exchange. Currently, almost all trade contracts, bothdomestic and international, including barter transactions but excluding oil and gas exports, thathave a value in excess of Manat 30 mn. ($5,700 at the official exchange rate) must be registeredwith the SCE. The requirement applies both to state-owned and private enterprises. Contractsmay not be approved if the terms are not considered to be favorable for Turkmenistan. An exportcontract should not be underinvoiced compared to an "average" world price and goods to beexported should be in sufficient supply in the domestic market. Some products, including certainfoodstuffs are prohibited from being exported. As a world price reference, SCE uses a variety ofdatabases, including searches on the Internet. Import and domestic contracts are also checked for

40

over or underinvoicing using the same reference methods. If there is a domestic producer of theproduct to be imported, imports contract may be prohibited or a surcharge required.

Current Status of ConstraintsExperience has shown that the registration process is time-consuming, and costly for businesses.Enterprise surveys indicate that only around half of businesses manage to complete contractregistration process in less than 2 weeks and it takes some enterprises several months to register acontract. Delays with import contracts registration mean that import shipments cannot be clearedthrough the Customs and have to be stored in the warehouses charging steep fees. Differencesover "appropriate" prices have led producers to import inferior products. The requirement thatthe imported goods are resold in the domestic market at the registered price lead to a loss offlexibility by the businesses in case of a change in market conditions (discounting price in case ofinventory accumulation or product aging). SCE assesses a fee of 0.4% of the contract value.Opportunities for rent-seeking at the SCE are not uncommon.

Reforn Program SuggestedThe role of the SCE must be re-considered. Requirements for the registration and price review ofarms-length commercial transactions between private entities should be stopped. Under-invoicingis best prevented by maintaining appropriate exchange rate policies and by strengthening customsregulations and capabilities. The SCE should be restructured to fulfil its original objective -facilitate trading in standardized cash commodities on a voluntary basis - with a possibleaddition of advisory services on a strictly voluntary basis on issues such as marketing, search forbusiness partners, or risk reducing strategies.

41

ANNEX 5:

TURKMENISTAN'S GROWING KNOWLEDGE BASE

PUBLIC SEeJ0OR MNGMT POViIRTYI ' XAL SRUTO8R PFRVAT1WSE4~rOR DR. RURLDEVJENV. ENERGY

* EFFECTIVE FISCAL MNGMT * LIVING STANDARDS SURVEY * CAPITAL MARKETS * AG. SECTOR REVIEW * ENERGY SECTOR STUDY(IMF, 97) (WB,00) REVIEW (USAID, 99) (WB, 97) (WB, 95)

* PUBLIC EXPENDITURE * EMPLOYMENT REPORT * ASSESSMENT OF * FARM SURVEY (WB,00) * ENERGY EXPORTREVIEW (WB, 98) (GoV,00) FOREIGN TRADE REGIME PROSPECTS (WB,00)

(USAID, 00) * BURDEN OF AGRIC* PROGRAM OF BUDGETARY * EDUCATION FOR ALL POLICIES (IMF,00) * ENERGY SERVICES (EBRD,

IMPROVEMENT (USAID, (GOV,99) * ADMINSTRATIVE AND IFC, 00)00) REGULATORY ENV. FOR * STRATEGY FOR AGRIC

* HuMAN DEVLPMT REPORT BUSINESS (USAID, 00) INVESTMENTS (EU,99) * ENERGY TAXATION (WB,* COMMENTS ON DRAFr TAX (GOVIUNDP, 99) 00)

CODE (WB, 00) * TURKMENISTAN AGRIC* EDUCATION SECTOR REVIEW DEV. (USAID, 98)

(UNDP, 97)* RED BOOK ON FLAURA AND

* DASHKHOWVUZ:REGIONAL FAUNA (UNDP, 00)DEVELOPMENT PRIORITIES(WB, 98)

* RATIONALIZING THE HEALTHSECTOR (WB, 97)

* WATER SUPPLY ANDSANITATION: NEEDSASSESSMENT (WB 95)

