TURKMENISTAN

	FY 1998 Actual	FY 1999 Estimate	FY 2000 Request
FREEDOM Support Act	$5,451,000	$13,420,000	$12,000,000

Introduction.

The United States has a strategic and economic interest in Turkmenistan becoming economically viable, politically independent and well integrated into international political and economic institutions. Turkmenistan has long borders with Iran and Afghanistan as well as close proximity to the Caucasus, the Middle East and South Asia. As an energy importing nation, the United States is interested in ensuring that Turkmenistan's energy potential be realized. Turkmenistan possesses the world's fourth largest natural gas resource as well as significant oil reserves. It has the potential to become a major player in world energy markets once export route questions are resolved.

The Development Challenge.

Limited progress has been achieved in Turkmenistan's economic sphere since the breakup of the Soviet Union. The government has not had the know-how or political will to carry out the reforms required for a transition to a free market economy. Turkmenistan remains a resolute one-party state with power vested in a communist-turned-nationalist leadership. While Turkmenistan has the potential to be a wealthy country, the government has adopted a gradualist approach to market reform. It avoids actions that might entail significant loosening of state control over the economy or rapid political liberalization. As a consequence, Turkmenistan has the lowest ranking of any NIS country in economic policy reform according to EBRD country progress ratings.

The general economic situation continues to deteriorate. The national currency has been progressively devalued. The Government of Turkmenistan (GOTK) has tightened fiscal and monetary policies and loosened foreign exchange and trade controls to try and correct some of the monetary imbalance. However, inflation remains high at approximately 21% despite a risky draw-down of international reserves to bring it down to this level. Until 1998, it was difficult to exercise fiscal control with over half of government expenditures effectively off-budget. Real gross domestic product (GDP) has declined more than 65% over the past four years. Central Bank foreign reserves are dangerously low and the GOTK continued in 1998 to build up short-term commercial debt to finance imports. This brought international attention to the country’s flawed economic strategy. The GOTK appears close to recognizing the need to adopt quickly some systematic economic reform policies. The International Monetary Fund (IMF) failed to reach an agreement with the GOTK on the terms for an IMF stand-by arrangement in late 1998. With USAID and World Bank (IBRD) support, the government has begun to design a mass privatization program which includes privatization of some agricultural land. An important step toward greater fiscal transparency was taken in late 1998, when the Parliament passed a 1999 budget which accounted for over 95% of all GOTK budgetary revenues and expenses. The state continues to dominate economic production. Key policy and regulatory constraints severely inhibit private investment.

Recent steps by the government to promote economic restructuring have provided an opportunity for USAID to offer more substantial assistance in market-oriented reforms. The core of USAID's assistance program is to strengthen the government's budget planning and management and advance legal and regulatory actions necessary for the growth of private enterprise and international investment (particularly in the petroleum sector). These programs will be reinforced by training public officials to increase their understanding of, and commitment to, legal and regulatory changes that foster market-based economies and democratic governance. Other donors have stated that similar USAID-financed training over the past few years has made Turkmen public officials more receptive to reforms.

The national leadership exercises firm authoritarian control over a highly centralized government structure with no freedom of the press and no tolerance for opposition political activities. However, some advances have been made. The President opened the Institute for Democracy and Human Rights (IDHR) which has a mandate to foster democratization of the state and monitor the protection of human rights. USAID has been assisting IDHR in identifying various needs for institution building. In addition, USAID has been working with a nascent GOTK working group to design broad democratic reforms for the country. Though Turkmenistan is not yet ready for a large democratization program due to its constrictive political climate, USAID will continue to stress the role of civil society organizations as partners with the state in the alleviation of social problems and as lead actors in community development.

