© 2024 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution Cite the work as follows: World Bank. 2024. “Turkmenistan Economic Report.” World Bank, Washington, D.C. All queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. TURKMENISTAN Economic Report December 2024 Macroeconomics, Trade & Investment TABLE OF CONTENTS Acknowledgements 8 Abbreviations 9 Overview 10 1. Introduction 13 2. Recent Economic Developments 15 2.1 Real Sector 16 2.2 External Sector 24 2.3 Fiscal Sector 26 2.4 Financial and Banking Sector 26 2.5 Monetary and Exchange Rate Developments 28 2.6 Labor Markets 28 2.7 State-Owned Enterprises and Private Sector Development 30 3. Social Profile: Gender and Inclusivity 37 3.1 Standards of Living, Poverty, and Social Protection 38 3.2 Health 39 3.3 Education 39 3.4 Gender 40 4. Outlook and Risks 41 5. Key Challenges and Recommended Policy Priorities 45 Annex 1: Trends in Turkmenistan’s Commodity Markets and Main Trading Partners 49 Annex 2: Trade Flow Assessment: Reaching New Markets 53 Annex 3: Turkmenistan Challenges and Policies 62 References 68 Turkmenistan I Economic Report I December 2024 4 Turkmenistan I Economic Report I December 2024 5 LIST OF FIGURES Figure 1. Real Gross Domestic Product Growth and Gross National Income per capita, 1993–2023 17 Figure 2. Gross Domestic Product Growth Compared to Other Country Groups 17 Figure 3. Structure of Gross Domestic Product, 17 Figure 4. Employment, by Sector 17 Figure 5. Oil and Gas Production, 2017–23 19 Figure 6. Labor Productivity in Sectors of the Economy, 2022 19 Figure 7. Dynamics of Total Investment, Budget Investment, and Foreign Direct Investment, percent of gross domestic product 19 Figure 8. Total Investment in Fixed Capital Compared to Income Peers, percent of gross domestic product 19 Figure 9. Structure of Investment by 21 Figure 10. Dynamics of Investment by 21 Figure 11. Dynamics of Incremental Capital Output Ratios 21 Figure 12. Incremental Capital Output Ratio by 21 Figure 13. Consumer Price Index, 2012–23 23 Figure 14. Trends in Main Commodity Exports 25 Figure 15. Dynamic of International Trade 25 Figure 16. Dynamics of Trade Balance and Current Account Balance, percent of gross domestic product 25 Figure 17. Trends in Budget Balance 27 Figure 18. Trends in Budget Expenditures and Public and Publicly Guaranteed Debt 27 Figure 19. Trends in Budget Revenue 27 Figure 20. Trends in Banking Capital and 27 Figure 21. Banking Sector Assets, Liabilities, Credits, and Deposits, percent of gross domestic product 27 Figure 22. Dynamics in Banking Assets and Credits, Annual Change 29 Figure 23. Banking Sector Liquidity Ratios 29 Figure 24. Growth in Economy, Population, and Employment, 2010–22 29 Figure 25. Employment Structure by Sub-Sector, 2022 31 Figure 26. Density of New Firms, 2019 31 Figure 27. Density of Total Businesses, 2022 31 Figure 28. State-Owned Enterprises versus Nonstate-Owned Enterprises, 33 Figure 29. Profitability of State-Owned Enterprises versus Nonstate-Owned Enterprises, 35 Figure 30. Governance Indicators Compared to Lower- and Upper Middle-Income Countries 36 Figure A1. Commodity Prices: Historical and Forecast 51 Figure A2. Economic Growth in Turkmenistan and Its 51 Figure A3. Import and Export Dynamics Show Growth in 2022 53 Figure A4. In Line with Commodity Price Trends 53 Figure A5. Trade Openness Is the Lowest in Relation to National Income, 2022 55 Figure A6. Deterioration of Trade Openness in Contrast to other Economies in the Region 55 Turkmenistan I Economic Report I December 2024 6 Figure A7. Exports Dominated by Four Commodities 55 Figure A8. Highly Concentrated Exports in Terms of Products (4-digit HS) and Markets 55 Figure A9. Top Ten Nonenergy Exports, Accounting for Four-Quarters of 57 Figure A10. Sharp Rise in Fertilizer Exports, 57 Figure A11. Few Trade Partners Dominate 57 Figure A12. Rise in Imports, 2022, Largely of Machinery and Equipment Goods 57 Figure A13. Capital Goods and Construction Materials Driving Import Trends 57 Figure A14. Outpace of Export versus Import Growth and Regional Partner Domination 59 Figure A15. Most Top Vegetable Imports Show a Decreasing CAGR* 59 Figure A16. Electronics and Transport Goods as Largest Imports, 2022 59 Figure A17. Import Sources of Machinery, Equipment, and Transport Goods Shift to the Middle East and North Africa 59 Figure A18. Quarterly Trade Flows with Key Partners Indicate a Continuation of 2022 Trends into 2023 (to be updated) 60 Figure A19. Turkmenistan’s Unrealized Export Potential (excluding Fuel Exports) 60 Figure A20. Regional Partners Have Similarly Low Coverage Rations in Existing Preferential Trade Arrangements 60 LIST OF TABLES Table 1. Macro Outlook Indicators annual percent changes, unless otherwise indicated 43 Table A1. Commodity Indexes and Prices, 2022–25 51 Table A2. Coverage of Preferential Trade Agreements by Deep Trade Agreement Category 61 LIST OF BOXES Box 1. Agriculture Sector: Governance and Land Rights 22 Box 2. Public Institutions and Governance 36 Box A1. Notes on Data Availability and Use 54 Turkmenistan I Economic Report I December 2024 7 ACKNOWLEDGEMENTS The report was written by a World Bank team led by Eskender Trushin, Senior Country Economist who is the main author. The team included David Knight, Lead Economist and Program Leader for Central Asia, Lucie Johanna Wuester, Consultant (who prepared the trade analysis in Annex 2), and Shoista Zakirova, Program Assistant. The report benefited from edits by Margie Peters-Fawcett. The report was prepared under the guidance of Antonella Bassani, Vice President for Europe and Central Asia; Asad Alam, Regional Director for Europe and Central Asia; and Andrei Mikhnev, Country Manager for Kazakhstan and Turkmenistan, and Tatiana Proskuryakova, Country Director for Central Asia. The team worked under the close supervision of Antonio Nucifora, Practice Manager for Europe and Central Asia. The report benefitted from peer review guidance provided by Dhruv Sharma, Senior Country Economist; and Ilyas Sarsenov, Senior Country Economist. Other colleagues in the World Bank provided insights and suggestions to the report including Irina Klytchnikova, Lead Agricultural Economist, Oraz Sultanov, Senior Social Protection Specialist, and Kanat Kaiyrberli, Senior Country Officer. The report is based on official data from the Statistical Yearbooks of Turkmenistan 2017–2023, with references to the data collected by the United Nations and other international organizations and agencies. The team is grateful to participants in consultation meetings with the Ministry of Finance and Economy as well as representatives from the private sector, non-governmental organization community, and development partners. Turkmenistan I Economic Report I December 2024 8 ABBREVIATIONS bbl barrel bcm billion cubic meters CBT Central Bank of Turkmenistan CPI consumer price index GDP gross domestic product ECA Europe and Central Asia ECD early childhood development FDI foreign direct investment GVC global value chain ICOR Incremental Capital Output Ratio ILO International Labour Organization IMF International Monetary Fund LMIC lower middle-income country SOE state-owned enterprise SDG Sustainable Development Goals SSF Stabilization and Savings Fund UMIC upper middle-income country UN United Nations YoY year over year This report is primarily prepared based on data sourced from the national authorities. The World Bank does not guarantee the accuracy of the data included in this work. Turkmenistan I Economic Report I December 2024 9 OVERVIEW Turkmenistan is a land-locked, upper middle-income country, characterized by a rigid statist economic model, and driven by natural gas exports. Turkmenistan’s economy is concentrated on commodity exports; in particular, natural gas, at 64 percent of total exports in 2022 and 68 percent in 2023, as well as oil and oil products, together making up about 90 percent of total exports in 2022-2023. The economy is largely state owned and relies on state-owned enterprises (SOE), of which the share in total sales of goods and services in all sectors was 59 percent in 2023, with substantial state oversight in the smaller private sector. Despite abundant revenues from commodity exports, social sectors appear underfinanced, as suggested by lower state budget spending on healthcare as a percent of gross domestic product (GDP) compared to Turkmenistan’s income peers (see part 3 of this report). The country has not participated in the Programme for International Students Assessment (PISA) test, which makes it difficult to evaluate the impact of government spending on school education. The lack of published economic and financial data makes any comprehensive assessment difficult. Economic growth has recently slowed down under the impact of external shocks, but still averaged about 6 percent over the last five years. Turkmenistan went through a period of adjustment as it first met with lower oil and gas prices and was further affected by the COVID-19 pandemic, with lower hydrocarbon demand, globally. Turkmenistan has been impacted over the last decade by the lower global oil and natural gas prices that transpired during the 2009–17 period; the COVID-19 pandemic in 2020–21; and the related slowdown in trading partners. Less favorable terms of trade and lower foreign direct investment (FDI) inflows slowed real GDP growth from over 9 percent in 2004–14 to 5.9 percent in 2020. Turkmenistan’s hydrocarbon production slowed after 2014 (natural gas production fell by 8 percent in 2020 compared to 2014, and oil production fell by 22 percent compared to 2014), at which point budget and current account deficits emerged. Tight foreign exchange controls, fiscal tightening (mostly by reducing state budget investment), and a policy of import substitution brought the fiscal and current accounts back into balance. Inflation was trending upward until 2022, whereby the official annual consumer price index (CPI) accelerated from 6.5 percent in 2019 to 8.9 percent in 2020 and 21.1 percent in 2021, reflecting rising costs due to global supply-chain disruptions during the COVID-19 pandemic and its recovery as well as eased domestic credit policy. In 2021–23, hydrocarbon global demand and prices rebounded, boosting economic activity and GDP growth. Global recovery following the pandemic has improved the price of gas and exports, as well as GDP growth. The government reported real GDP growth accelerated to 6.2 percent in 2022 and 6.3 percent in 2023, driven by growth in the service sector and higher exports. Growth in 2023 was reported in all sectors: agriculture by 4.4 percent, industry by 4.3 percent, and services by 8.8 percent. On the demand side, investment and exports were the main drivers of growth in 2022 (full expenditure data are not yet available for 2023). Net exports, as a share of GDP, increased from 6.3 percent in 2021 to 9.5 percent in 2022. Investment increased by 14.2 percent in nominal terms in 2022 compared to 2021 and by 7.5 percent in nominal terms in 2023 compared to 2022. CPI inflation declined from its peak of 21.1 percent at the end of 2021 to 3 percent at end-2022 and 1.4 percent at end-2023 due to easing supply chain disruptions, a fall in international prices, greater domestic food production, tighter domestic credit policy, and continued price and foreign exchange controls. In February 2022, Turkmenistan adopted its long-term 2022–2052 National Program of Socio-Economic Development and the medium-term 2022–2028 Presidential Program to implement the longer-term program. The new plans include support to private sector development and accession to the World Trade Organization. The long- term development strategy increases the focus on digitalization, food security, green economy, human capital, free Turkmenistan I Economic Report I December 2024 10 zones, and social safety nets. The National Program of Socio-Economic Development recognizes the importance of diversifying the economy to foster sustainable economic growth. Authorities aim to support growth through more economic openness, and their new World Trade Organization accession bid is the centerpiece of this shift. While the state continues to play a dominant role in the economy, the private sector is gradually developing. Recognizing the need to reduce the state’s economic dominance, the government aims to support growth through private sector development, with changes in the legal-regulatory framework, improvements in digital infrastructure, SOE privatization, public-private partnerships, and expansion of economic zones. The outlook is positive for 2025, with overall commodity prices expected to remain well above pre-pandemic levels. The natural gas benchmark price was 18 percent lower, on average, in 2024 than 2023, and is expected to increase by a moderate 7 percent in 2025. As hydrocarbon production and exports in Turkmenistan are dependent mostly on China’s economic prospects and demand for gas, the World Bank’s growth projections in China were 4.8 percent in 2024 and 4.3 percent in 2025. Chinese gas consumption is set to increase by 6.2 percent in 2024 and 8.2 percent in 2025, suggesting that Turkmenistan’s gas exports will remain strong in 2024–25. In February 2024, the Dubai-based firm, Dragon Oil, announced that it would begin drilling in an undeveloped section of Turkmenistan’s Caspian Sea territory by end-2024. The initiative should boost hydrocarbon production, supporting growth in 2025 and beyond. In March 2024, the Turkish-Turkmen Memorandum of Understanding is a signal that Turkmenistan is willing to sell gas to Western destinations—Turkey and potentially the European Union—in the future. The boost to hydrocarbon production will help to increase Turkmenistan’s trade surplus further and maintain current account surpluses in 2024 and 2025. The World Bank projects growth at 6.1 percent in 2024, with a small deceleration in 2025 as global energy prices potentially fall but will, nevertheless, remain high, while fixed investment and strong public spending on wages—which keep increases ahead of inflation—will offer some support. An increase in economic productivity may come from government policies to promote the role of the private sector by allocating more credit to private firms, with a gradual move toward a more-market based economy and privatization. These policies, in addition to the new agriculture development program, are expected to contribute to growing investment and consumption, and to partly offset a weaker external demand in 2025. Faster expansion of gas production and exports, as well as strong revenue from energy and non-energy products, are projected to maintain the state budget balance in small surplus in 2024 and 2025. With budget revenue at around 15.1 percent of GDP in 2024–25 and expenditures at around 13.8 percent of GDP, the budget surplus is expected to be about 1.3 percent of GDP. Activity outside of the large hydrocarbon economy will remain dependent on government support for SOEs and private firms engaged in import substitution or export promotion. Public debt is projected to remain below 5 percent of GDP, reflecting scheduled repayments on energy projects and the government’s aversion to new borrowing. Growth in public investment is expected to increase, partly due to the second phase of the Arkadag Smart City project and the development of oil refining and transport corridors. The outlook is subject to significant uncertainty and risks. External risks include geoeconomic spillovers from an intensification of the Russian Federation’s war in Ukraine, leading to disruptions in supply chains and greater commodity price volatility, including a potential spillover of instability from Afghanistan and the pace of global recovery. Domestic risks mainly stem from slow pace or further delays in domestic structural reforms, lower-than- planned revenue receipts, weakening bank balance sheets, and the materialization of contingent liabilities from SOEs Overview 11 and state-owned banks. Continued rapid growth of subsidized credit to potentially uncompetitive projects may worsen bank asset quality, contributing to financial and currency vulnerabilities. On the upside, stronger than expected oil and gas prices could boost growth prospects. Progress on diversifying export destinations remains an upside risk for growth. Turkmenistan needs to navigate a series of challenges as it aims to progress to sustainability and reach high-income status. Turkmenistan is facing multiple challenges at once: those of a resource-rich country seeking to properly manage incomes from these resources and grow beyond the limit of those resources; identifying the new sources of growth to drive toward a high-income country; and completing the transition to a market economy. Other challenges are the ever-increasing threats of climate change and to ecological sustainability. To effectively address each set of challenges, the government needs to develop a detailed set of policies and to consolidate them into a general roadmap, with milestones, ministries and stakeholders, and a timeline, and to ultimately bring this roadmap to life. As Turkmenistan’s main cross-cutting economic challenge is to translate hydrocarbon wealth into more diversified, sustainable and inclusive growth, it needs to develop a market-based diversification strategy. Such strategy requires reforms to improve business environment, reduce