42

CAS TABLE A2

Turkmenistan at a glance 12/19/00

Euroos &POVERTY aWn SOCIAL Central Low-

Turkmenbstan Asia Income Delpment diamond1999Population, mid-vear (millions) 4.8 475 2,417 Ule expectancyGNP Der capita (Atlas method, US$) 660 2.150 410GNP (Atlas method. US$ billions) 3.2 1.022 988

Averaq annuat arowth. 1993-99

Population (%l 2.1 0.1 1.9Labor force f%l 2.5 0.6 2.3 GNP Gross

per prImaryMoat recent etimate (latest vear available. 1993-99) capita enrollment

Poverty (% of population below national povertv line)-- 58Urban population (% of total opoulaton) 44 67 31Life expectancv at birth (vears) 66 69 60Infant mortalitv (per 1.000 lve births).- 33 22 77Child malnutritlon (% of children under 5) .. 43 Access to safe waterAccess to improved water source (% of pooulation) 61 .. 64Illiteracv (% of Population ace 15+) 1 3 39 TuramenssnGross Drlmary enrollment /% of school-ace populaton) 93 100 96

Male 93 101 102 Low-income groupFemale 93 99 86

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1979 199 1998 1999

GDP (US$ billions at official exchanae rate) .. .. 2.9 3.3Gross domestic InvestmentVGDP .. 35.2 45.5 46.3ExDorts of moods and services/GDP .. .. 29.7 41.6 TradeGross domestc savina/sGDP .. 26.1 10.8 26.0Gross national savinqslGDP .. .. 12.8 29.0

Current account balancelGDP .. .. -32.7 -17.3Interest pavmentstGDP .. .. 2.3 2.4 Domestic Inveatma ntTotal debVGDP .. .. 79.2 70.0 SavIngsTotal debt service/exports .. .. 32.0 32.0Present valuie of debUtGDP . .. 74.2 B5.6Present value of debtexDorts .. .. 217.1 145.0

Indebtedness1979-8 1989-99 1996 1999 1999-03

(averace annual cr0 wth)GDP .. -8.8 7.0 17.0 11.9 - TudmenistanGNPpercadta .. -10.1 3.6 13.3 10.2 Low-income groupExDorts ot oods and seices .. -15.1 -18.6 61.7 32.7

STRUCTURE of the ECONOMY1979 1989 1998 1999 Growth of GDP and agricutture%)

(% of GOP) 4

Aoriculture .. 28.9 25.2 24.7Industrv and constructon .. 33.8 40.6 43.3 20

Industr .. .. 30.8 33.6 oServices 37.3 34.2 32.0 -20 9* 9

Private consumrtion .. 51.4 74.2 62.4 .General covemment consumption .. 22.5 15.0 11.6 e arzP ImDorts of aoods and services .. .. 64.5 61.9

(averace annual cowth) G19 1989-99 19 1999 Growth of exports and Import 1)Aariculture .. -7.7 24.4 25.5 80Industrv and construction .. -5.9 4.7 13.1 do -

Industry .. .. 1.3 12.6 20Services .. -5.9 6.3 13.8 20, /_ 1

Private consumption .. .. .. .. -20 99General aovemment consumption ..Gross domestic investment . 9.4 17.0 3.0 40Importsof aoodsand services . -1.5 9.9 10.9 ENcf1 a ImportsGross nabonal product .. -7.2 4.9 14.5

Note: Due to restrictons on access to statistical data Imposed by Turkmen authorities, the numbers In the tahle need to be treated with caution.

* The diamonds show four key Indicators In the countrv (in bold) comDared with Its inconmroug averaae. If data are missina, the diamond willbe incomplete.- According to the 1998 Uving Standards Measurement Survey, 58% of population had Incomes below the oicia minimum wage at the time.Turkmen authorites suggest that another, relative poverty measure - share of population wfth incomes below 50% of median per capita inoome -- mav be apDrooriate. Official statsics Indicate that onlv 1% o ooulaton falls below this level.

Recent official statistics indicate that this may have fallen to as low as 26 per 1000 live births.