More than five years after independence, the average Turkman faces hardships caused by inflation, poorly-funded government services, and the tremendous costs of maintaining a state-run economy. The majority of Turkmenistan's population, particularly outside the capital, suffers from hunger and disease. Special initiative earmark funds are being used to meet health needs especially for family planning and infectious disease control/prevention. A new partnership program is helping create a primary health care training center modeled on an existing emergency medical center. This center will train family medicine practitioners and nurses in primary health care. Targeted opportunity exists in Turkmenistan to expand women's role in managing their reproductive health. There is a critical need to address the low health status of women in Turkmenistan.

Other Donors.

The IMF provides technical assistance in macroeconomic policy. The European Union's development program supports privatization, agriculture, energy, and private sector development. The United Nations Development Program (UNDP) supports a public administration institute, and United Nations Children’s Fund (UNICEF) provides assistance in reproductive health and maternal/child care. Other donors include the Turkish International Cooperation Agency, the British Know How Fund, and United Nations High Commission for Refugees (UNHCR).

FY 2000 Program.

Because of the slow pace on reforms in Turkmenistan, USAID's economic reform assistance will continue to be limited but focused on improving the legal and regulatory environment for investment and growth, and improvement and transparency in the budget process. Most recently, USAID is supporting an initiative in agribusiness and land privatization, and in agricultural policy reform through the USDA. USAID will continue to take advantage of opportunities to provide technical support for accession to the World Trade Organization (WTO). USAID is also increasing its assistance to reform Turkmenistan’s energy sector as described in the Central Asia Regional Presentation.

Under cross-cutting and special initiatives, USAID will continue to fund targets of opportunity in democracy and health. USAID plans to increase assistance to civil society development through indigenous non-governmental organizations (NGOs), especially those working outside of the capital, and on establishing a legal information center. Depending on developments with the governmental democracy working group, USAID is also considering initiating assistance aimed at fostering judicial reform and facilitating the development of an independent parliament.

To help address pressing social needs, health-related programs and family planning activities will be increased to strengthen primary health care and disease prevention and control. USAID will expand assistance in the health sector on infectious disease control, reproductive health, and women’s groups. Complementary in-country and third-country training activities will be expanded to better prepare and persuade decision-makers to adopt policy changes.

TURKMENISTAN

FY 1999 PROGRAM SUMMARY*
(in Thousand of Dollars)

USAID Mission Director: Glenn Anders

Strategic Objectives	Economic Restructuring	Democratic Transition	Social Stabilization	Cross-cutting / Special Initiatives	Total
Privatization	---	---	---	---	---
Fiscal Reform	600	---	---	---	600
Private Enterprise	3,200	---	---	---	3,200
Financial Reform	---	---	---	---	---
Energy	---	---	---	---	---
Environmental Management	---	---	---	---	---
Citizens' Participation	---	---	---	---	---
Legal Systems	---	---	---	---	---
Local Government	---	---	---	---	---
Crises	---	---	---	---	---
Social Benefits	---	---	---	---	---
Environmental Health	---	---	---	---	---
Cross-cutting / Special Initiatives	---	---	---	8,200	8,200
TOTAL	3,800	---	---	8,200	12,000
*Freedom Support Act (FSA) funds

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ACTIVITY DATA SHEET

PROGRAM: TURKMENISTAN
TITLE AND NUMBER: Increased Soundness of Fiscal Policies and Fiscal Management Practices, 110-S001.2
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 2000: $600,000 Freedom Support Act
INITIAL OBLIGATION: FY 1998; ESTIMATED COMPLETION DATE: FY 2002

Summary: Turkmenistan has been relatively slow to effect serious economic restructuring measures. Since independence, USAID and other donors such as the World Bank and the IMF have conducted an ongoing dialogue on the need for change and on the types of approaches required to embark on serious reform. This activity focuses on strengthening the expenditure side of fiscal policies to provide a more rational allocation of scarce government resources and a more transparent picture of the real fiscal costs of maintaining a predominant state role in the production sphere of the economy. The purpose is to increase the soundness of fiscal policies and fiscal management practices. It is anticipated that a key indirect result of this work will be increased GOTK understanding of the need for more rapid privatization of the economy. In the past year, there have been clear indications that the GOTK is more serious about advancing the economic reforms needed to promote sustainable development. Budget reform is a priority reform area for the GOTK, as approximately 50% of state spending was off-budget in 1997 as opposed to 20% at this juncture. Successful reforms by the GOTK would lead to a decline in the general government deficit as a percentage of GDP to 0.1% by 2001.