distortions to markets, address real exchange rate overvaluation to ensure favorable environment for the private sector-led growth that will increase productivity and create more jobs. It will also require reforms to improve SOEs’ corporate governance, enhance public investment management, improve targeting of social spending, base public wage increases on performance, and enhance governance and transparency. Turkmenistan I Economic Report I December 2024 12 1. INTRODUCTION 1. INTRODUCTION Turkmenistan’s reliance on gas exports has made the economy vulnerable to fluctuations in the global energy market. The external accounts and fiscal accounts mostly followed the changes in these external factors. In other words, when world prices on oil and gas were high – exports and fiscal revenues were high and spending on investment and government consumption from state budget and by SOEs were also high. When world prices were low (in 2014- 2018, 2020) – revenues were low, state budget and SOEs spending got adjusted to be lower, with lower investment, etc. While the Turkmenistan’s government polices also reflected the external realities and adjusted from “good times” to “bad times”, and then back to “good times”, Turkmenistan has been an island of stability in Central Asia as the government managed to maintain spending on health, education, and social protection. These economic trends are discussed in the report. However, the report mainly focuses on the sources of the current economic growth and, most importantly, sources of future growth of Turkmenistan, how to make growth more sustainable, what are the main challenges on this way to overcome based on the international experience? Trends in global commodity prices and in economies of Turkmenistan’s main trading partners (China, Turkiye, Iran, Russian Federation) are supportive for Turkmenistan’s economic growth prospects in the medium-term (See Annex 1). Commodity prices are expected to decrease by 5 percent in 2025, after softening by 3 percent in 2024. The projected declines are led by oil prices but tempered by price increases for natural gas and a stable outlook for metals and agricultural raw materials. The Brent crude oil price averaged at $80/bbl in 2024, about 3 percent lower than a year earlier but 40 percent above the 2015-19 average. Crude oil prices are expected to decrease further, to an average of $73/bbl in 2025. The European natural gas benchmark was 18 percent lower, on average, in 2024 than 2023. But in 2025, gas prices are expected to increase by a moderate 7 percent (y/y). Turkmenistan I Economic Report I December 2024 14 2. RECENT ECONOMIC DEVELOPMENTS 2. RECENT ECONOMIC DEVELOPMENTS 2.1 Real Sector Turkmenistan is an upper-middle-income country (UMIC) with high economic growth, based on its natural gas pro- duction and exports. Its gross national income per capita was US$8,2501 in 2023 (Figure 1), according to national statistics.2 From 2017 to 2023, Turkmenistan’s average economic growth rate of 6.2 percent, in real terms, outpaced the average for the Europe and Central Asia region (ECA) (excluding high-income countries), lower middle-income countries (LMIC), and upper middle-income countries (UMIC) (Figure 2). Economic growth has shown significantly little fluctuation over the last five years despite shocks over the period, including the COVID-19 pandemic and sharp fluctu- ations in oil and gas prices. The government reported that real GDP growth accelerated to 6.3 percent in 2023, driven by services growth and higher hydrocarbons exports. Global recovery after the pandemic has improved gas exports and GDP growth. On the supply side, expansion in 2023 was reported in all sectors, with services as the main growth drivers. Agriculture grew by 4.4 percent as targets for cotton and wheat production were achieved, and from expansion in horticulture production for domestic and foreign markets. Industry expanded by 4.3 percent, with gas production rising by 6.9 percent (Borayov 2024b). The construction sector grew at a slower rate of 2 percent. Total services grew by 8.8 percent, with increases in trade and catering by 12.8 percent and transportation (including international air and rail services) and communication by 8.4 percent. Based on the limited data available on the structure of the economy by sector (Figure 3), it appears that Turkmenistan’s economy is dominated by the service sector, accounting for approximately 48 percent of GDP, followed by industry at 34 percent of GDP—dominated by the hydrocarbon sector—and the agriculture sector at 12 percent of GDP. On the demand side, investment and net exports were the main drivers of growth in 2022. Full expenditure-side data are not yet available for 2023. Expenditure data, in fact, are not available in real terms for any year, in which case analysis must be conducted on nominal values. Net exports as a share in GDP increased from 6.3 percent in 2021 to 9.5 percent in 2022. Investment increased by 14.2 percent in nominal terms in 2022 compared to 2021, representing 18.1 percent of GDP in 2022. This investment related to industrial infrastructure and facilities as well as social infra- structure, including new health centers, schools, cultural and residential complexes, and investments in the new city of Arkadag.3 A program to provide affordable housing has resulted in the construction of dwellings to accommodate approximately 200,000 people. Of total investments, 51 percent was allocated for social infrastructure and the rest for industrial infrastructure. Export of natural gas reportedly reduced in physical units (billion cubic meters) by 5.4 percent 1  In Atlas U.S. dollars exchange rate terms. 2  Data are national statistics, as reported by the Turkmen authorities, unless stated otherwise. Growth on the supply side by sectors of the economy has been officially reported in the national newspaper since 2015, with missing growth rate data for key sectors in 2018–20. Turkmenistan is not part of the International Monetary Fund’s (IMF) General Data Dissemination System (e-GDDS) and International Finance Statistics (IFS), whereby it would benefit from greater disclosure of macroeconomic and financial data and capacity building to produce high-quality statistics. Nongovernment entities continue to have significantly limited access to disaggregated data, and information sharing remains restricted even within the government. Publishing more data on national accounts, as well as fiscal, financial, and external statistics would improve the understanding of trends among all stakeholders, boost foreign investment, and ease access to global financial markets. Posting the Statistical Yearbook, National Accounts, and Banking Bulletin on the Internet would be a practical step toward filling the information gaps. The IMF and World Bank have offered the authorities the necessary technical assistance to upgrade national account methodologies. 3  In June 2023, Turkmenistan officially opened a new city, Arkadag, built from the ground up, 30 kilometers south of the capital, Ashgabat. The city is designed for 70,000 people. Arkadag is termed a smart city due to the availability of modern digital services, technical equipment, video surveillance (with automatic recognition of faces), intelligent transport system with automated traffic lights for managing vehicle flows, including electric cars and buses. Turkmenistan I Economic Report I December 2024 16 Figure 1. Real Gross Domestic Product Growth and Figure 2. Gross Domestic Product Growth Compared to Gross National Income per capita, 1993–2023 Other Country Groups (in percent) (in percent) 9000 25 10 8000 20 7000 15 8 6000 10 5000 5 6 4000 0 4 3000 -5 2000 -10 2 1000 -15 0 -20 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2010 - 2016 2017 - 2022 GNI per capita, Atlas method (US$) (LHS) TKM UMIC Real GDP growth, % change (RHS) LMIC ECA (excl. high income) Sources: World Bank (2024i); World Bank staff calculations; Sources: World Bank (2024i); World Bank staff calculations; and Turkmenistan’s national statistics. Turkmenistan’s nations statistics. Note: GNI = gross national income; GDP = gross domestic product; Note: TKM = Turkmenistan; ECA = Europe and Central Asia; LHS = left hand side; and RHS = right hand side. LMIC = lower-middle-income country; UMIC = upper-middle-income country. Figure 3. Structure of Gross Domestic Product, Figure 4. Employment, by Sector by Sector (in percent) (in percent) 100 % 100 % 36.4 38.0 41.8 44.1 46.8 51.1 51.1 48.6 49.4 35.6 35.7 37.4 37.6 38.0 38.5 39.5 38.6 39.5 15.3 16.0 8.7 8.3 6.9 6.0 5.8 5.7 5.4 5.7 5.7 50% 14.8 12.6 10.8 7.5 6.2 50% 12.7 12.7 12.3 12.6 12.2 12.5 12.8 12 12.3 9.5 7.9 39.0 35.4 32.3 32.3 31.7 27.9 29.2 32.9 33.0 43 43.3 43.4 43.8 44.0 43.3 42.3 43.7 42.5 9.3 10.5 11.1 11.0 10.8 11.5 11.8 10.9 11.3 0% 0% 2015 2016 2017 2018 2019 2020 2021 2022 2023 2015 2016 2017 2018 2019 2020 2021 2022 2023 Agriculture Construction Agriculture Construction Industry Services, total Industry Services, total Source: World Bank staff calculations, based on official data. 2. Recent Economic Developments 17 in 2022 and by an additional 2.3 percent in 2023, with gas exports to China accounting for 96 percent in 2022 and 80 percent of total gas exports in 2023. However, Turkmenistan reportedly increased export of electricity (by 25.3 percent in 2022), textile products (by 15.6 percent in 2022), and vegetables (by 31.2 percent in 2022 and 6.1 percent in 2023). Turkmenistan’s government is continuously investing in oil and gas, in order to modernize and expand the electricity and heat sector. About 75.2 percent of total energy supply in Turkmenistan comes from natural gas and 24.8 from oil. The energy sector is partly subsidized, with citizens receiving free electricity, heating, and gas up to a certain level of consumption until 2019, but from January 1, 2019 the government introduced payments for population on electricity and gas and is taking steps to reduce subsidies to curb domestic demand and increase exports. With natural gas pro- duction of 83.8 bcm in 2021, Turkmenistan ranks 35th in global gas production (IEA n.d.(b)). Gas production increased from 66 bcm in 2011 to 83.8 bcm in 2021, of which about 91 percent of total gas production is coming from Turkmengaz, the national gas company. Gas production has slightly reduced in recent years, to 82.3 bcm in 2022 and 80.6 in 2023. Natural gas in Turkmenistan is used for electricity generation and for final consumption. Turkmenistan reduced nat- ural gas production volume in physical units by 1.8 percent in 2022 and by 2 percent in 2023 (Figure 5), but increased electricity production from gas by 7.7 percent in 2022 and by 1.4 percent in 2023. In addition to electricity generation, natural gas is widely used for heating and cooking and is an important fuel for many industrial processes. The major nonenergy use for natural gas is the production of key chemicals used to manufacture fertilizers and plastics. With total CO2 emissions from fuel combustion at 95 million metric tons in 2022—or 0.28 percent of global emis- sions—Turkmenistan ranks 39th, globally, on CO2 emissions from combustion fuels4. Although burning natural gas emits considerably less CO2 (and other pollutants) than do coal or oil, it remains a significant source of emissions that must be reduced to meet international climate goals. Methane, the primary component of natural gas, is a potent greenhouse gas. Leaks from gas pipelines and processing facilities, as well as the intentional venting or flaring of un- wanted gas at production sites, mean that oil and gas extraction operations, themselves, are substantial contributors to climate change, even before any fuel is burned. The share of natural gas in emissions stood at 81 percent of total CO2 emissions from fuel combustion in 2022 and the rest 19 percent from oil (IEA n.d.(a)). Labor productivity (measured as value added per worker) is highest in industry (i.e., mining, manufacturing, and water and gas supply), followed by construction and services, while agriculture has the lowest labor productivity rates (Figure 6). The large gaps in Turkmenistan’s labor productivity between agriculture, industry, construction, and services suggest that a reallocation of labor from low (e.g., agriculture) to high productivity sectors (e.g., manufacturing and services) could accelerate growth. Total investment as a share of GDP has declined over time until 2022, but increased in 2023. Investment in fixed capital as a share of GDP in Turkmenistan fell from an exceptionally high level of 47 percent in 2015-16 to 17.5 percent of GDP in 2022 but increased to 18.3 percent in 2023 (Figure 7). State budget investment (central and local state budgets, which excludes investment of SOEs) appears to have decreased from 10.6 percent in 2015 to 1.3 percent of GDP in 2022 and one percent in 2023 as the fiscal position was consolidated. Turkmenistan’s investment as a share in GDP is on par with its regional ECA peers (excluding high-income countries), but lower than the UMIC average (Figure 8). The share of ‘nonbudget investment’ (which includes investment by SOEs and domestic private sector investment)5 as a share in GDP appears to have decreased from 36.7 percent in 2015 to 16.3 percent in 2022 and increased a bit to 17.3 percent in 2023, and foreign direct investment (FDI) decreased from 8.6 percent of GDP in 2015 to 2 percent in 2022 and 2023. The reasons for such dynamics in investment are unclear but likely partly reflect challenges in the business environment and limited business confidence. As most FDI in Turkmenistan is directed toward the country’s 4  International Energy Agency (Turkmenistan - Countries & Regions - IEA). 5  A breakdown of these data is not available; however, it is likely that this high level of ‘nonbudget’ investment is driven by SOEs’ investment into natural resource extraction. It seems that SOE investment exceeds private investment coming from the private sector, which is much lower compared to other countries of similar income levels. Domestic private sector is likely to be small, mostly represented by small firms investing in construction, construction materials, real estate, accommodation and public catering, trade, agriculture, other services. Turkmenistan I Economic Report I December 2024 18 Figure 5. Oil, Gas, and Electricity Production, Figure 6. Labor Productivity in Sectors of the 2007–2023 Economy, 2022 thousand U.S. dollars per employee 35 000 90 80 80 71,5 30 000 70 80 35 000 90 70 25 000 80 60 71,5 30 000 60 70 20 000 70 50 25 000 60 15 000 40 50 60 20 000 50 30 10 000 40 40 50 37,8 15 000 20 5 000 30 32,8 10 000 10 30 40 27,8 37,8 - 20 0 5 000 32,8 10 20 30 27,8 20072007 20112011 20122012 20132013 20142014 20152015 20162016 20172017 20182018 20192019 20202020 20212021 20222022 20232023 - 0 10 20 7,8 Oil (incl. condensate), thousand ton (LHS) Electricity (LHS), million kWh 0 10 7,8 Total Agriculture Industry Construction Services Oil condensate), (incl.gas, Natural thousand ton (LHS) bln m3 (RHS) economy Electricity (LHS), million kWh 0 Total Agriculture Industry Construction Services Natural gas, bln m3 (RHS) economy Source: State Statistics Committee, Government of Turkmenistan. Source: World Bank staff calculations, based on official data. Notes: bln = billion; LHS = left hand side; RHS = right hand side. Note: Calculated by official exchange rate of 3.5 manat per US$1.00. Figure 7. Dynamics of Total Investment, Budget Figure 8. Total Investment in Fixed Capital Compared to Investment, and Foreign Direct Investment, Income Peers, percent of gross domestic product percent of gross domestic product 45 35 40 UMIC 34 45 35 35 40 UMIC 34 30 29 35 LMIC 25 31 30 29 20 LMIC 25 31 15 25 20 TKM 46 10 15 25 5 TKM 46 10 25 0 ECA (exc. high income) 5 2015 2016 2017 2018 2019 2020 2021 2022 2023 25 0 25 ECA (exc. high income) 2015 2016 2017 2018 2019 2020 2021 2022 2023 25 Total investment 0 10 20 30 40 50 Foreign Direct Investment Total investment 0 2017-2022 20 10 2010-2016 30 40 50 State budget investment Foreign Direct Investment State budget investment 2017-2022 2010-2016 Source: World Bank staff calculations, based on official data. Source: World Bank staff calculations, based on official data. Notes: GDP = gross domestic product. General government investment Notes: UMIC = upper-middle-income country; LMIC = lower-middle-income includes state budget investment and does not include investment by country; TKM = Turkmenistan; ECA = Europe and Central Asia (excluding state-owned enterprises. high-income countries). 