43

Turkmenistan

PRICES and GOVERNMENT FINANCE

1979 1989 1998 1999 Inflation (%)

(% chanpe) .50Consumer DNces .. .. 19.8 20.1 1000Implicit GDP deflator .. 10.7 17.7 5.0

500Govwrnment financet% of GDP, Includes current arants) 0Current revenue .. .. 18.5 19.9 95 5 907 98

Current budoet balance .. .. -6.0 -1.7 - GDP detlator C CPlOverall surplus/deficit .. .. -2.6 0.0

TRADE

(US$ millions) 1979 1989 1998 1999 Export and Import level (USS mill.)Total exports (lob) .. .. 614 1,164 3,000

Natural gas .. .. 70 390 2,500

Oil and oil Products .. .. 236 352 2 000Manufactures .. .. 116 182 . _.0

Total Imports (fob) . . 1,137 1,374 00Food . .. 91 221Fuel and energy . .. 46 60 SoCapital goods 35 362 0[ , 1

Export rnce Index (19940100) .. .. 62 53Import price lndex (1994-100) .. .. 104 107 C Exports WimportsTerms of trade (1994-100) .. .. 60 49

BALANCE of PAYMENTS

(USS millions) 1979 1989 1998 1999 Currant account balance to GDP(%)Exports of goods and services .. .. 851 1,376 20

Imports of goods and services .. .. 1,845 2.046 10Resource balance -994 -670

0Netincome .. .. 33 -6 o w 5 U 97 U UNet current transfers .. .. 27 105 -10

Current account balance .. .e -935 -571 -20

Financina items (net) .. .. 1,029 705 -30Changes in net reserves .. .. -94 -134 -40Memo:Reserves Including gold (US$ millions) .. .. 1,379 1,513Official exchanoe rate (IocaI1US$. averagee .. .. 4.890 5.200

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) 1979 1989 1998 1999 ComposItlon of 1999 debt (USS mll.)

Total debt outstanding and disbursed .. 0 2,265 2,314IBRD .. 0 9 9IDA 0 0 0 G:322 A: 9 D: 33

Total debt service .. 0 313 479IBRD .. 0 0 1IDA 0 0 0

Composition of net resource flowsOffkiial arants ,, 5 4Official creditors .. 0 124 97Private creditors .. 0 343 166Foreign direct Investment .. .. 62 125Port.ollo eouitv .. .. 2 0 F: 1,594

World Bank program 0Commitments .. 0 0 0 A - IBRD E -ENilatralDisbursements P o o o - IDA D -Other miuttilteral F - PrtvatePrincipal reDavments * 0 0 0 ° C - IMF a - Short-termNet flows 0 0 0Interest payments .. 0 0 1Net transfers .. 0 0 -1

Including shutte trade 12/19/00Development Economics

44

CASTABLEB2

Turkmenistan: Selected Indicators* of Bank PortfolioPerformance and Management

As Of Date 12/07/2000

Indicator 1998 1999 2000 2001Portfolio AssessmentNumber of Projects Under Implementation a 3 3 3 3Average Implementation Period (years) b 1.6 2.6 3.6 3.1Percent of Problem Projects by Number a, c 33.3 100 100 100Percent of Problem Projects by Amount as c 27.9 100 100 100Percent of Projects at Risk by Number a, d 33.3 100 100 100Percent of Projects at Risk by Amount a, d 27.9 100 100 100Disbursement Ratio (%) 9 5.3 0 23.3 10.3Portfolio ManagementCPPR during the year (yes/no) Disbursement Suspension NoSupervision Resources (total US$) 207 225 220Average Supervision (US$/project) 70 75 73

Memorandum Item Since FY 80 Last FiveFYs

Proj Eval by OED by Number 0 0Proj Eval by OED by Amt (US$ millions) 0 0% of OED Projects Rated U or HU by Number 0 0% of OED Projects Rated U or HU by Amt 0 0

a. As shown in the Annual Report on Portfolio Performance (except for current FY).b. Average age of projects in the Bank's country portfolio.c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP).d. As defined under the Portfolio Improvement Program.e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the

beginning of the year: Investment projects only.* All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio,

which includes all active projects as well as projects which exited during the fiscal year.