The direct beneficiary is the Ministry of Finance. More broadly and of greater importance, the citizens of Turkmenistan will benefit from budgetary reforms that lead to more efficient use of public sector resources and encourage private sector growth.

Key Results: Improved fiscal management and reform in Turkmenistan will hinge on: 1) reducing the government deficit as a percentage of GDP to around 0.1% by FY 2001; 2) renewed GOTK compliance with conditions of international financial institutions; and 3) continued reductions in the off-budget share of the total public sector expenditures, to zero by the end of FY 2001.

Performance and Prospects: The USAID fiscal reform program is already gaining momentum, and initial receptivity of the Ministry of Finance to the resident advisor's recommendations has been very positive. The GOT has incorporated 95% of the resident advisor's suggestions into its FY 1999 budget documents, all of which were passed by the Parliament. The number of government entities and investment funds covered under the budget has increased from 30 to 92, thereby significantly decreasing "off-budget" requirements. This is a key step toward the establishment of a comprehensive national budget. In addition, USAID continues support for development of a new budget systems law which, if enacted, will require detailed monthly financial reporting of all state ministry and agency expenditures, including capital expenditures.

In keeping with USG priorities in Turkmenistan, USAID was instrumental in the July 1998 enactment of amendments to the Civil Code, including provisions to conform intellectual property provisions to WTO requirements that were drafted in consonance with the project. Likewise, a Presidential decree was issued abolishing a significant number of administrative barriers to free trade. This decree incorporated much of what was contained in recommendations USAID made through its resident advisor. USAID assisted the GOTK in drafting a number of laws that will ultimately provide legislation to spur foreign investment.

Possible Adjustments to Plans: The focus of technical assistance is on design and implementation of a formal budget process that brings all state spending on-budget, as well as the establishment of modern program budgeting and analytical methods. At this time, GOTK discussions on a comprehensive macroeconomic reform program with the IMF are intensifying. If these negotiations culminate in a stand-by arrangement, USAID will be well positioned to support implementation of the expenditure control and rationalization measures which would be included as conditionality in the IMF Program.

Subject to continued commitment by the GOTK to budget reform, USAID will continue to fund a resident budget advisor to the Ministry of Finance. The advisor will: 1) support effective implementation of budget reform legislation; 2) train key Ministry of Finance officials in budget analysis and preparation; and 3) introduce a new budget classification system that is consistent with international standards. Such work would complement the World Bank privatization project.

Other Donor Programs: In budget reform efforts, USAID cooperates closely with the World Bank and IMF.

Principal Contractors, Grantees, or Agencies: USAID activities are implemented through Booz Allen & Hamilton.

Selected Performance Measures:

	Baseline	Target
General government deficit as percent of GDP:	1,6% (1995)	0.1% (2001)
GOTK compliance with conditions of international financial institutions:	No (1996)	Yes (2001)
Off-budget share of total public sector expenditures:	50% (1997)	0% (2001)

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ACTIVITY DATA SHEET

PROGRAM: TURKMENISTAN
TITLE AND NUMBER: Accelerated Development and Growth of Private Enterprises, 110-S001.3
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 2000: 3,200,000 Freedom Support Act
INITIAL OBLIGATION: FY 1997 ESTIMATED COMPLETION DATE: FY 2001