2. Recent Economic Developments 19 oil and gas sector6, because of falling and low hydrocarbon prices—even before the COVID-19 pandemic in 2014–19— foreign companies have been increasingly withdrawing from Turkmenistan’s oil, gas, and petrochemical sectors due to lower profit margins, the exchange rate, and bill payment problems. Strict controls on currency flows have limited the repatriation of profits or payments to suppliers. Delays in payments to foreign companies (not related to public and government-guaranteed debt repayments) also have become a common factor. The government has not developed measures to facilitate significant FDI outside the energy sector. The structure of investment also changed significantly, whereby the share of investment in the service sector in- creased at the expense of investment in industry. The share of investment in industry (including mining exploration) decreased from 49.3 percent in 2007 to 25.7 percent in 2022 but increased to 30.1 percent in 2023, while the share of services increased from 41.6 in 2007 to 65.9 percent in 2022 but reduced to 58.9 percent in 2023, respectively (Figure 9). Investment in agriculture as a share in GDP, increased from 1.7 percent in 2022 to 4.4 percent in 2023. While the share of investment in transport and communications declined from 12.9 percent in 2007 to 6 percent in 2022-23 —and that to wholesale and retail trade and catering is broadly unchanged—investment increased to “other services” (i.e., financial services, tourism and accommodation, art and culture, and social services, e.g., education, health, and social protec- tion) in recent years, among others. The dynamics in millions of manat (Figure 10) shows the increase in investment in industry and agriculture in 2023 with relative adjustment of investment in services. As total investment in fixed capital in Turkmenistan as a share of GDP has declined since 2015, the incremental cap- ital output ratio (ICOR) has fallen. A higher ICOR7 in Turkmenistan’s economy in 2010–16 suggests that the economy was employing a significant amount of capital for relatively modest gains in output, suggesting lower efficiency of in- vestment in that period. The lower ICOR in 2017–2023 (Figure 11) suggests that the country is becoming more efficient in using its investment for production. At a sectoral level, the ICOR in most recent years (2021–23) has been lower in agriculture and construction but much higher in the service and mining industry sectors (Figure 12). This points to the economic value of increasing investment in sectors with a low ICOR, while in other sectors, growth is likely to be constrained by other factors. The agriculture sector has received only on average 4.6 percent of total investment in 2017–2023, even though it is the sector with highest return on investment in Turkmenistan’s economy (Figure 12). To achieve economic gains, investment needs to flow to viable economic sectors and, therefore, may call for complemen- tary reforms. The public investment program is oriented to support an import substitution strategy. Turkemnistan’s public invest- ment program has a significant concentration of projects in industry, especially heavy industry, including chemical and petrochemicals, as well as in services. International experience demonstrates the relative inefficiency of investments and economic performance under import substitution policies (Nourzad 2008). For example, manufacturing export growth in countries with strong export orientation were four times higher and, with efficiency of investment, two times higher than in countries with strong import substitution. 6  According to UNCTAD's World Investment Report 2023, FDI inflows to Turkmenistan decreased from US$ 2.1 billion in 2017 to $1.8 billion in 2019, $1.3 billion in 2021 and $0.9 billion in 2022. At the end of 2022, the total stock of FDI was estimated at US$ 41.53 billion, representing around 53 percent of the country's GDP. Oil and gas, agriculture, construction, and recently manufacturing are the main investment sectors. China, Russia, Kazakhstan, and Uzbekistan are the main investors in the country. China has been actively investing in Turkmenistan across various sectors, but mostly to oil and gas sector co-financing pipelines and refineries, and it remains the largest gas buyer in the country. For instance, during the first phase of the Galkynysh field’s development, China spent more than $8 billion (BBC: China's growing demand for Turkmenistan's gas, 20 November 2014). In 2020, China’s FDI in Turkmenistan USD was $336 million. Areas of focus include aligning the Belt and Road Initiative with Turkmenistan’s development strategy, promoting digital economy, cross-border e-commerce, and advancing agricultural and scientific and technical cooperation. 7  ICOR helps assess the productivity of investments, showing how much extra capital is needed to produce one more unit of output or income in an economy. Turkmenistan I Economic Report I December 2024 20 Figure 9. Structure of Investment by Figure 10. Dynamics of Investment by Sector of the Economy Sector of the Economy percent of total millions of manat 100% 25000 100% 25000 20000 75% 20000 75% 15000 50% 15000 50% 10000 25% 10000 5000 25% 5000 0% 0 2007 2017 2022 2023 2007 2017 2022 2023 0% 0 2007 2017 2022 2023 2007 2017 2022 2023 Industry (incl. mining exploration) Agriculture Industry (incl. mining exploration) Agriculture Construction Transport and Construction Transport and Industry (incl. mining exploration) Agriculture Industry (incl. mining exploration) Agriculture Retail trade and public catering communications Retail trade and public catering communications Construction Transport and Construction Transport and Other services Wholesale trade communications Other services Wholesale trade communications Retail trade and public catering Retail trade and public catering Other services Wholesale trade Other services Wholesale trade Sources: World Bank staff calculations, based on official data Figure 11. Dynamics of Incremental Capital Figure 12. Incremental Capital Output Ratio Output Ratios by Sector of the Economy 8,0 90 9 7,6 87,8 8,0 7,5 8,3 7,2 90 80 87,8 9 8 7,0 7,6 7,5 8,3 7,2 6,6 80 70 8 7 7,0 6,0 6,6 70 60 7 6 6,0 5,0 4,7 60 50 6 5 4,5 4,5 5,0 4,7 4,0 50 40 5 4 4,0 4,0 4,5 4,5 3,8 3,6 4,0 3,7 3,3 4,0 4,0 3,8 40 30 3,3 31,9 3,2 4 3 3,0 3,1 2,9 3,7 3,3 2,7 3,6 2,8 3,2 3,1 2,9 30 20 3,3 31,92,6 3 2 3,0 2,4 2,7 2,0 2,8 2,6 20 10 2,4 7,7 2 1 0,8 0,6 2,0 1,0 10 0 0,8 7,7 1 0 0,6 2020 2021 2022 2023e 1,0 0 0 0,0 2020 2021 2022 2023e 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Construction Agriculture Industry Services 0,0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Construction Agriculture Industry Services Source: World Bank staff calculations, based on official data. Source: World Bank staff calculations, based on official data. Note: Incremental Capital Output Ratio (ICOR) is the ratio of the share Note: Incremental Capital Output Ratio (ICOR) is the ratio of the share of investments in gross domestic product to gross domestic product of investments in gross domestic product to gross domestic product growth rate [ICOR’ = 100*(Nominal Investment/Nominal Value Added)t-1/ growth rate [ICOR’ = 100*(Nominal Investment/Nominal Value Added)t-1/ Real growth of the Value Added.t The lower an ICOR, the more efficient Real growth of the Value Added.t The lower an ICOR, the more efficient investments. investments. 2. Recent Economic Developments 21 2.1.1 Agriculture While less significant as a share of economic output, agriculture is a mainstay of employment. While the agricultural sector’s share in GDP was only 11 percent in 2022 and 11.3 percent in 2023, its share in total employment was about 42 percent, although this employment is of relatively low value addition (Box 1). Of total agricultural output in 2023, the share of crop production was 50.1 percent and the rest, livestock. Turkmenistan is a largely desert country with only 4 percent of land available for arable use. Most agricultural land is naturally of low fertility and requires irrigation. The most significant crops by area planted are grains (i.e., barley, rice, and maize) and cotton. Turkmenistan is among the top 10 producers of cotton in the world, with 1.2 million tons of raw cotton produced in 2022 and 0.7 million tons in 2023. Total grain production was 1.7 million tons in 2022 and 1.5 million tons in 2023. Production of vegetables has been increasing over time, rising from 1 million tons in 2021 to 1.2 million tons in 2022 and 1.3 million tons in 2023. Private farmers grow most of Turkmenistan’s fruits and vegetables; however, all production of grain and cotton remains under state control. Box 1. Agriculture Sector: Governance and Land Rights In the post-Soviet period, many large collective farms in Turkmenistan were transferred to a new category of about 5,000 such private peasant farms (daýhanlar or “daýhan” farms) operating on 81,000 hectares (about 5 percent of total cultivated land area). Most former collective and state farms were transformed into associations of leaseholders. So- called peasant associations (daýhan birlişigi) were organized by presidential decree in place of the former collective and state farms, and each association was instructed to parcel out its fields to individual leaseholders (typically, heads of families). The average leasehold within a peasant association is 4 hectares, whereas a dayhan farm averages 16 hectares. While Turkmenistan’s 1992 Constitution nominally recognizes private land ownership, the Land Code stipulates that privately owned land is nontransferable, which differs from the accepted notion in market economies, where ownership implies transferability of property rights. In practical terms, all land in Turkmenistan is controlled by the state, and the state allocates land use rights to leaseholders as well as daýhan farmers. The allocation of land use rights typically involves assignment of annual production targets in cotton and grains. Leaseholders receive land use rights from the state through the intermediation of the local peasant association (the lease term is usually 5–10 years). The lease is nontransferable; that is, if a family cannot farm, the leasehold reverts to the association for reassignment. Daýhan farmers receive land directly from the state. Initially, the land is granted in use rights, but once the farmer has established a record of successful farming (within two to three years), the land is transferred into "private ownership." On the other hand, if the farmer fails to achieve satisfactory results, the land may be confiscated by the state, even if it has the status of private ownership. Source: World Bank staff elaboration. 2.1.2 Industry Turkmenistan’s industry depends heavily on the production and export of natural gas, oil, petrochemicals and, to a lesser degree, cotton fiber and textiles. While the share of industry in GDP was 33 percent in 2023 (excluding construction), its share in total employment was only 12.3 percent. Turkmenistan’s government is continuously investing in oil and gas to modernize and expand the electricity and heat sector. The energy sector is almost fully subsidized, with citizens receiving free electricity, heat, and gas up to a certain level of consumption. Since independence, Turkmenistan has invested in 70 plants and factories for production of cotton yarn, textiles, garments, footwear, stockings and knitted fabric. Four cement plants operate in Turkmenistan, and plans have been announced to construct three more. Turkmenistan produces petrochemicals, such as fertilizers (e.g., urea, ammonia), polypropylene, and polyethylene. As nonhydrocarbon chemicals, it produces potash fertilizer, bromine, and iodine. In January 2023 Turkmenistan discovered iron oxide deposits Turkmenistan I Economic Report I December 2024 22 near Çagyl, Türkmenbaşy District, and Balkan Province. Industry production has been increasing over time, whereby electricity production (in billions of kilowatt hours) increased from 30.24 in 2021 to 32.58 in 2022 and 33.04 in 2023; mineral fertilizers (in thousands of tons) from 760.8 in 2021 to 816.8 in 2022 and 768 in 2023; iodine (in tons) from 745.7 in 2021 to 763.2 in 2022 and 748.6 in 2023; cement in (millions of tons) from 2.0 in 2021 to 2.89 in 2022 and 2.91 in 2023; cotton fiber (in thousands of tons) from 394.5 in 2021 to 394.9 in 2022 and 395.7 in 2023; cotton yarn (in thousands of tons) from 120.6 in 2021 to 121.5 in 2022 and 115.9 in 2023; fabric (in millions of square meters) from 214.3 in 2021 to 228 in 2022 and 242.1 in 2023; and footwear (in millions of pairs) from 6.9 in 2021 to 7.1 in 2022 and 6.7 in 2023. 2.1.3 Services The service sector is the largest sector in Turkmenistan’s economy. It includes wholesale and retail trade, transport and storage, information and communications, accommodation and catering, financial and insurance, professional, technical and administrative support, real estate, social services (i.e., education health, social provision), art and entertainment, as well as other services. The share of the service sector in GDP was 49.4 percent in 2023 and, in total employment, 39.5 percent. Service production has been increasing over time recently, while transportation services by all types of transport increased (in millions of tons) from 551.4 in 2021 to 585.1 in 2023; passenger transportation by all means of transport (in millions of people) increased from 977.4 in 2021 to 1,005 in 2023; retail trade turnover (in billions of manats) increased from 132 in 2021 to 140.3 in 2023; and number of internet subscribers (in thousands of units) increased from 2,919.6 in 2021 to 3,188.4 in 2023. The number of cellular subscribers (in thousands of units) increased from 6,254.6 in 2021 to 6,408.7 in 2023. The CPI has declined from its peak of 21.1 percent at the end of 2021 to 1.4 percent in the end of 2023. Inflation was trending up until 2022: official annual CPI accelerated from 6.5 percent in 2019 to 8.9 percent in 2020 and 21.1 percent in 2021 (Figure 13)—reflecting rising costs, including due to global supply chain disruptions during the COVID-19 pandemic— and eased domestic credit policy. Inflation fell to 3 percent in 2022 and 1.4 percent in 2023 (Fitch Ratings 2024) due to base effects—easing supply chain disruptions and international food prices—and greater domestic food production. Figure 13. Consumer Price Index, 2012–2023 Percent 25 21,1 20 15 10 10,4 7,2 8,9 7,8 6,2 6,5 5 6,0 4,4 3,0 4,0 1,4 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Sources: State Statistics Committee, Government of Turkmenistan, for 2012–22 and for 2023 data; Fitch Ratings (2024). 2. Recent Economic Developments 23 2.2 External Sector Turkmenistan is the world’s seventh largest (IEA n.d.(b)) exporter of natural gas as of 2021. Out of total gas exports of US$9.4 billion in 2022, 96 percent went to China, with the rest split between Azerbaijan, Kazakhstan, and Uzbekistan. Turkmenistan aims to diversify its natural gas export destinations to Iraq, Pakistan, and Turkiye; so far, it has resumed exports to the Islamic Republic of Iran in 2023, as well as signed contracts to supply Iraq. Turkmenistan’s trade openness is much lower than expected, based on the level of economic development, and it has deteriorated rapidly over the past decade. Trade openness, as measured by the ratio of trade in goods and services to GDP, fell from 92 percent, on average, in 2011-2014 to 51 percent in 2015-2019 and 39 percent in 2022. This is lower than the UMIC average of about 50 percent of GDP in 2022. Based on the average over 2020 to 2022, 78 percent of total export value represented natural gas, with most of the remainder as oil and oil products. Fertilizer exports rose from US$2.1 million in 2007 to US$241.7 million in 2022 and US$241.2 in 2023, while cotton-fiber exports declined from US$560 million in 2014 to US$38.6 million in 2019 due to the U.S. ban on Turkmen cotton amid concerns about human rights, as well as domestic textile development in Turkmenistan. Electricity exports (in billions of kilowatt hours) increased from 5.5 in 2020 to 7.5 in 2021, 9.4 in 2022 and 9.3 in 2023, mainly to Afghanistan, the Kyrgyz Republic, the Islamic Republic of Iran, and Uzbekistan. Turkmenistan’s main export destinations are Afghanistan, China, the Islamic Republic of Iran, Italy, Russia, Turkiye, and Uzbekistan. Among imports, in 2023, the major categories were machinery and equipment (29.4 percent), vehicles (11.5 percent), base metals (14 percent), chemicals (12.6 percent), and plastic and rubber (4.7 percent). Import trends have been affected by import substitution efforts. Turkmenistan’s main sources of imports are China, Germany, Kazakhstan, Russia, Turkiye, the United Arab Emirates, and the United States. The share of China in total Turkmenistan’s export increased from 0.3 percent in 2007 to 52 percent in 2016-2021 and to 58 percent in 2022 and 58.7 percent in 2023, while the share of imports from China declined from 15 percent in 2007 to 9.8 percent in 2022 and 11 percent in 2023. The share of China in total trade (export plus import) of Turkmenistan was 41.3 percent in 2023. Turkmenistan’s natural gas is transported to China via three pipeline lines with a total annual capacity of 55 bn cubic meters. These pipelines to China allowed Turkmenistan to significantly decrease its previous dependence on Russia; previously, about 70 percent of Turkmenistan’s gas exports transited through Russian pipelines. A more detailed analysis of Turkenistan’s export and import structure and flows is presented in Annex 2. The drastic changes in the trade balance after 2017 was driven by the export growth. Weaknesses in the external sector emerged in recent years, as Turkmenistan was impacted by adverse external shocks that had lasting effects. These factors included lower world oil and natural gas prices in 2012–17, the COVID-19 pandemic beginning in 2020, and slower economic activity among trading partners. Turkmenistan’s hydrocarbon production slowed after 2014 (Figure 14), causing lower exports and trade balance (Figure 15). Turkmenistan’s trade balance fell deeply into deficit in 2016 due to relatively low oil and gas prices and a rising import bill (Figure 16). Since 2019, it has returned to surplus, with a balance of 7 percent of GDP in 2022 and 4.8 percent of GDP in 2023. This was achieved due to an expansion of exports (with export values 68 percent higher in 2023 than in 2017) and lower imports, with import values 26 percent lower in 2023 than in 2017. Falling exports in 2014-16 and 2019-20 prompted the government to reduce imports through an import substitution policy, foreign exchange restrictions, and reductions in public investment. Introduction in 2020 of a 100 percent surrender requirement for SOE export proceeds added further administrative restrictions. 