45

CAS TABLE B3

Bank Group Program Summary for TurkmenistanAs Of Date12/07/2000

Proposed IBRD Base-Case Lending Program aFiscal year Proj ID US$(M) Strategic Implementation b

Rewards b Risks (HIMIL)(HIMIL)

2001

2002 HEALTH 10 H M2003 KARAKUM CANAL 20 H H

CROP PROTECTION & ANIMAL HEALTH 15 M M

Turkmenistan - IFC and MIGA Program, FY 1998-20011998 1999 2000 2001

IFC approvals (US$m) 2.75 13.70 2.75

IFC by Sector (%)FINANCIAL SERVICES 9FOOD AND AGRO-BUSINESS 91

Total 0 0 100 0

IFC by Investment Instrument(%)Loans 91EquityQuasi-Equity 9OtherTotal 0 0 100 0

MIGAMIGA guarantees (US$m) 0 8

46

CAS TABLE B4

Summary of Nonlending Services - TurkmenistanAs Of Date 12/07/2000

Product Completion FY Cost (US$000) Audiencea Objectiveb

Recent completions-- Agriculture Sector Review 1997 120 G, B PD, KG-- Rationalizing the Health Sector 1997 120 G, B, D PD, KG-- Turkmenistan: Improving the 1999 115 G, B PD, KG

Management of Public Expenditure-- Dashkhovuz: Regional Priorities 1999 115 G, B PD, KG-- Energy Export Prospects 2000 50 G PD, KG, PS-- Advice on Tax Code 2000 15 G PD, KG, PS-- Farm Survey 2001 100 G, B PD,KG-- Living Standards Profile 2001 120 G, B PD, KG

Underway- Country Assistance Strategy (CAS) 2001 180 G, B PS, PS

-- Debt Management (IDF) 2002 40 G PS, PD-- Public Procurement (IDF) 2001 30 G PS, PD-- lnternat'l Accounting Principles (IDF) 2002 56 G PS, PD-- National Environmental Action Plan 2002 110 G KG, PD, PS-- Energy Restructuring Study 2001 32 G, B KG, PD

Planned-- National Economic Forum 2002 30 G, D, B, PD KG, PD-- Living Standards and Statistics (IDF) 2003 40 G KG, PS-- Comprehensive Water Strategy 2002 100 G KG, PD, PS-- Country Economic Memorandum 2003 200 B, D, PD KG-- Macro & Sector Reform Dialogue 2001-3 170 G, B KG, PD, PS

a. Government, donor, Bank, public dissemination.b. Knowledge generation, public debate, problem-solving.

47

CAS TABLE B5

Turkmenistan Social IndicatorsLatest single year Same region/income group

Europe & Low-1970-75 1980485 1993-99 Central Asia Income

POPULATIONTotal population, mid-year (millions) 2.5 3.2 4.8 474.7 2,417.0

Growth rate (% annual average) 2.9 2.4 1.2 0.2 1.9Urban population (% of population) 47.5 45.7 43.7 66.5 31.4Total fertility rate (births per woman) 5.7 4.7 2.2 1.6 3.8

POVERTY(% of population)National headcount index .. .. 58.0

Urban headcount index .. ..

Rural headcount Index .. ..

INCOMEGNP per capita (US$) .. .. 660 2,150 410Consumerprice index (1995=100) .. .. 954 183 137Food price index (1995=100) .. .. 1,058

INCOMEICONSUMPTION DISTRIBUTIONGini index .. .. 67Lowest quintile (% of income or consumption) .. .. 7Highest quintile (% of income or consumption) .. .. 49

SOCIAL INDICATORSPublic expenditure

Health (% of GDP) .. .. 2.6 4.3 1.1Education (% of GNP) .. .. 5.4 5.1 3.2Social security and welfare (% of GDP) .. .. 3.4 8.8

Net primary school enrollment rate(% of age group)

Total .. .. .. 100 76Male .. .. .. 100 81Female .. .. .. 99 71

Access to safe water(% of population)

Total .. .. 61Urban .. .. 85Rural .. .. 42

Immunization rate(% under 12 months)

Measles .. .. 99 91 77DPT .. .. 98 89 82

Child malnutrition (% under 5 years) .. ..