Summary: When senior policy makers of the Government of Turkmenistan (GOTK) signaled serious interest in accelerating economic reforms, USAID initiated a technical assistance program in mid-1997 designed to promote private sector development. This initiative has emphasized support for the GOTK's efforts to gain accession to the World Trade Organization (WTO) and associated policy and regulatory reforms to promote investment and acceleration of the privatization process. With USAID assistance, a Presidential decree was issued to abolish various administrative barriers to trade. USAID advisors continued to assist the GOTK in drafting reform legislation covering foreign investment, registration and competition. Additionally, and with USAID assistance, another Presidential decree was issued approving a discounted cash flow method of assessing the value of enterprises. In late FY 1998, USAID initiated the first phase of agricultural land privatization. In addition, the Central Asian American Enterprise Fund (CAAEF) has been active in Turkmenistan with $14 million in equity investment and $5.2 million in approved loans through late FY 1998. With USAID financing, the International Executive Service Corps has provided technical support to potential CAAEF clients and to participating local banks. USAID will be able to gauge success in this area if the share of GDP generated by private enterprises increases to 75% by 2001.

Enterprises and individuals involved in private sector development will benefit from this initiative. More broadly, Turkmenistan's citizens will benefit from reforms that lead to sustainable economic growth.

Key Results: In order to witness progress towards this objective, advances in the following indicators should be observed: 1) the share of GDP generated by private enterprises climbs to 75% by FY 2001; 2) the percentage of total capital investment in the private sector would rise to 75% by FY 2001; and 3) the dollar value of joint funds invested would increase to $11 million by FY 2001.

Performance and Prospects: There have been a number of successes recently, as mentioned above. In addition, amendments to the Civil Code were enacted in July 1998 that included provisions to conform intellectual property to WTO requirements and USAID assisted the government in drafting reform legislation in the area of foreign investment. While these bode well, there are also some significant issues that could hinder prospects for success in the future: 1) the existence of competing state entities involved in privatization as well as overlapping responsibilities; 2) the lack of a clear political commitment to privatization; 3) an inadequate legislative and regulatory base for privatization; and 4) the lack of a securities/capital market to facilitate privatization.

With regard to private business, USAID has only just begun to provide technical assistance to nine private sector companies in different sectors, such as bakeries, an auto parts manufacturer, a poultry farm, a print shop and a private commercial bank. Unfortunately, introduction of the needed macroeconomic reform has been slow. It will be necessary for the business regulatory environment to improve in order for businesses to grow and expand.

Possible Adjustments to Plans: USAID-supported technical assistance continues to focus on analysis of the benefits of WTO accession and review of the compatibility of the current Turkmenistan regulatory environment with WTO standards. A full-scale support program for WTO accession will be launched in 1999, assuming the GOTK commits itself to a comprehensive accession and compliance effort. USAID assistance to the industrial privatization program has been closely coordinated with the World Bank. In January 1998, the GOTK partially reorganized inter-ministerial responsibilities for privatization. The government is establishing a new privatization office within the State Foreign Investment Agency and formulating a pilot enterprise privatization program. USAID will provide analytical and training support for this pilot effort. If the pilot is successful (as expected), USAID will intensify support for privatization of more visible and financially viable industrial assets. Additionally, USAID will be working closely with the Ministry of Agriculture and Water Resources in implementing agribusiness and land reform privatization. Another area of potential USAID support is in privatization of industrial and agricultural construction enterprises. The main objective of the program is to improve food security by means of attracting private business into the agricultural privatization process.

Other Donor Program: USAID works closely with government entities involved in private sector development and economic restructuring. Lead donors include the IMF, World Bank and EU.

Principal Contractors, Grantees, or Agencies: USAID activities are implemented through Booz Allen & Hamilton, CAAEF and IESC.

Selected Performance Measures:

	Baseline	Target
Share of GDP generated by private enterprises	20% (1996)	75%(2001)
Percentage of total capital invested in the private sector	8% (1997)	75% (2001)
Dollar volume of joint venture funds invested (millions)	$3 (1997)	$11 (2001)

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