8 These measures together, contributed to a fall in imports by about 20 percent in 2016–20. Increased exports in 2022 boosted the trade balance surplus. In 2022, imports rose by 17.8 percent, while exports rose by 42.7 percent, with earnings mainly from exports of gas to China and additional gas exports to Azerbaijan and the Islamic Republic of Iran under existing gas swap agreements. The slight increase in imports in 2020–22 reflected some relaxation of import controls since the pandemic, along with increased energy prices and exports. The reduced exports and increased imports in 2023 have reduced trade balance surplus from 12.4 percent of GDP in 2022 to 9.1 percent of GDP in 2023. Total external debt was 28.5 percent of GDP in 2020. 8  These receipts are accumulated in the Reserve Currency Fund, established in May 2020, to be used for essential imports of food, materials, and machinery for priority projects. The account of the fund is managed by the CBT. Turkmenistan I Economic Report I December 2024 24 Official reserves remained high and stable. Despite the pandemic, the CBT’s net foreign assets are more than adequate with respect to imports, at US$28 billion at end-2017; US$33 billion—or 39 months of imports—at end-2019; 57 percent of GDP at end-2020; and 51.5 percent of GDP, or 48 months of imports, at end-2021 (Fitch Ratings 2021, 2022, and 2024). Figure 14. Trends in Main Commodity Exports Figure 15. Dynamic of International Trade millions of U.S. dollars millions of U.S. dollars 14 000 25 000 12 000 20 000 10 000 15 000 8 000 10 000 6 000 5 000 4 000 - 2 000 -5 000 - -10 000 2007 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Natural gas Oil products Oil Cotton fibre Electricity Export Import Trade balance Sources: Turkmenistan’s national statistics; World Bank staff Source: World Bank staff calculations, based on official data. calculations; and FRED (2024). Figure 16. Dynamics of Trade Balance and Current Account Balance, percent of gross domestic product Percent of GDP 20 15 10 5 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 -5 -10 -15 -20 -25 Source: Turkmenistan national statistics (trade balance) and IMF estimates, 2024 (current account balance). 2. Recent Economic Developments 25 2.3 Fiscal Sector Fiscal policy has been moderately contractionary in recent years, with the authorities maintaining a budget surplus and prioritizing social expenditure. Since 2014, faced with limited options to significantly raise budget revenue in the short term, the Turkmen government has undertaken a fiscal adjustment that eliminated the fiscal deficit by 2017 and increased the budget surplus9 to 3.2 percent of GDP in 2022 and 1.3 percent of GDP in 2023 (Figure 17) from 0.6 percent of GDP in 2021 (Figure 18). The government relied on expenditure consolidation, in particular cutting public investment as a share of GDP in 2022-23. Given reduced global prices on hydrocarbons in 2014–18, total budget revenues as a share in GDP reduced from 17.9 percent in 2017 to 13.6 percent in 2020, but then increased to 15.7 percent in 2022 and 15 percent in 2023 due to revived gas exports to China and additional exports to Azerbaijan and the Islamic Republic of Iran under existing gas swap agreements. While the state budget does not capture off-budget expenditure, which is thought to be considerable, general government expenditures as a share in GDP fell from 17.9 percent in 2017 to 12.5 percent in 2022 and 14.1 percent in 2023, driven by a fall in state budget investment as a share in GDP from 7.7 percent in 2015 to 1.1 percent in 2022 and 1.0 percent in 2023. The government has borrowed externally, mostly for infrastructure and healthcare projects. It has been able to repay public debt since 2018; as a result, the general government debt (domestic and external) has reduced from 24 percent of GDP in 2017 to 5.8 percent of GDP in 2022 and 4.7 percent of GDP in 2023 (IMF, 2024). State budget revenue rose from 13.9 percent of GDP in 2021 to 15.7 percent of GDP in 2022 and 15 percent of GDP in 2023, due to larger income and profit taxes from energy exports and from non-energy revenues. Revenue receipts from value-added tax, profit tax, subsoil resource use taxes, and personal income taxes increased in 2022-23 compared to 2021 as economic activity increased in the energy (e.g. natural gas, oil and oil-products, electricity) and non-energy sectors (Figure 19). Additional transfers from the state gas company (Turkmengas) and increases in excise taxes on alcohol and tobacco and customs duties supported budget revenues since 2020–21 amidst lower hydrocarbon proceeds and weaker domestic demand. The government maintains a sovereign wealth fund, referred to as the Stabilization and Savings Fund (SSF), established in 2008. SSF funds are saved in domestic assets and used for financing large extra-budgetary projects. Besides the SSF, there is another extra-budget fund managed by the CBT, the Foreign Exchange Reserve Fund for oil and gas revenues.10 Authorities have established a simple rule for sharing proceeds. Around one-third of hydrocarbon export revenues are saved in the Foreign Exchange Reserve Fund. 2.4 Financial and Banking Sector The financial sector serves primarily as a tool for the government to allocate credit to SOEs at concessional rates. The banking system includes nine commercial banks as of 2023, of which four are state banks (State Bank for Foreign Economic Affairs of Turkmenistan; Dayhanbank; Turkmenistan State Commercial Bank; and State Development Bank) and five are joint-stock banks (Turkmenbasy, Halkbank, Senagat, Turkmen-Turk, and Rysgal) with significant state shares. There also are five branches of foreign banks (Turkmen-Turkish Joint-Stock Commercial Bank, National Bank of Pakistan, Deutsche Bank, Commerzbank, and Bank Saderat Iran). Most credit is allocated to SOEs at low interest rates, especially in priority import substitution, export promotion, and social sectors, and is funded to a significant degree by central bank financing. Banks appear well capitalized with the risk-weighted capital adequacy ratio at 29.7 percent in 2022 (Figure 20), although loans to SOEs are assigned zero-risk weight. About a quarter of loans and deposits are denominated in foreign exchange, although the net open foreign exchange position appears small. While the financial sector remains highly dollarized, the degree of dollarization has reduced over time. Credit to the economy 9  Although there is no reported evidence, the existence of quasi-fiscal expenditures is rather likely, given the size of the public sector and the need for its subsidization. 10  There is no available information about the value of assets held in these funds nor how they are governed. Turkmenistan I Economic Report I December 2024 26 Figure 17. Trends in Budget Balance Figure 18. Trends in Budget Expenditures and Public percent of gross domestic product and Publicly Guaranteed Debt percent of gross domestic product 20 30 24,2 25 22,0 15 22,6 20 18,3 17,9 17,9 10 17,3 14,1 13,7 15,2 14,1 15 13,6 13,4 12,5 15,2 9,6 12,4 12,1 13,1 5 9,0 12,0 11,8 11,4 10 10,7 5,8 0,1 3,2 7,7 0,2 4,7 0,1 0,6 0,9 5 5,1 2,7 0 0,0 1,8 1,2 1,3 1,6 1,1 1,0 -0,7 -1,3 -5 2015 2016 2017 2018 2019 2020 2021 2022 2023 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total expenditure Capital expenditure Total revenue Total expenditure Budget balance Current expenditure Public debt Source: World Bank staff calculations, based on official data. Source: Turkmenistan national statistics; IMF (2024) for public and publicly guaranteed debt; World Bank staff calculations as shares of official gross domestic product. Figure 19. Trends in Budget Revenue percent of gross domestic product 20 Other taxes & proceeds Pension insurance mandatory 15 state contributions Excise taxes 10 VAT Personal income tax 5 Sub-soil resource use taxes Profit taxes (CIT) 0 Total revenue, % of GDP 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: World Bank staff calculations, based on official data. Note: VAT = value added tax; CIT = corporate income tax. Figure 20. Trends in Banking Capital and Figure 21. Banking Sector Assets, Liabilities, Credits, Foreign Currency Deposits and Deposits, percent of gross domestic product 50 90 45 80 40 35 70 30 60 25 50 20 40 15 30 10 5 20 0 10 2015 2016 2017 2018 2019 2020 2021 2022 0 2015 2016 2017 2018 2019 2020 2021 2022 Total regulatory capital to Risk-weighted asses, % Banking sector assets Banking sector liabilities Foreign currency deposits, % of total deposits Total banking credit Total banking deposits Source: World Bank staff calculations, based on official data. Source: World Bank staff calculations, based on official data. 2. Recent Economic Developments 27 has increased from 37 percent of GDP in 2015 to 55.7 percent of GDP in 2022 (Figure 21), and it grew, on average, by 9.4 percent per year in nominal terms in 2016–22. Annual credit growth slowed down in 2018 and 2021 but increased in 2020 (to support enterprises during the COVID-19 pandemic) and in 2022 (Figure 22). The authorities introduced a loan moratorium to support borrowers hit by the pandemic in 2020, while tightening credit policy. The moratorium has covered around 40 percent of the bank credit portfolio and it ended in early 2024. The banking sector of Turkmenistan maintained lending growth in 2021 and 2022 in line with its economic expansion. Loans to firms in the service sector in 2022 accounted for 57.6 percent of total loans, industry 40.4 percent, agriculture 10.6 percent, and construction 1.6 percent of total. Access to credit by foreign investors is limited. Reported nonperforming loans remain considerably low—below one percent—but the share of loans overdue by 20 to 50 days is significantly higher, at 9.7 percent in 2021 (IMF 2021). Banking sector assets continued to grow to 2020; however, they have not kept up with GDP growth in recent years, since the share of GDP in banking sector assets and deposits fell in 2021–22 (Figure 23). The ratio of liquid assets to total assets also reduced in 2021 from 2020, but increased again in 2022, although ratio of loans to deposits continued to increase in 2021–22 (Figure 23). Several types of national plastic cards are used in Turkmenistan, including Milli Kart, Altyn Asyr, and Turkmen Kart. Turkmen banks are able to issue Visa, MasterCard, and Maestro cards that are supported by international payment systems, and Turkmen citizens are able to make noncash payments and withdraw funds from ATMs in foreign countries. The nonbanking financial sector and capital markets are underdeveloped. The nonbanking financial sector is represented by the insurance sector, which comprises four insurance companies that are regulated by the state insurance supervision authority, represented by the Ministry of Finance and Economy of Turkmenistan. One state insurance organization, Turkmengosstrakh, and three nongovernmental companies operate in Turkmenistan. Turkmenistan’s capital market is underdeveloped, and the Ashgabat Stock Exchange remains at an early stage of development. 2.5 Monetary and Exchange Rate Developments Most bank lending went to SOEs in the government’s priority sectors, with some credit provided to private firms engaged in import substitution or export promotion. The main instrument of monetary policy is credit targeting. The CBT provides direct lending at subsidized interest rates. Credit is allocated mostly to SOEs—especially to those directly implementing the government’s import substitution and export promotion programs—which continue to take the dominant share of the loan portfolio. Phasing out direct concessional lending would support external adjustment while promoting market-oriented financial intermediation. Lending by the CBT to banks to meet the country’s development objectives has contributed to higher inflation compared to other countries in the region, built pressure on exchange rates, and exacerbated the real exchange rate misalignment, adversely affecting competitiveness. A dual exchange rate system contributed to an unfavorable business and investment climate. Turkmenistan operates a dual exchange rate system. There is a noticeable difference between the official and parallel market exchange rates. The Turkmen manat exchange rate against the U.S. dollar is fixed and has been adjusted only once in the past 10 years, from manat 2.85 to manat 3.5 in January 2015. Profit repatriation is challenging and currency conversion is difficult (e.g., to repay loans, including to international financial institutions). Access to the official exchange rate is severely restricted by the CBT, usually to large and medium-size companies that have export revenue. Currency restrictions result in delays of three to six months in conversion. The government has “encouraged” foreign businesses to focus on export-oriented areas of business that can service their borrowing from forex revenues. Turkmenistan I Economic Report I December 2024 28 Figure 22. Dynamics in Banking Assets and Credits, Annual Change in percent 25 20 15 10 Total banking credit, annual change, % 5 0 Banking sector assets, 2015 2016 2017 2018 2019 2020 2021 annual change, % Source: World Bank staff calculations, based on official data. Figure 23. Banking Sector Liquidity Ratios 2,5 100 90 2,0 80 70 1,5 60 50 1,0 40 Loans to Deposits Ratio 30 0,5 20 Manat loans to Manat 10 deposits Ratio 0,0 0 Liquid assets to total 2015 2016 2017 2018 2019 2020 2021 2022 assets, % (RHS) Source: Turkmenistan national statistics; IMF (2024); World Bank staff calculations as shares of official gross domestic product. Figure 24. Growth in Economy, Population, and Employment, 2010–22 10 9,2 8 6,2 6 GDP growth, % 4 Working age population growth*, % 1,8 1,5 2 1,2 1,3 0,5 0,6 Employment growth*, % 0 2010-2016 2017-2022 Total population growth**, % Sources: State Statistics Committee, Government of Turkmenistan. * International Labour Organization modeled estimates; ** United Nations population data. 2. Recent Economic Developments 29 2.6 Labor Markets Despite high GDP growth, job creation for the youth remains a challenge, where the unemployment rate is much higher than the national rate. Turkmenistan population11 growth (i.e., 1.5 percent a year, on average, over the last five years) has exceeded average employment growth (1.2 percent) for the entire period of 2010–22 (Figure 24). According to estimates from the International Labour Organization, while the national unemployment rate has been stable and increased marginally from 4.0 percent in 2015–19 to 4.4 percent in 2020–22 (due to the COVID-19 pandemic in 2020-21), youth unemployment was 10.6 percent in 2022. The country’s economic structure, which lacks diversity and is heavily reliant on capital-intensive sectors such as hydrocarbons and chemicals, complicates the creation of high-quality jobs. These sectors often employ foreign specialists due to a local skills shortage, underscoring the need for training programs. Most employment is consolidated in agriculture and services, rather than industry and construction (Figure 25). Employment has increased from 1.9 million in 2015 to 2 million in 2022,12 or by 5.2 percent, while working age population remained broadly unchanged, meaning that job creation has been in line with or has exceeded the growth of the working age population (Figure 24). According to modeled data from the International Labour Organization (ILO), the ratio of employed population to working age population has increased from 51.2 percent on average in 2011–16 to 54.2 percent in 2017–22. The share of employment in services increased at the expense of slightly reduced share of construction, while the shares of employment in agriculture and industry were broadly unchanged in 2015-2023. The share of value addition in services and agriculture, however, increased while the shares of industry and construction were reduced. The share of employment in agriculture has broasdly unchanged at 43 percent in 2015 and 43.7 in 2022 and 42.5 percent in 2023, and share of employment in industry (excluding construction) was 12.7 percent in 2015 and 12.4 percent in 2022 and 12.3 percent in 2023 (Figure 4, Figure 25). At the same time as the share of employment in services increased from 35.6 percent in 2015 to 39.5 percent in 2023, the share in construction reduced respectively. This means that most labor productivity growth has occurred within-sectors improvements rather than through reallocations across the sectors, indicating limited labor movement across sectors and minimal structural transformation in recent years. Service sector employment is dominated by retail and wholesale trade (8.8 percent), followed by transport, storage, and communications (5.7 percent), real estate (1.8 percent), and accommodation and catering (1.2 percent of total). “Other services” consists of education (8.7 percent of total employment), health and social services (3.7 percent), among others. Within the service sector, all subsectors rose in shares of employment (wholesale and retail trade, real estate, accommodation, and public catering), but the transport and communications sector share remained stagnat. Despite the government’s efforts to support development and employment in manufacturing, including chemicals, construction materials, food processing, and pharmaceuticals, the share of industrial employment changed only marginally. About 25 percent of total workers are employed in the state sector; approximately 50 percent in the nonstate sector; 23 percent in mixed public-private enterprises, public associations, and cooperatives; and about 2 percent in foreign-owned enterprises, including joint ventures. About 77,500 individuals were employed by independent entrepreneurs, including self-employment (GovTM 2020, pp 146, 219–301). 