Life expectancy at birth(years)

Total 67 65 66 69 60Male 63 61 63 65 59Female 70 68 70 74 61

MortalityInfant (per thousand live births)** 57 52 33 22 77Under 5 (per thousand live births) .. .. 46 26 108Adult (15-59)

Male (per 1,000 populafton) .. 267 278 283 277Female (per 1,000 population) .. 268 283 120 248

Matemal (per 100,000 live births) .. .. 110

* According to the 1998 Lvng Standards Measurement Survey, 58% of population had incomes below the official minimum wage at the time.Turkmen authorites suggest that another, relative poverty measure -- share of population with Incomes below 50% of median per capita income -may be appropriate. Official statistics indicate that only 1% of population falls below this level.** Recent official statistics Indicate that this may have fallen to as low as 26 per 1000 live births.

2000 World Development Indicators CD-ROM, Worid Bank

48

CASTABLEB6

TURKMENISTAN: KEY ECONOMIC INDICATORS *

Actual Estimate ProjectedIndicator 1996 1997 1998 1999 2000 2001 2002 2003 2004

National accounts (as % of GDP)Gross domestic producta 100 100 100 100 100 100 100 100 100

Agriculture 13 20 25 25 22 16 15 15 15Industry and construction 65 44 41 43 52 66 67 68 68Services 23 36 34 32 26 18 18 17 17

Total Consumption 105 89 74 58 49 53 55 58Gross domestic fixed investment 18 44 45 36 33 33 32 32

Exports (GNFS)b 75 39 30 42 61 97 99 101 100Imports (GNFS) 75 63 64 62 56 79 86 89 91

Gross domestic savings -5 11 26 42 5 1 47 45 42Gross national savings' -3 13 29 42 50 46 45 42

Memorandum itemsGross domestic product 2,379 2,682 2,862 3,305 4,313 4,117 4,246 4,458 4,618(US$ million at current prices)GNP per capita (US$, Atlas method) 790 640 550 660 870 970 930 900 900

Real annual growth rates (%, at previous year prices)Grossdomesticproductatmarketprices -6.7 -11.4 7.0 17.0 18.1 20.5 4.5 5.0 2.7Gross domestic investment .. .. 17.0 3.0 -2.9 4.6 2.1 1.6 1.6

Real annual per capita growth rates (%, at previous year prices)Gross domesde product at market prices -8.5 -12.4 5.6 15.8 16.6 18.8 2.8 3.2 0.7Total consumption .. .. .. .. 2.1 10.0 5.3 2.3 1.4Private consumption .. .. .. .. -0.4 7.2 5.9 2.1 2.4

Balance of Payments (US$ millons)Exports (GNFS)b 1,775 1,046 851 1,376 2,646 3,975 4,189 4,504 4,624

Merchandise FOB 1,692 774 614 1,164 2,437 3,757 3,963 4,271 4,386Imports (GNFS)b 1,794 1,679 1,845 2,046 2,413 3,271 3,644 3,966 4,197

Merchandise FOB 1,388 1,005 1,137 1,374 1,578 2,139 2,392 2,671 2,871Resource balance -20 -634 -994 -670 233 704 545 538 427Net current transfers 5 -31 27 105 34 14 4 4 4Current account balance 2 -580 -934 -571 204 641 486 494 393

Net private foreign direct investment 108 108 62 125 112 100 104 109 114Long-term loans (net) 86 791 467 263 -4 78 6 -59 6Official -79 28 124 96 53 3 -23 -32 -38Private 165 762 343 167 -57 75 29 -28 45

Other capital (net, icl. euors & omiissions) -194 -206 500 318 46 -228 -302 -248 -240Change in reservesd -2 -113 -94 -134 -266 -591 -293 -294 -274

Memorandum itemsResourcebalance(%ofGDP) -0.8 -23.6 -34.7 -20.3 5.4 17.1 12.8 12.1 9.2Annual value growth rates (%)Merchandise exports (FOB) -18.8 -54.3 -20.7 89.5 109.3 54.2 5.5 7.8 2.7Primary -19.2 -56.0 -30.7 97.3 131.3 56.0 5.3 7.9 2.6Manufactures -5.5 -7.1 107.7 56.4 -9.2 28.9 8.8 6.5 4.6

Merchandise imports (FOB) -15.5 -27.6 13.1 20.8 14.9 35.6 11.8 11.7 7.5

__...._..._....

* National Economic and Debt Information are World Bank estimates using variousdifferent and incomplete sources. They should be considered with a degree of caution.

49

(Continued)

Turkmenistan - Key Economic Indicators(Continued)

Actual Estimate ProjectedIndicator 1996 1997 1998 1999 2000 2001 2002 2003 2004

Pssblic finance (as % of GDP at market prices)'Current revenues 16.6 23.1 18.5 19.9 20.0 20.7 20.8 21.0 21.2Current expenditures 16.3 25.3 24.5 21.6 20.7 20.9 21.6 22.0 22.2Cumrent account surplus (+) or deficit (-) 0.3 -2.2 -6.0 -1.7 -0.7 -0.2 -0.8 -1.0 -1.1

Capital revenuesf .. 2.2 3.4 1.7 0.7 0.5 0.4 0.3 0.3Foreign financing -0.3 -0.5 -0.1 0.0 0.5 0.2 0.0 0.0 0.0

Monetary indicatorsM3/GDP 8.1 10.2 14.9 14.9 14.5 9.2 9.2 9.6 10.0Growth of M3 (%) 411.7 81.2 65.3 22.6 27.0 28.3 28.7 30.9 29.5Private sector credit / GDP (%)5 0.6 1.4 1.6 1.5 2.0 0.8 1.1 1.9 2.3

Price indices

Nominal exchange rate (LCUIUS$. 3,258 4,143 4,890 5,200 5,200 11,015 13,682 16,426 19,557annual averagep

Real exchange rate (US$1LCU, 193.0 225.0 212.0 233.0 263.5 201.5 191.9 186.5 184.1Jan 1996 =100tConsumerprice index (%change) 445.8 21.4 19.8 20.1 13.9 35.0 21.8 20.0 18.9GDPdeflator(%change) 1174.3 61.6 17.7 5.9 10.5 67.8 22.6 20.1 20.1

a. GDP at factor costb. "GNFS" denotes "goods and nonfactor services."c. Includes net unrequited transfers excluding official capital grants.d. Includes use of IMF resources.e. State budget only. Due to the lack of access to information on activities of extrabudgetary funds, the funds, including ForeignExchange Reserve Fund, are included in the residual private sector. The funds service most of external debt and have independentsources of tax and non-tax income.f. Primarily repayments on rescheduled natural gas debtsg. Private sector proper, excluding extrabudgetary funds.h. "LCU" denotes "local currency units." An increase in real exchange rate index denotes appreciation.

50

CAS TABLE B7

KEY EXPOSURE INDICATORS *

Actual Estimate ProjectedIndicator 1996 1997 1998 1999 2000 2001 2002 2003 2004

Total debtoutstanding and 751 1771 2265 2314 2304 2263 2269 2211 2217

disbursed (TDO) (US$m)a

Net disbursements (US$m)a 86 791 467 263 -4 78 6 -59 6

Total debt service (TDS) 193 263 313 480 374 501 450 451 418

(US$m)'

Debt and debt service indicators

(%)TDO/XGSb 39.5 147.3 231.7 154.7 85.0 55.8 52.9 47.9 46.6

TDO/GDP 31.6 66.1 79.2 70.0 53.4 55.0 53.4 49.6 48.0

TDS/XGS 10.1 21.9 32.0 32.1 13.8 12.4 10.5 9.8 8.8ConcessionaUTDO 2.6 2.2 5.2 9.8 11.7 12.3 11.9 11.3 10.0

IBRD exposure indicators (%)IBRD DS/public DS 0.1 0.2 0.1 0.2 0.5 0.7 1.3 1.8 2.2

Preferred creditor DS/public 32.6 0.5 0.6 0.9 2.8 2.3 3.2 3.8 4.3

DS (%)c

IBRD DS/XGS 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.2 0.2

IBRD TDO (US$m) 3 7 9 9 29 37 39 41 43

Share of IBRD portfolio (%) 0.0 0.01 0.01 0.01 0.02 0.03 0.03 0.04 0.04

IDATDO(US$m) 0 0 0 0 0 0 0 0 0

IFC (US$m)Loans 0 0 0 0 0 0.3 0.5 1.0 1.5

Equity and quasi-equitye 0 0 0 0 0 0.0 0.0 0.0 0.0

MIGA

MIGA guarantees (US$m) 0 0 0 8 8 8 8 8 8

a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-

term capital.b. "XGS' denotes exports of goods and services, including factor services and workers' remittances.

c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and theBank for International Settlements.

d. Includes equity and quasi-equity types of both loan and equity instruments.