2.7 State-Owned Enterprises and Private Sector Development Turkmenistan lags its neighbors and income peers in the creation of enterprises relative to its working age population. About 0.4 newly registered firms13 each year per 1000 people of working age population have been registered 11 Total population reached 7 million, according to the official recent population census of 2023. The latest United Nations (UN) data refer to 6.4 million in 2022, prior to the census. 12 National statistics do not publish the number of employed in the economy (World Bank staff calculations, based on modeled data from the International Labour Organization). 13 In calculations on figures 26 and 27 and in comparing Turkmenistan with other countries only firms registered as legal entities have been considered, and “individual entrepreneurs without legal entity status” (IE) were excluded. According to Turkmenistan’s legislation, IEs have right to hire employees and create jobs, and the number of IEs is increasing in Turkmenistan as their income is taxed at low rate of 2 percent. Turkmenistan I Economic Report I December 2024 30 Figure 25. Employment Structure by Sub-Sector, 2022 Agriculture Agriculture Manufacturing Manufacturing Other services Other services Construction Construction Accommodation & Accommodation & catering catering Agriculture Agriculture Transport Transport Real estate Real estate Other Other services services Mining Mining Trade Trade Electricity, gas, Electricity, water supply, gas, water waste mgt supply, waste mgt Wholesale & Wholesale retail trade & retail trade Manufacture Transport, storage, Transport, storage, communications communications Manufacture Professional, scientific, Professional, scientific, technical technical Source: Statistical Yearbook of Turkmenistan, 2023. Figure 26. Density of New Firms, 2019 Figure 27. Density of Total Businesses, 2022 7 7 70 65,1 64 6 6 70 65,1 64 6 6 60 60 5 5 4 4 50 50 2,9 2,9 2,8 2,8 2,7 2,7 2,5 2,5 3 3 2,3 2,3 2,2 2,2 37,3 40 37,3 40 2 2 1 0,4 0,4 30 26,1 26,1 1 30 23,1 23,1 21,7 21,7 0 0 20 20 12,8 12,8 income Federation Kazakhstan Uzbekistan income) Malaysia Azerbaijan Turkmenistan middle income Russian Federation Kazakhstan Uzbekistan high income) Malaysia Azerbaijan Turkmenistan Asia Central Asia 9,7 9,7 10 6,2 6,2 4,6 4,6 3,9 10 4,6 4,6 3,9 1,6 & Central 1,6 1,3 1,3 Upper middle (excluding high 0 0 Russian Europe & (excluding China Malaysia Kazakhstan Republic Turkiye Azerbaijan Uzbekistan Iran Arabia Turkmenistan Tajikistan Japan India Pakistan China Malaysia Kazakhstan Kyrgyz Republic Turkiye Azerbaijan Uzbekistan Iran Saudi Arabia Turkmenistan Tajikistan Japan India Pakistan Upper Europe Saudi Kyrgyz Source: World Bank staff calculations, based on official data. Source: World Bank staff calculations, based on official data. Note: New firm density is the ratio of the number of newly Note: Total business density is the ratio of the number of registered registered firms per 1,000 people at ages 15 to 64. firms per 1,000 people at ages 15 to 64. 2. Recent Economic Developments 31 in Turkmenistan, compared to more than two firms in neighboring countries (Figure 26). In total business density, Turkmenistan, with 4.6 firms per 1000 people of working age, is above India and Pakistan, but below Azerbaijan, the Islamic Republic of Iran, the Kyrgyz Republic, Turkey, and Uzbekistan (Figure 27). Since initiating market-oriented reforms, Turkmenistan is taking steps toward a more market-friendly economy. Many sectors are dominated by SOEs, however, with little competition and lack of a systematic official record of these, when compared to relevant peers. The state continues to play a dominant role in the economy through state ownership of key enterprises and banks, planning and coordination, and import substitution and export promotion policies, while the private sector is developing gradually.14 Recognizing the need to reduce the state’s economic dominance, the government aims to support growth through private sector development, with changes in the legal- regulatory framework, improvements in digital infrastructure, SOE privatization, public-private partnerships, and expansion of economic zones. SOEs are found across various sectors, with a notable presence in competitive activities; that is, sectors where private sector operations are viable.15 This makes doubtful the necessity of state involvement in these areas, such as the manufacturing, construction, wholesale and retail services; and professional, scientific, and technical services; among others. The extensive presence of SOEs in sectors suitable for private participation highlights the critical need to uphold competitive neutrality.16 Many SOEs are monopolies or the main producers of goods and services in their sectors. This is particularly the case in electricity production, mining, manufacturing of motor vehicles, transport, and telecommunications. Turkmenistan’s SOE framework lacks clear guidelines for separating commercial and public service activities; furthermore, there is no obligation for a specific rate of return for all SOEs. SOEs receive financial benefits through tax exemptions, ad hoc subsidies, and below-cost input prices. Turkmenistan, however, lacks a systematic public and official record of SOEs. Key information, such as aggregate financial data and the overall economic impact of SOEs, is severely limited and is not publicly accessible. While the share of SOEs in total output of the economy is decreasing, most enterprises remain state owned. Out of the 18,552 registered enterprises (as of August 2023), the share of enterprises that are classified as SOEs reduced from 62.9 percent in 2019 to 54 percent in 2022, but increased to 59.2 percent in 2023, and the share of small- and medium- size (SME) enterprises17 increased from 37.1 percent in 2019 to 46 percent in 2022, but reduced to 40.8 percent in 2023.18 The government has made efforts to expand business activity in new subsectors of the economy, including downstream petrochemical production. The share of SOEs in total output production (sales) was 54 percent in 2022; that is, lower than in 2020 (60 percent) and in 2021 (56.8 percent). The share of nonstate firms was 46 percent in 2022 (Figure 28). Despite the government privatization program, the process has yet to achieve the desired results. The 2014 Law on the Denationalization and Privatization of State Property and the State Program for Privatization of Enterprises and Objects of State Property in Turkmenistan for 2013-2016 have guided privatization in the past, with a target to increase the private sector share of GDP to 70 percent by 2020, excluding the hydrocarbon sector. The enterprises in manufacturing, construction, transportation and communications, and other sectors were to be privatized through 14  The precise size of the private sector is not possible to determine because public ownership of companies is not comprehensively reported. 15  According to the taxonomy, competitive sectors comprise activities that can be efficiently provided by the private sector (with little to no entry barriers and which are commercially viable for multiple firms to operate). Partially contestable sectors are those whose activities exhibit market failures (such as externalities) that may lead to under-provision of service. Finally, natural monopolies comprise activities that are not economically viable for more than one operator (due to high entry barriers, scale of economies, or sub-additivity cost structures). 16  Competitive neutrality means that rules and policies are applied to ensure that SOEs, as well as private businesses, are able to compete on a level playing field. 17  Turkmenistan’s Law on State Support to Small and Medium Enterprises (adopted in August 2009) defines SMEs as follows: in the industry, power generation, construction, and gas and water supply sectors, small enterprises are defined as those with up to 50 employees and medium enterprises are those with up to 200 employees; in all other sectors, small enterprises are those with up to 25 employees and medium enterprises are those with up to 100 employees. 18  Most private enterprises registered as legal entities are SMEs in the retail trade, manufacturing, and service sectors, but statistics on their share in GDP, output, or in total employment are not available. Turkmenistan I Economic Report I December 2024 32 Figure 28. State-Owned Enterprises versus Nonstate-Owned Enterprises, by Sector of the Economy, percent of total sector revenue in 2022 Other services 50 50 Art, entertainment, recreation 26 74 Health and social services 99 1 Education 79 21 Administrative and support services 7 93 Professional, scientific, technical services 79 21 Real estate services 20 80 Financial and insurance services 100 0 Information and communication 93 7 Accommodation and catering services 67 33 Transportation and storage 79 21 Wholesale and retail trade, repaid ofmotor vehicles 64 36 Services, of which 72 28 Construction 15 85 Water, sewage, waste management 56 44 Electricity, gas, steam, air conditioning 100 0 Manufacturing 72 28 Mining 39 61 Industry, of which 53 47 Agriculture 43 57 Total economy 54 46 0 10 20 30 40 50 60 70 80 90 100 Share of SOEs Share of non-SOEs Source: World Bank staff calculations, based on official data in GovTM (2023, pp 153–165). Note: SOE = state-owned enterprise. 2. Recent Economic Developments 33 direct auctions and sales and transforming the state-owned enterprises into joint stock companies. From 1994 up to the end of 2023, a total of 2,833 state property objects were privatized, including 933 in wholesale and retail trade and repair, 155 in manufacturing, 117 in agriculture, 109 in real estate, 70 in transport and storage, 35 in construction and 1,414 in other types of activities (GovTM. 2024. p.183-184). However, the share of nonstate firms in GDP was 46 percent in 2022. Since 2018, the government has offered some agricultural land for 99-year leases to farmers. As of 2019, 40 such leases existed. However, the rules and procedures governing privatization in Turkmenistan lack transparency. Foreign investors are allowed to participate in the bidding process only after they have been approved by the State Agency for Protection from Economic Risks under the Ministry of Finance and Economy. Strategic facilities, as identified by the government, are not subject to privatization, including those related to natural resources. Government policies and measures in place continue to obstruct market functioning and hamper domestic market integration. SOEs play a large role in the economy; however, their presence in sectors where private enterprises could compete raises questions about the need for state involvement. Many SOEs in Turkmenistan are profitable, while some non-SOEs are not profitable. SOEs have higher profitability than nonstate firms in trade, in the electricity and gas supply industry, information and communications services, and financial and insurance—mostly because SOEs have the subsidized input prices and other privileges (Figure 29). Despite such privileges, however, nonstate firms have higher profitability than SOEs in some sectors, such as agriculture, mining, manufacturing, construction, accommodation and catering, and administrative and support services, as well as in education, health, art, entertainment, and recreation. Three sectors in Turkmenistan, however, are not profitable for nonstate enterprises, probably because these sectors are dominated by SOEs; these are (i) water supply, sewage, waste management, (ii) information and communication, and (iii) financial and insurance services. For SOEs, nonprofitable sectors include (i) agriculture; (ii) water supply, sewage, and waste management; (iii) art, entertainment, recreation, and (iv) accommodation and catering services. SOEs have negative profitability in accommodation and catering services as well as in art, entertainment, and recreation services. These services need to be privatized in the first order. Nonstate firms are able to reach a higher profitability by the cost of production in mining, manufacturing, agriculture, trade, information and communications, real estate, and education services. It is important to note that SOEs and nonstate firms, alike, have negative profitability in water, sewage, and waste management, which should be a priority for price and demonopolization reforms. Private sector growth remains hindered by advantages granted to SOEs, such as favorable lending, de facto preferential treatment in procurement, lower prices on inputs, regulatory exemptions, and tax benefits. It is important to change the government’s role across four critical dimensions: as a supplier, financier, regulator, and referee. Support policies to SOEs are often not well designed and go to firms that do not need the support. Enterprise support programs, together, constitute a large cost to the budget in terms of explicit costs and foregone revenues. Many of these programs may be impairing market functioning and competition among firms. Energy tariffs could be gradually liberalized, yet they remain significantly below the level required for cost recovery. The government through various measures must compensate to the energy SOEs their losses from below-market domestic prices on energy. In the telecommunications and railway sectors, alike, the absence of independent regulatory bodies undermines impartial oversight of Turkmentelekom and Türkmen Demiryolları (railway system). Turkmenistan I Economic Report I December 2024 34 Figure 29. Profitability of State-Owned Enterprises versus Nonstate-Owned Enterprises, by Sector of the Economy (average for 2020–22), in percent Other services Art, entertainment, recreation Health and social services Education Administrative and support services Professional, scientific, technical services Real estate services Financial and insurance services Information and communication Accommodation and catering services Transportation and storage Wholesale & retail trade, repair vehicles Services, Total Construction Water, sewage, waste management Electricity, gas, steam, air conditioning Manufacturing Mining Industry, of which Agriculture Total economy -20 80 180 280 Non-SOEs SOEs Source: World Bank staff calculations, based on official data in statistical yearbook of Turkmenistan, Ashgabat, 2023, p. 153-165. Notes: (i) SOE = state-owned enterprise; (ii) profitability is calculated as a ratio of profit (before taxes) to production cost; and (iii) these calculations do not account for SOE subsidized input prices and other privileges. 