______.__._.___________.

* National Economic and Debt Information are World Bank estimates using variousdifferent and incomplete sources. They should be considered with a degree of caution.

51

CAS TABLE B8

STATUS OF BANK GROUP OPERATIONS IN TURKMENISTANAs of Date 12/07/2000

Last PSR Expected and Actual

Supervision Rating b/ Original Amount in US$ Millions Disbursements a'

Project ID Project Name Develogment Imolementation Fiscal Year IBRD IDA GE Cancel. Undisb. Orig. Frm Rev'dOblectives Progress

Number of Closed Projects: 0

Active ProjectsP034083 URBAN TRANSPORT U S 1997 34.2 0 0 0 13.2 13.1 -10.9P008867 WATER SUP/SAN U U 1997 30.3 0 0 0 28.1 20.2 0P034092 IBTA HU U 1995 25.0 0 0 10.2 8.9 19.1 4.1

Total 89.5 0 0 10.2 50.3 52.4 -6.8

IFC's PORTFOLIO IN TURKMENISTAN

Statement of IFC'sHeld and Disbursed Portfolio

As of 06/30/00 in US Dollars Millions

Held Disbursed

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

Approvals Pending Commitment

2000 SEF Esret Dairy 2.5 0 0 0 0 0 0 02000 SEF Garashsyzlyk 0 0 0.25 0 0 0 0 0

Total Pending Commitment: 2.5 0 0.25 0 0 0 0 0

52

CAS TABLE B9: TURKMENISTAN CAS MATRIX FY01-03

Goals Government Strategy Bank Group Activities { Key Key

l | Lending | AAAh ESWITA |International Performance Benchmarks_______________ ________________L_ agPartners _ __________

A. PUBLIC RESOURCE MANAGEMENT

1. Strengthen Budget Government Budget to Restructured IBTA Dialogue on FERF USAID * Progressive elimination of Extra-Management and reflect all Govt funds and Loan Budgetary FundsTransparency elimination of all extra- (on-going)

budget accounts (pages 265- * Adoption of an effective plan to6 of National Program) rationalize the FERF

* Wide dissemination of the fullbudget.

2. Strengthen Debt Government to strengthen IDF Debt Management UNDP * Submission of a complete debtManagement and control over Debt and Grant report to the Debt ReportingTransparency Payments (pages 268-9 of (on-going) System

National Program)* Leveling off of the DSR to no

more than 15% of exports.

* Improvement in timelyrepayment of debt

3. Increase * Govt's participation in * National Economic All Donors * Improved dissemination ofInformation Quality external forums and Forum (proposed) macro-economic and otherand Dissemination training is limited information within

* Public Procurement Turkmenistan* Govt supports the Grant (IDF)

introduction of Int'l * Progressive increase in use ofAccounting Principles * Int'l Acct Princ Grant International Accounting

(IDF) Principles

* Adoption of a PublicI Procurement Law

53

Goals GovernmentStrategy f Bank Group Activities Key KeyXLnding A AA: ESWA Ineatiol ; Perfoman Benchmarks

A S 0 { - I:~~~~~~~~~~~~~~ Partners

B. HEALTH AND SOCIAL SERVICES

4. Improve Poverty Government Statistics TA for Living Standards UNDP, UK, * Improved country approach toMonitoring and Agency has prepared a Monitoring and Targeting UNICEF poverty monitoring and targetingTargeting Living Standards Survey (proposed IDF Grant)5. Enhance Delivery of Government has committed Water Supply Project Comprehensive Water UNICEF, * Increase % of populace withWater to the Poor and to expanding availability, (on-going) Strategy USAID access to safe waterimprove sustainability but has yet to increase water (proposed)

tariffs * Build a framework forintroducing water charges topromote maintenance andconservation