2. Recent Economic Developments 35 Box 2. Public Institutions and Governance Turkmenistan’s public institutions have been gradually evolving in recent years. Turkmenistan is a presidential re- public, whereby the president is not only the head of state but also the head of government. Turkmenistan held presi- dential elections in March 2022 and Serdar Berdimuhamedov was elected as Turkmenistan’s third president. In 2023, Turkmenistan’s legislative bodies were reorganized, with the formerly bicameral system becoming unicameral and with all legislative power vested in what was formerly the lower house, the Mejlis. The Halk Maslahaty, or People’s Council, which was established in 2020 as an upper house, was reestablished as an independent representative body that exerts supreme constitutional authority. Turkmenistan is characterized by weak governance, as well as lack of transparency and accountability of the government in decision making and reporting macroeconomic data. Turkmenistan has laws and regulatory frameworks in place. However, the lack of independence and transparency of the judiciary, along with weak application of rule of law and regulatory quality is of great concern to private sector and foreign investors. Turkmenistan ranks consistently among the bottom 15 countries in the world in terms of Transparency International’s Corruption Perceptions Index (i.e., 167th among 180 countries in 2022, with no change since 2019), thus reflecting a high perception of corruption in the country. Turkmenistan also publishes limited aggregate statistical data in newspapers, which lack details. Statistical yearbooks are compiled but are not publicly available, and the state budget is not independently audited. The population and civil society play little role in policymaking, and there is no independent media. Out of six governance indicators, Turkmenistan is ranked more favorably in comparison to lower- and upper middle-income countries in political stability/absence of terrorism and government effectiveness, while ranked lower on citizens’ voices and government accountability to the public, regulatory quality, rule of law, and control of corruption (Figure 30). Figure 30. Governance Indicators Compared to Lower- and Upper Middle-Income Countries Source: Kaufmann and Kraay (2023). Note: This chart shows the percentile rank of the country on each government indicator. Higher values indicate better governance ratings. For instance, a bar of 75 percent has the following interpretation: an estimated 75 percent of the countries rates worse and an estimated 25 percent of countries rates better than the selected country. The thin black lines indicate the corresponding 90 percent confidence interval. Turkmenistan I Economic Report I December 2024 36 3. SOCIAL PROFILE: GENDER AND INCLUSIVITY 3. SOCIAL PROFILE: GENDER AND INCLUSIVITY 19 3.1 Standards of Living, Poverty, and Social Protection Availability of revenues from commodity exports and high growth rates suggest that poverty has declined; however, there is no reliable data to confirm this. While there are no reliable estimates of poverty when applying the international poverty line, the UN estimates that in 2019, the incidence of multidimensional poverty was only 0.2 percent.20 In 2022, the average Human Development Index for Turkmenistan of 0.745 (i.e., 0.726 for females and 0.760 for males) positioned the country in the high human development category—91st out of 191 countries. Turkmenistan lags its regional peers in terms of its sustainable development goal (SDG) performance. The country’s overall UN SDG score was 68.5 (Sachs et al.) in 2022 compared to the Caucasus and Central Asian average of 72.6. Life expectancy (SDG3) was estimated at 69 years in 2021 and, despite improvement over time, it was 71 years in Europe and Central Asia (excluding high-income countries) and 75 years for the upper middle-income group of countries (World Bank 2024d). There are challenges of excessive freshwater withdrawal and low wastewater treatment (SDG6), poor rural road access and internet use (SDG9), and a low rate of press freedom (UN 2020). Turkmenistan ranks relatively poorly in the under-five child mortality rate per 1000 live births (32.9 in 2022) compared to the average in upper- middle income countries (9.8 in 2022)21 and in undernourishment alongside some regional peers. The proportion of the population suffering from hunger fell from 6.4 percent in 2001 to 5.7 percent in 2021 (UN 2024b), and the proportion of children under five years of age with stunted growth fell from 26.6 percent in 2000 to 11.5 percent in 2016 and to 7.1 percent in 2019. The share of children under five with prevalence of wasting in Turkmenistan was reduced from 4.2 percent in 2016 to 4.1 percent in 201922. Social protection provides access of Turkmenistan’s population to welfare benefits, pensions, state subsidies, and social benefits. Total spending on social protection and pensions in Turkmenistan is estimated at 3.5 percent of GDP, on average, in 2015–22.23 Social protection of the population in Turkmenistan is defined in the Law (GovTM 2012) to ensure access to welfare benefits, pensions, state subsidies, and social benefits, and it consists of an extensive set of social policies and programs (cash and noncash) that covers most citizens. Workers receive paid sick leave. Unemployment benefits exist (manat 293 or about US$85 per month in 2019) and are adjusted periodically, based on changes in the national average wage. Social protection schemes include universal birth grants, universal cash benefits for children under three years of age, and benefits for orphaned children and children with disabilities. In 2021, the proportion of the vulnerable population receiving social assistance cash benefits was 10.9 percent; the proportion of the population covered by at least one social protection benefit was  44.2 percent; and the proportion of the employed population 19  There is no up-to-date household survey data readily available—a limited household survey was conducted in 2011, but its results were not published—and, in general, social data is significantly limited, making any analysis difficult. Some social indicators are available in the State Statistics Committee’s Statistical Yearbook. 20  The proportion of the country's workers and their families living on less than US$1.90 per person per day reduced from 31.5 percent in 2000 to 0.6 percent in 2022 (UN 2024a). 21  United Nations World Population Prospects: The 2022 Revision (https://data.un.org). 22  Voluntary National Review of Turkmenistan on the progress of implementation of the Global Agenda for Sustainable Development Goals. – Ashgabat, 2023, p.54. In UMIC the average share of children under 5 with prevalence of wasting was 2.4 percent in 2022. 23  World Bank calculations, based on official data (GovtTm 2022, p 13 and p 130; and GovTM 2023). Turkmenistan I Economic Report I December 2024 38 covered in the event of work injuries was 52.6 percent in 2019. It is important to identify ways to further strengthen the social protection system to ensure its effectiveness. In 2022, the Law on Social Services was adopted, which classified social workers as a public service. 3.2 Health Turkmenistan’s spending on health is lower than that of its regional peers. Its healthcare sector appears underfinanced, as suggested by high infant mortality rates and malnourishment. Life expectancy at birth was 71.8 years and the infant mortality rate was 32.9 deaths per 1,000 live births as of 2022. The maternity mortality rate per 100000 of births was reduced from 3.0 in 2015 to 1.7 in 202224, which is far lower than UMIC average (62 in 2020) and even than average in high-income countries (12.0 in 2020). State budget health spending is a small fraction of total spending on health and less than adequate.25 Out-of-pocket health spending in Turkmenistan is estimated at 75 percent of total health spend. General government spend on healthcare has been at 1.3 percent of GDP, on average, in 2015–2226, which is lower than 1.5 percent of GDP for LMICs; lower than 2 percent of GDP, on average, in Central Asia and Caucasus countries; and lower than 3.5 percent, on average, for UMICs. Government spend in countries within the Organisation for Economic Co-operation and Development was 8 percent of GDP in 2015-–19. Following two years of COVID-19 slowdown, the efforts in health and nutrition significantly scaled up in 2022. The state program, “Saglyk” (Health), was adopted for the introduction of advanced methods of prevention and treatment of diseases and development of the pharmaceutical industry. Significant progress also was achieved in scaling up early childhood development (ECD) services, with developmental monitoring provided by ECD demonstration facilities in all regions of the country. Over 1,400 health professionals were trained in ECD and early identification of developmental delays. Over the last decade, including during the global COVID-19 pandemic, Turkmenistan maintained a high routine vaccination coverage above 95 percent. 3.3 Education Turkmenistan’s public education spending is lower than its geographic neighbors and income peers. Government spending on education amounted to 3.7 percent of GDP, on average, in 2015–22, which is slightly lower than the average of Central Asian and Caucasus countries, at 3.9 percent of GDP; lower than the average of 4.1 percent during the same period for UMICs; and 5.1 percent, on average, for Members of the Organisation for Economic Co-operation and Development. As of 2022/2023, Turkmenistan had 1,084 kindergartens and 1,882 secondary schools of all types, with a total of 1.567 million students in primary, secondary, and high schools in 2022/2023. Turkmenistan had 25 institutions of tertiary education, with 69,856 students and 9,152 graduates in 2022. The international assessment of school students’ knowledge (Programme for International Students Assessment, PISA, test)27 has not been conducted in Turkmenistan that prevents understanding of results of the government spending on school education. 24  Voluntary National Review of Turkmenistan on the progress of implementation of the Global Agenda for Sustainable Development Goals. – Ashgabat, 2023, p.66. 25  The public component of health expenditure is underestimated, if only state budget expenditures are considered, to the extent that SOEs, which represent 54 percent of economic activities, provide social services, including related to health. No data, however, is available on such services. 26  Calculated based on data from Voluntary National Review of Turkmenistan on the progress of implementation of the Global Agenda for Sustainable Development Goals. – Ashgabat, 2023, p. 48, and based on official data in Statistical Yearbook of Turkmenistan. – Ashgabat, 2023 on state budget expenditures in 2022 (p.152) and on GDP (p.24). 27  PISA allows assessing quality of school education in each country based on same criteria by assessment of knowledge of school pupils 15-years of age in math, sciences, and reading in national language. The PISA results in 81 countries are available here (PISA: Programme for International Student Assessment | OECD). 3. Social Profile: Gender and Inclusivity 39 3.4 Gender Despite some progress, gender gaps, gender-based violence, and disadvantageous social norms facing women and girls persist, and gains in human capital of women and girls remain untapped. Turning human capital investments into economic gains means addressing multiple barriers to women‘s economic empowerment. In 2022, on a scale of 0-100, the degree to which country legal frameworks promote, enforce, and monitor gender equality in public life stood at 70 points, while the score with respect to gender employment and economic benefits stood at 60 points. According to the World Bank’s Gender Data portal (World Bank 2024c), Turkmenistan’s labor force participation gap is 2.7 percentage points (ppt), significantly less than the ECA average of 14 percent. Its gender gap in bank account ownership is 10.2 ppts, much greater than the 3 ppts, on average, in ECA and 4 ppts in UMICs, on average. The proportion of seats in national parliament held by Turkmen women was 25.9 percent in 2022 (an increase from 18 percent in 1997) and is broadly in line with ECA (30.9 percent) and UMIC (27.7 percent) averages. The proportion of women in ministerial level positions was 5.9 percent in 2022; that is, lower than ECA (27 percent) and UMIC (21.2 percent) averages. The prevalence of physical and/or sexual violence by an intimate partner28 against women aged 18 to 59 was found to be 12 percent in 2020; that is, higher than in ECA (6.3 percent) and UMIC (8.8 percent). Although the Turkmen government identifies gender equality as a priority, and there are laws guaranteeing women’s rights, there nevertheless are gaps in practical implementation of the laws. In 2021, the UN Population Fund reported that nearly 60 percent of women in Turkmenistan could not make autonomous decisions over healthcare, contraception, and the ability to say yes or no to sex. Turkmenistan developed the 2023–2028 National Action Plan on Child Rights, following country-wide consultations in 2022. Legal provisions for child protection were strengthened in 2022 with Criminal Code amendments, which include child-sensitive procedures in dealing with children in contact with the law and diversion for young offenders. In 2022 Turkmenistan conducted its first survey on the “Health and Status of a Woman in the Family,” which indicated that 12 percent of women aged 18 to 69 experienced physical and/or sexual abuse from a husband or partner at least once in their lives. 28 Gender Statistics in Turkmenistan in the light of Survey on the Health and Status of a Woman in the Family (Turkmenistan) (https://unece.org/statistics/documents/2023/04/working-documents/gender-statistics-turkmenistan-light-survey-health) Turkmenistan I Economic Report I December 2024 40 4. OUTLOOK AND RISKS 4. OUTLOOK AND RISKS The outlook remains positive in 2024 and 2025, as overall commodity prices are forecast to remain about 38 percent above pre-pandemic levels and then decline only slightly. Natural gas prices are expected to decline by 3 percent or 4 percent in 2024–25. In contrast, oil prices are projected to increase in 2024, with the Brent crude price averaging US$84/bbl in 2024 (up from US$83/bbl in 2023), reflecting the recent escalation of geopolitical tensions and a tight supply-demand balance.  Turkmenistan’s hydrocarbon exports and production are dependent mostly on China’s economic prospects and demand for gas. The World Bank’s growth projections in China are 4.5 percent in 2024 and 4.3 percent in 2025. Chinese gas consumption is set to increase by 6.2 percent in 2024 and 8.2 percent in 2025, suggesting that Turkmenistan’s gas exports will remain strong in 2024–25. In February 2024, the Dubai-based firm, Dragon Oil, announced that it would begin drilling in an undeveloped sector of Turkmenistan’s Caspian Sea territory by end-2024. The initiative should boost hydrocarbon production, supporting growth in 2025 and beyond. Turkmennebit and Dragon Oil Turkmenistan Ltd. signed a contract in July 2022 to extend the product-sharing agreement until May 1, 2035. The company’s main goal is to increase oil production from the Cheleken Contract Area. Dragon Oil had invested US$8.1 billion in drilling and equipping the field, producing a cumulative 437 million/bbl of oil by mid-2022. Dragon Oil’s investments during the contract extension period will amount to another US$7-8 billion. It also is expected that an additional 350 million/bbl of crude oil will be produced at a daily rate of 60,000-70,000/bbl (Interfax 2024). In March 2024, the Turkish-Turkmen Memorandum of Understanding is a signal that Turkmenistan is willing to sell gas to Western destinations—Turkey and, potentially, the European Union—in the future. The boost to hydrocarbon production will help to increase Turkmenistan’s trade surplus further in 2024 and 2025. GDP growth is projected at about 6 percent in the near term. The growth is projected at 6.1 percent in 2024 and at 6 percent in 2025. This forecast assumes higher capital spending and stable hydrocarbon export receipts. Oil production is projected to increase gradually through 2025. Government policies to promote the role of the private sector, including through a gradual move toward a more market-based economy and privatization, may support increased economic productivity. High investment growth, stemming from new public investment and higher public spend on wages that keep increasing ahead of inflation are expected to boost domestic demand, encouraging growth in agriculture production, manufacturing, and services. The government envisages the implementation of large-scale projects, including the construction of the Turkmenistan-Afghanistan-Pakistan-India gas pipeline; a new airport in the Balkan region; a combined power plant with a capacity of 1,574 megawatts; the Ashgabat-Turkmenabat international high- speed motorway; a bridge over Garabogaz Bay; and the second phase of the country’s first smart city, Arkadag (Borayov 2024a). The government is expected to support the private sector by allocating more credit to private firms and by moving forward with select privatizations. These policies, in addition to the new agriculture development program, are expected to contribute to growing investment and consumption and to partly offset weak external demand. An expansion of hydrocarbon exports is projected in 2024 and 2025. The natural gas and other energy exports will be growing modestly in 2024–25 due to constrained infrastructure capacity. Given China’s growing demand for natural gas by 6 percent in 2024 and by 8 percent in 2025, Turkmenistan can increase its export of natural gas to China, accordingly. Speedier expansion of gas production and exports after 2029, however, would require new pipeline infrastructure along a regional route yet to be finalized—one that China is financing—in addition to measures to expand production capacity. Output of gas, oil, and oil products will continue to sustain high growth until this period, with expectations of favorable prices and external demand. Activity outside of the large hydrocarbon economy will remain dependent on government support for SOEs and private firms engaged in import substitution or export promotion. Turkmenistan I Economic Report I December 2024 42 Strong revenue from hydrocarbons is projected to keep the state budget balance in small surplus in 2024 and 2025. While financing for government investment projects will remain sizable, public debt is projected to decline further to 4.5 percent of GDP in 2024 and below that in 2025, reflecting scheduled repayments on energy projects and the government’s aversion to new borrowing. Further growth in public investment is expected, partly due to the second phase of the Arkadag Smart City project and the development of oil refining and transport corridors. Table 1. Macro Outlook Indicators annual percent changes, unless otherwise indicated 2021 2022 2023 2024 2025 Estimated Forecast Forecast GDP, at constant factor prices 6.2 6.2 6.3 6.1 6.0 Agriculture 3.8 5.7 4.4 4.3 4.2 Industry 9.2 6.3 4.3 4.5 4.6 Construction 0.3 0.3 2.0 2.2 2.5 Services 5.9 7.1 8.8 8.2 8.0 Inflation (CPI), end of period 21.1 3.0 1.4 4.0 4.5 Revenues (% of GDP) 13.9 15.7 15.0 15.5 15.5 Fiscal Balance (% of GDP) 0.6 3.2 1.3 1.0 0.6 Public Debt (% of GDP) 10.7 5.8 4.7 4.5 4.4 Sources: Turkmenistan statistics; IMF (2024) on public debt; and World Bank staff projections. The outlook is subject to significant uncertainty and risk. Given a highly uncertain external environment, the risk is elevated. External risks include geoeconomic spillovers from an intensification of Russia’s war in Ukraine, leading to disruptions in supply chains and greater commodity price volatility; a potential spillover of instability from Afghanistan; and the pace of global recovery. Economic growth in 2024 is to be aided by continued elevated global energy prices. Progress on diversifying export markets remains an upside risk for growth. Domestic risks mainly stem from the slow pace or further delays in domestic structural reforms; a slower-than-planned revenue increase; weakening bank balance sheets; and the materialization of contingent liabilities from SOEs and state-owned banks. Additionally, a return on past investment could be lower than anticipated due to, for example, the price of hydrocarbon and the demand for new products (mostly gas chemicals). Subsidies to SOEs may also lower returns while discouraging improvements in efficiency. The weaker-than-expected economic viability of public investment projects could undermine debt repayment capacity. Continued rapid growth of subsidized credit to potentially uncompetitive projects may worsen bank asset quality, thus contributing to financial and currency vulnerabilities. On the upside, favorable inflows of exports and budget revenue, income and capital from higher hydrocarbon prices, faster progress in improving productivity, FDI attractiveness, and access to financial markets may well boost growth prospects. 4. Outlook and Risks 43 Turkmenistan I Economic Report I December 2024 44 5. KEY CHALLENGES AND RECOMMENDED POLICY PRIORITIES 5. KEY CHALLENGES AND RECOMMENDED POLICY PRIORITIES Turkmenistan can accerate economic growth by raising labor productivity in lagging sectors, such as agriculture and services, and by improving allocative efficiency. The large gaps in Turkmenistan’s labor productivity between agriculture and services, on one hand, and industry and construction, on the other, suggest that a reallocation of labor from low (e.g., agriculture) to high productivity sectors (e.g., manufacturing and high-skilled services, e.g. financial, IT, professional, education) could accelerate economic growth. Improvement in agricultural productivity can also act to accelerate and catalyze industrialization, diversification, and enhance national income per capita. Allocative efficiency is the efficient allocation of resources that leads to maximum overall benefits in the economy thereby promoting economic growth. It needs an efficient market, which is always reflected in the market prices for goods and services. For the market to function well, the government must eliminate distortions to markets (of outputs, inputs, labor, and finance) and improve business environment and investment climate for private sector. There are many distortions to remove, e.g. liberalize prices on outputs and exchange rate, ‘level the playing field’ by reducing SOEs’ monopolization and various privileges, and liberalize prices on inputs by reducing energy subsidies to improve efficiency. The prevailing dual exchange rate system is central to an unfavorable business and investment climate. Trade analysis shows that non-fuel exports of Turkmenistan have been flat or grown slowly in the past years in nominal terms, and declined as a share of GDP. Turkmenistan operates a dual exchange rate system and the gap between the official exchange and “parallel market” rates has been increasing. This dual system, which implies significant rationing of foreigh exchange at the official rate is a major impediment to businesses who rely on imports as part of their processes, and imposes significant distortions for capital repatriation abroad. As a result, while the dual exchange rate system adversely affects all businesses that are subject to FX rationing, it is more distortive for firms that either seek to engage in global value chains or have foreign ownership. This is a concern, as evidence indicates around the world, that these kinds of firms tend to drive productivity gains and positive structural reform in developing countries. Turkmenistan needs a policy to improve the busines environment and investment climate, especially to attract FDI to non-hydrocarbon sectors. Total investment, especially non-public investment, as a share in GDP appears to have decreased significantly in 2015-2022: total investment decreased from 47 percent to 17.5 percent, and non-budget investment (including SOEs and private investment) decreased from 36.7 percent to 16.3 percent over this period. While this reflects a slowdown in oil and gas investment, it also illustrates the lack of appetite for investment in other sectors. Strict controls on currency flows have limited the repatriation of profits or payments to foreign suppliers. There have been expropriation risks for foreign enterprises and reports of seizures of local companies, and reports that investment- related legislation is not consistently implemented or enforced. Despite the government’s privatization program, it has attracted little foreign or domestic private investment. The rules and procedures governing privatization in Turkmenistan lack transparency. Foreign investors are allowed to participate in the bidding process only after they have been approved by the State Agency for Protection from Economic Risks under the Ministry of Finance and Economy. The government could consider reforming the legislative framework for privatization and foreign investment. Improvements to the business and investment climate will also be critical to sustainably create more jobs, especially for young people entering the labor force. Most employment is consolidated in agriculture and low-skilled services, Turkmenistan I Economic Report I December 2024 46 rather than manufacturing and high-skilled services. Capital-intensive sectors such as hydrocarbons and chemicals create relatively few jobs. This underscores the need for the development and diversification on the non-hydrocarbon economy, supported by training programs to develop skills in manufacturing and high-skilled and high-productivity services, such as IT, financial, professional, education, etc. Private sector growth remains hindered also by advantages granted to SOEs, such as favorable lending, lower prices on inputs, regulatory exemptions, and tax benefits. Despite various subsidies and privileges to SOEs, non-SOEs firms on average have higher profitability than SOEs in some sectors, such as agriculture, mining, manufacturing, construction, accommodation and catering, and administrative and support services, as well as in education, health, art, entertainment, and recreation. SOEs have negative profitability in accommodation and catering services as well as in art, entertainment, and recreation services. These services need to be privatized in the first order. Support policies to SOEs are often not well designed and go to firms that do not need the support. Enterprise support programs, together, constitute a large cost to the budget in terms of explicit costs and foregone revenues. Many of these programs may be impairing market functioning and competition among firms. In the telecommunications and railway sectors, the absence of independent regulatory bodies undermines impartial oversight of Turkmentelekom and Türkmen Demiryolları (railway system). The number of SOEs could be reduced further, while the remaining SOEs could face similar rules as private firms. SOEs in Turkmenistan are found across various sectors, with a notable presence in competitive activities - where private sector operations are viable. This makes doubtful the necessity of state involvement in these areas, such as the manufacturing, construction, wholesale and retail services; and professional, scientific, and technical services; among others. The extensive presence of SOEs in sectors suitable for private participation highlights the critical need to uphold competitive neutrality.29 Many SOEs are monopolies or the main producers of goods and services in their sectors. This is particularly the case in electricity production, mining, manufacturing of motor vehicles, transport, and telecommunications. Turkmenistan’s SOE framework lacks clear guidelines for separating commercial and public service activities; furthermore, there is no obligation for a specific rate of return for all SOEs. Turkmenistan lacks a systematic public and official record of SOEs. Conducting structural reforms is important as Turkmenistan needs to maximize its benefits from possible, future accession to the WTO. Total trade at 37 percent of GDP on average over 2015 to 2022 is below the average for its peers in the upper middle-income group. Turkmenistan’s trade facilitation is weak. WTO accession would be an important impetus for its further market access in non-fuel sector products, diversification, and economic development. Improving output markets and factor market efficiency (particularly finance, land, energy subsidies and prices) is necessary for the emergence of a more efficient private sector in non-fuel sectors and for attracting FDI. Reforms to reduce impediments in labor market (skills, lack of childcare in provinces, limited domestic labor mobility), land use and the ability to sell or transfer land-use rights remain strictly regulated. Energy subsidies distort domestic prices and prevent establishing a market economy in Turkmenistan. The electricity, heating, and natural gas for citizens and enterprises is significantly subsidized, with citizens receiving free electricity, heating, and gas up to a certain level of consumption. Turkmenistan has the highest energy subsidy expenditures in the region at 14 percent of GDP in 2015, followed by Iran with 9.2 percent of GDP30. While the government is taking steps to reduce subsidies to curb domestic demand and increase exports, subsidies seriously distorting domestic prices and prevent market forces to reveal comparative advantages of Turkmenistan in any non-fuel production. Also, subsidies promote inefficient allocation of Turkmenistan’s resources (hindering growth), encourage pollution (contributing to climate change and premature deaths from local air pollution), and are not well targeted at the poor (mostly benefiting higher 29  Competitive neutrality means that rules and policies are applied to ensure that SOEs, as well as private businesses, are able to compete on a level playing field. 30  For energy and fuel subsidies, data are readily available at the International Energy Agency (IEA). Loek Groot and Thijs Oostveen, Welfare effects of energy subsidy reform in developing countries. Review of Development Economics, Volume 23, Issue 4, Nov 2019, pages-iii, 1477-1944. 5. Key Challenges and Recommended Policy Priorities 47 income households). In addition, energy subsidies undermine efforts to deal with climate change by keeping greenhouse gas emissions higher than they otherwise would be. As the energy tariffs in Turkmenistan remain significantly below the level required for cost recovery, they could be gradually liberalized. While social spending in Turkmenistan is significant, its focus could be shifted more on the quality of human capital. However, the quality of human capital in Turkmenistan is unknown due to the absence of PISA test, program for international student assessment conducted by the OECD for all countries intended to evaluate educational systems by measuring 15-year-old school pupils’ performance on mathematics, science, and reading. The government of Turkmenistan is investing huge resources to industrial infrastructure and facilities as well as social infrastructure, residential complexes and in new health centers and schools. But the results of those investment in human capital, especially in education, are unknown. By conducting the international standardized assessments of educational attainment Turkmenistan could verify the returns on investment in education and design measures to improve the quality of teaching and to receive targeted technical assistance from the UN, World Bank, and other international financial institutions to further improve quality of Turkmenistan’s human capital. Turkmenistan’s low energy efficiency has implication to climate change. Although burning natural gas emits considerably less CO2 (and other pollutants) than do coal and oil, it remains a significant source of emissions that must be reduced to meet international climate goals. Methane, the primary component of natural gas, is a greenhouse gas. Leaks from gas pipelines and processing facilities, as well as the intentional venting or flaring of unwanted gas at production sites, mean that oil and gas extraction operations are substantial contributors to climate change. In contrast to renewable resources, the oil and gas are depleting resources that will one day vanish in Turkmenistan as in many other oil and gas exporting countries. Thus, Turkmenistan needs to update its long-term strategy to diversify its economy to escape from total hydrocarbon dependency by adding measures to minimize the negative effects of the Dutch Disease on the Turkmenistan economy and to accelerate transition to green energy and adaptation to climate change. The potential reduction in global demand for oil and gas due to measures adopted in advanced countries to transit to renewable energy sources may reduce the long-term global demand for Turkmenistan’s fuels and require corrections to the national development strategy until 2050. To summarize the above, Turkmenistan needs to navigate a series of challenges as it aims to progress to higher economic efficiency, sustainability, accede to the WTO, and reach high-income status. The main four types of challenges are as follows: those (i) of a resource-rich country; (ii) of a developing upper middle-income country that aims to become a high-income country; (iii) of transition to a market economy; and (iv) of global climate change adaptation and ecological sustainability. A more detailed description of these challenges is presented in Annex 3. Turkmenistan I Economic Report I December 2024 48 ANNEX ANNEX 1: Trends in Turkmenistan’s Commodity Markets and Main Trading Partners 1.1 Commodity Markets Commodity prices are expected to decrease by 5 percent in 2025, after softening 3 percent in 2024 (World Bank 2024a, Figure A1). This would lead aggregate commodity prices to their lowest levels since 2020. The projected declines are led by oil prices but tempered by price increases for natural gas and a stable outlook for metals and agricultural raw materials. The Brent crude oil price is projected to average $80/bbl in 2024, about 3 percent lower than a year earlier but 40 percent above the 2015-19 average (Table A1). The energy price index is projected to fall by 6 percent in 2024 (y/y), followed by further declines of 6 percent in 2025. This annual price decline reflects ample global oil supply and modest consumption growth, which offset the impact of escalating geopolitical tensions. Crude oil prices are expected to decrease further, to an average of $73/bbl in 2025 driven by increasing supply among non-OPEC producers, coupled with modest growth of global oil demand owing to slowing oil consumption in China. The European natural gas benchmark is projected to be 18 percent lower, on average, in 2024 than 2023, as gas markets continue to adapt to a reconfiguration of supply following Russia’s invasion of Ukraine. The decline in 2024 reflects high levels of storage, worldwide, and an increasing supply, with the reconfiguration of trade flows initiated by the Russian invasion of Ukraine largely complete. But gas prices are expected to increase by a moderate 7 percent in 2025 (y/y). After rising 6 percent in 2024 (y/y), base metal prices are forecast to hold steady in 2025. Agricultural prices, after edging up in 2024, are expected to fall by 4 percent in 2025 (y/y), largely reflecting increasing supplies amid favorable weather conditions. Although the price forecasts assume no further conflict escalation, risks remain tilted to the upside, stemming from the conflicts in the Middle East and Ukraine and its consequent impact on energy supplies. A conflict-related reduction in the region’s energy exports could drive oil and gas prices higher in the closing months of 2024 and well above the forecasts for 2025, with knock-on consequences for other commodities. Other upside risks to commodity prices include stronger- than anticipated economic growth, especially if related to policy stimulus in China, and potential supply disruptions due to climate change-related extreme weather. There are two-sided risks to industrial commodity demand stemming from economic activity. On the one hand, concerted stimulus in China and above-trend growth in the United States could push commodity prices higher. On the other, weaker-than-anticipated global industrial activity could dampen them. 1.2 Trends in Turkmenistan’s Main Trading Partners China Following a moderate post-pandemic increase of 5.2 percent in 2023, growth is projected to wane to 4.8 percent in 2024, and 4.3 percent in 2025. The downturn in the property sector and weak business confidence weigh on domestic demand (World Bank 2024e). Gross domestic product (GDP) growth rose from 3.0 percent in 2022 to 5.2 percent in 2023. The authorities have provided moderate macroeconomic stimulus. Monetary policy has been eased with reductions in the policy rates and liquidity provision through targeted credit support Central Bank of China. Weak housing demand and high developer debt continue to constrain the property sector. While the property sector downturn continues to dampen real estate investment, the reallocation of investment from real estate to manufacturing is likely to continue. Moreover, moderate fiscal expansion is expected to support near-term growth. Turkmenistan I Economic Report I December 2024 50 Figure A1. Commodity Prices: Historical and Forecast Table A1. Commodity Indexes and Prices, 2022–25 Index, 100 = 2015 -19 average Commodity Unit 2022 2023 2024e 2025f 250 (Prices/Indexes are in nominal US dollars, 2010 = 100) Total 1/ 142.5 108.0 104.3 99.0 200 Energy 2/ 152.6 106.9 100.8 94.5 Grain 150.4 133.0 112.9 107.6 150 Fertilizers 235.7 153.5 116.9 115.2 Metals and minerals 3/ 115.0 104.0 107.7 106.8 100 Crude oil $/bbl 99.8 82.6 80.0 73.0 Natural gas, Europe $/mmbtu 40.3 13.1 10.8 11.5 50 2019 2020 2021 2022 2023 2024 2025 Natural gas, Japan $/mmbtu 18.4 14.4 13.0 13.5 Cotton fiber $/kg 2.86 2.09 1.9 2.0 Wheat $/mt 430 340 270 265 Energy Metals and minerals Agriculture Commodity prices Gold $/toz 1801 1943 2350 2350 Source: World Bank Source: World Bank (2024a). Note: Index, 100 = 2015–19 average. Historical data from 2019–23. Data for Notes: e = estimate; f = forecast. 