6. Enhance ADocation Government is interested in Pilot Health Project WHO, UNICEF * Improvement in Life Expectancyof Health Resources exploring reform in the (proposed loan) and Infant Mortality Statistics

health care system I_I_I

C . AN EFFICIENT RURAL ECONOMY

7. Improve Financial The Govt has transferred Policy Dialogue * Reduce share of state order andReturns of Farmers most land to lease-holders, increase freedom of farners to

but most continue to use the sell produce at market prices.state order for lack ofalternatives * Increase share of private farmers

8. Improve Water The stated position of the Comprehensive Water USAID, AsDB Increase in the percent of costConservation and Govt is for free water, but Strategy (proposed) recovery on a cash basis for irrigationMaintenance some interest in water user water supply to at least 20%.

charges emerging9. Rehabilitate The Govt has put funding * Crop Protection USAID Rehabilitation of facilities, withAgriculture Facilities for crop protection. It has (proposed loan) Potential Cof. sustainability through user charges

not put enough funding for * Ka Canal from the KuwaitCanal Rehabilitation (proposed loan) Fund, IsDB

54

Goals Government Strategy Bank Group Activities Key | Keyl | Lending AAA: ESWtrA International Performance Benchmarks______________________I ~~~~~~~Partners

D. PRIVATE SECTOR DEVELOPMENT

10 Commercialize Most large enterprises still Downstream Study on a Create list of public companiesState Companies operate largely under the Energy Sector to be separated from Ministries

control of the State Commercialization and commercialized(FY01)

* Some Energy Co's placed on acommercial basis (egTurkmenbashy Oil Refinery)

11 Liberalize Trade * The Govt maintains a * Improved access to FX viaand FX controls single official exchange Policy Dialogue single exchange rate

rate, but access islimited, and the curb a Exemption of the Private Sectorrate is quite far apart from registration under the

Comrnodity Exchange* The State Commodity

Exchange maintainsextensive controls overnormal trade

E. ENVIRONMENTAL PROTECTION

12. Participate in Govt is a member of several a Aral Sea Program UNDP/GEF w Improvement in livingMulti-Country regional efforts (on going) conditions in the AralEnvironmental Efforts Basin

m Caspian Sea Program(on-going) a Reduction in Caspian

based pollution13. Develop a National Govt has made a . Preparation of a UNDP, Japan, Switz. * Publication of an effectiveEnvironment Strategy commitment to preparing a NEAP NEAP document

NEAP (FY01)

55

CAS TABLE B1O:

TURKMENISTAN - CAS SUMMARY OF DEVELOPMENT PRIORITIES

Network Aria Country Major Issue Country Bank Priority Priority ReconciliationPerformance Priority

Poverty Reduction & Economic Management

Poverty Reduction Poor/Fair Allocation of Public Resources, Inequality Medium High -- Continued Dialogue andinformation sharing

-- IDF Grant for LivingStandards Monitoring

Economic Policy Poor Currency Liberalization, FERF High HighPublic Sector Poor Budget and Debt Management High HighGender Fair Access to Higher Level Education Medium Medium

Human Development

Education Poor Curriculum, Time in School, Access to Higher Ed. Medium MediumHealth, Nutrition, & Pop Fair Poor Water Quality, Health Care System High HighSocial Protection Poor/Fair Need for Targeting Assistance to Poor High Medium Dialogue on Pov. Statistics

Environment & Sustainable Development

Rural Development Poor Eliminating State Order, Conservation of water and Medium High -- Dialogue on Agric. ReformMaintenance of Irrigation System -- Water Strategy

Environment Fair Realizing the NEAP Medium MediumSocial Development Fair Transparency in laws, NGO registration Low Medium Work with civil society

Finance, Private Sector & Infreastructure

Financial Sector Poor Basic Functioning, Inter-bank transactions High Medium Dialogue on Banking SectorPrivate Sector Poor Access to FX, State Commodity Exchange, State Order Medium High Limited DialogueEnergy and Mining Fair Maintaining Access to Export Market, High Medium Energy Sector Dialogue

commercialize firmsInfrastructure Fair Maintenance of Existing Infrastructure High Medium -- Dialogue on Water Supply

-- Proposed Canal Rehab pro.

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