1/ The World Bank's commodity total 2024–25 are forecasts based on World Bank (2024a). price index is composed of energy and non-energy prices (excluding precious metals), weighted by their share in 2002-04 exports. The energy index's share in the overall index is 67 percent. 2/ Energy price index includes coal (Australia), crude oil (Brent), and natural gas (Europe, Japan, U.S.). 3/ Base metals plus iron ore. Figure A2. Economic Growth in Turkmenistan and Its Main Trading Partners, 2019–25 Percent 12 10 8 6 4 2 0 -2 2019 2020 2021 2022 2023 2024f 2025f -4 China Iran, Islamic Rep. Russian Federation Turkiye Turkmenistan Sources: World Bank (2024h) and World Bank staff calculations. Annex 1: Trends in Turkmenistan’s Commodity Markets and Main Trading Partners 51 Russian Federation Economic growth is expected to decrease to 3.4 in 2024, and 1.6 percent in 2025 (World Bank 2024f). After the initial recessionary impact of sanctions in 2022, the economy returned to growth in 2023 by 3.6 percent (supported by fiscal stimulus, including military spending); credit expanded by 17.4 percent in real terms in 2023 on military and subsidized mortgages; and the mitigation of the impact of sanctions through trade diversion to Central Asia and the South Caucasus, China, India, and Türkiye was successful. The general government deficit widened from 1.4 percent in 2022 to 2.3 percent of GDP in 2023. The current account remained in surplus in 2023, but shrank five-fold compared to 2022, as export receipts slumped, and imports rebounded. Consumer price index (CPI) inflation increased to 7.6 percent by December 2023. Unemployment reached the historically low rate of 3 percent in 2023, largely associated with the military effort and the emigration abroad of large numbers of young men. Credit to the private sector grew Russian businesses while households continue to be affected by restrictions on export of a wide range of goods, persistent gaps in supply of some technological equipment, and higher trade costs. Growth of 2.2 percent is expected in 2024, supported by fiscal stimulus, before decreasing to 1.1 percent in 2025 and 2026 (World Bank 2024g). Turkiye Türkiye has been moving rapidly to normalize macroeconomic policies. Economic growth was strong at 5.1 percent in 2023, although it is projected to moderate to 3.2 percent in 2024 and 2.6 percent in 2025 (World Bank 2024h). Real GDP expanded by 5.1 percent in 2023, mainly driven by sustained growth in private consumption alongside a strong pickup in investment and government consumption. Exports contracted 2.7 percent in 2023 while imports grew firmly at 11.7 percent. The current account deficit fell to 4.2 percent of GDP in 2023. Inflation decreased from 57.7 percent in January 2023 to 38.2 percent in June 2023, but increased to 67.1 percent in February 2024 following the Turkmen lira depreciation, minimum wage increases, government tax adjustments, and strong demand. The fiscal deficit deteriorated to below -5 percent of GDP in 2023 (from -0.8 in 2022) due to rising expenditures and earthquake-related investment needs. Economic growth is projected to decelerate to 2.6 percent in 2025, with a more sustainable growth composition. Islamic Republic of Iran The Islamic Republic of Iran’s economy is continuing its oil-driven growth in 2023/24, helping employment to return to pre-pandemic levels (World Bank 2024f). GDP growth accelerated to 5.1 percent year-on-year in the first half of 2023/24 fiscal year (Iranian year ending March 20), primarily driven by the oil sector and services. Oil sector value addition surged by 17.1 percent y/y, fueled by greater success in marketing oil exports, including through price discounts. The non-oil sector showed robust growth of 3.8 percent y/y, which drove employment to pre-pandemic levels in Q3 2023/24, as job creation increased by 2.9 percent and the unemployment rate reached a record low of 7.6 percent. Real GDP growth is forecast to moderate to an annual average of 2.8 percent from 2024/25 to 2026/27. The initial boost in oil production and exports in 2023/24 is projected to moderate significantly, with a similar spillover effect into the non-oil sector. Weaker global demand, ongoing sanctions, energy shortages, liquidity constraints, underinvestment, and geopolitical tensions further contribute to this outlook. The current account surplus is projected to gradually decrease, influenced by lower commodity prices and heightened global competition in key markets. Turkmenistan I Economic Report I December 2024 52 ANNEX 2: Trade Flow Assessment: Reaching New Markets Turkmenistan’s trade is marked by undiversified exports that are highly dominated by natural gas and a heavy reliance on few trade partners. Export and import dynamics (Figure A3) are largely tied to those relating to global economy and commodities. Nonfuel exports have grown slowly in the past years, while imports almost have recovered to 2015 levels. While exports and imports have grown faster than at global levels, as a share of GDP trade nevertheless has declined (Box A1). China is the principal export market, notably for Turkmen gas. In the past five years, exports have grown rapidly to China (52 percent), Turkiye (89 percent), and Uzbekistan (551 percent). Turkmenistan also relies on exports of crude oil, fertilizers, textiles, and vegetables. Imports are dominated by machinery and equipment goods, largely from China, Kazakhstan, Turkiye, and the United Arab Emirates. Figure A3. Import and Export Dynamics Show Growth in 2022 14 60% Billions US$ 12 40% 10 2015=100% 20% 8 0% 6 2012 2013 214 2015 2016 2017 2018 2019 2020 2021 2022 -20% 4 -40% 2 -60% 0 -80% 2012 2013 214 2015 2016 2017 2018 2019 2020 2021 2022 -100% Import Fuel Export Non-fuel Export Import Fuel Export Non-fuel Export A B Sources: World Bank staff calculations. Figure A4. In Line with Commodity Price Trends In 2015, several of the Government of Turkmenistan’s policy changes led to defining changes in trade patterns. Following a dispute between Turkmengas and Russian- 500 140 owned Gazprom and the decline in gas prices, export 450 120 values fell by 20 percent in 2015 year over year (y/y) 400 100 (Figure A4). As the balance of payments deteriorated, Index 2010 =100 350 300 80 Turkmenistan devalued the manat to partly offset real 250 appreciation in the previous years. A state program also 200 60 was adopted to create import substituting industries, 150 40 100 aiming to boost the balance of trade and promote job 50 20 growth. In 2016, restrictions also were imposed on the 0 0 free exchange of foreign currencies. In 2018-20, imports 2013M01 2013M10 2014M07 2015M04 2016M01 2016M10 2017M07 2018M04 2019M01 2019M10 2020M07 2021M04 2022M01 2022M10 2023M07 accounted for around half of 2015 import values. Import values thus declined by 24 percent y/y, compared to a robust growth of around 8 percent annually in the previous Natural Gas Index Fertilizer Index five years. As Turkmenistan depends heavily on natural Crude oil, avg (S/bbl) RHS gas exports to China, the Covid-19 pandemic impacted fuel exports markedly, but trade levels had recovered by Sources: World Bank staff calculations; WB Commodity Prices (2024) 2021. Annex 2: Trade Flow Assessment: Reaching New Markets 53 Box A1. Notes on Data Availability and Use Turkmenistan provides limited trade data publications, compounded by concerns about the reliability of Turkmenistan’s official statistics. Despite some availability of trade information, the information that is accessible remains limited and tends to be either delayed or covers only a limited time frame. This, in part, has been highlighted specifically during the Covid-19 pandemic (as the official narrative posted continued strong growth, contrasting global and regional experiences).1 To overcome this challenge, this study has compiled a mirror trade dataset that includes the trade flows of 109 countries from 2017 to 2022. An additional dataset considers trade with major trade partners on a quarterly basis in 2018-23 (accounting for 60 percent of imports and over 90 percent of exports). Based on the mirror trade dataset, it is possible to analyze the trade dynamics at the six-digit HS level2 with all countries recording trade with Turkmenistan. The use of mirror data, however, also is associated with inaccuracies; for instance, due to incorrect tariff classifications, time lags in recording data (although this is minor for annual data), mistakes in registration of provenance at customs, and other declaration errors.2 A particular challenge lies in estimating the trade with countries—for this study, notably the Russian Federation and Belarus—that have ceased publishing trade data. As Russia is a major trade partner, the 2021 data proxies for that of 2022 in the absence of more accurate data, roughly matching the trade levels report by Turkmenistan Customs. The mirror dataset draws on data from the United Nations Comtrade Database4 and national statistics. 1 Gogoberishvili (2023). 2 Harmonized System six-digit standard, administered by the World Customs Organization. 3 WCO (2015). 4 For further information, see https://comtradeplus.un.org. Turkmenistan’s trade-openness is much lower than expected, based on the level of economic development (Figure A5), and has deteriorated rapidly over the past two decades, with natural gas accounting for around three-quarters of total export value (Figure A6). The trade-to-GDP ratio is one of the most basic indicators of openness to foreign trade and economic integration.31 Turkmenistan ranks lowest in relation to its level of trade openness. This is not surprising as four goods have accounted for nine-tenths of total exports (2020-22 average)—almost three-quarters of exports are natural gas—and the top three export markets account for 84 percent of all trade. Given the structure of the export basket, fluctuations are associated with commodity price shocks, whereby 1998 and 2010 saw dwindling oil and gas prices, associated with a higher trade openness. Turkmenistan’s natural gas exports rose by 52 percent, y/y, in 2022 and are set to remain at high levels on the back of new export agreements. In mid-2022, Turkmenistan signed an agreement for a trilateral gas swap deal with Azerbaijan and the Islamic Republic of Iran. 31  By weighting the combined relevance of exports and imports of goods relative to the size of an economy, the ratio indicates the level of integration between the domestic economy and world markets. There is a positive relationship between trade openness and per capita income, whereby countries tend to trade more as incomes rise. Meanwhile, trade openness may be somewhat misleading, since a low ratio does not necessarily imply high (tariff or nontariff) barriers to foreign trade; rather, it may be due to factors such as size of the economy and geographic remoteness from potential trading partners. Turkmenistan I Economic Report I December 2024 54 Figure A5. Trade Openness Is the Lowest in Relation to Figure A6. Deterioration of Trade Openness in Contrast National Income, 2022 to other Economies in the Region Sources: World Bank (2024i). Figure A7. Exports Dominated by Four Commodities* Figure A8. Highly Concentrated Exports in Terms of Products (4-digit HS)* and Markets Source: World Bank staff calculations based on mirror trade data. Source: World Bank staff calculations based on mirror trade data Note: * Harmonized System four-digit standard (administered by the Note: * Harmonized System four-digit standard (administered by the World Customs Organization). World Customs Organization). Annex 2: Trade Flow Assessment: Reaching New Markets 55 The top 10 nonenergy products consist of fertilizers, cotton, other chemicals and plastic products, and tomatoes which, together, account for four-fifth of total nonenergy exports (Figure A9). While fertilizer exports have risen sharply in value terms, cotton exports have declined in the past five years. Over three-quarters of cotton exports reach Turkiye, as Turkish companies have established partnerships and provided direct investment in Turkmenistan. Citing human rights concerns, however, the United States, for instance, has imposed a ban on cotton from Turkmenistan (Korkmaz, 2019). Polymers of ethylene and sulphur are inputs into important global value chains, such as packaging and insulation for the former and batteries and fertilizers for the latter. Turkmenistan’s tomato exports reach Russia, Kazakhstan, and the Kyrgyz Republic, supplying around half of imports to the latter two. Fertilizer exports, in particular, rose sharply in 2021 and 2022, in line with commodity price dynamics (Figure A10). Half of those exports reach Turkiye, for which the rise in imports does not reflect trade diversion but, rather, a total increase in global import prices. Initial data indicates that imports (in value terms) from Turkmenistan have subsequently halved in 2023, in part due to higher imports of fertilizers from the Middle East and North Africa. In the Latin America and the Caribbean region, fertilizer exports mostly reached Brazil until 2021 (likely replaced by imports from Uzbekistan in 2022) and Argentina and Uruguay in 2022, the two latter countries in which exports likely have more or less halved in 2023 in value terms. Turkmenistan’s fertilizer exports, in total, reached 45 markets in 2022, compared to 15, on average, in 2017-19. While imports are more diversified, largely consisting of capital goods of machinery and electronics, the top three import partners also account for almost three-quarters of all imports (Figure A11). Import trends have been affected by import substitution efforts and demand patterns, following foreign exchange controls (Figure A12). In 2018, imports dipped as demand in construction materials32 declined. Capital goods have driven the gradual increase in import values, particularly in 2022 (Figure A13). The share of imports from the European Union (EU) and Turkiye has decreased in the past five years, while imports from China, Central Asia, and the South Caucasus have risen. Imports of cell phones have notably risen (16 percent of imports), which mostly originate from the United Arab Emirates, accounting for a quarter of imports in 2022 (compared to less than 10 in the previous years). Hence, the top three import sources (i.e., China, Turkiye, and the United Arab Emirates) accounted for 70 percent of all imports in 2022, higher than the regional average of 56 percent. Turkmenistan has implemented both import substitution and export promotion policies to support growth. In line with this import substitution program, official and black-market exchange rates remain distortedly spread, in part to provide a form of subsidy for certain imports. The Turkmen manat appreciated in 2021, reaching a parallel market exchange rate of around 19 manat per US$1.00 in 2022, implying that foreign currency became more available for small- and medium-size enterprises in priority sectors (EBRD 2023a). Priority is notably given to the food and beverage sectors. In general, import substitution strategies are associated with obstacles for competitiveness, aiming to decrease dependence on foreign imports while increasing innovation development and domestic production and without diminishing the quality of the goods produced. The difficulty associated with import substitution lies in the challenging balance of positive and negative potential outcomes. While import substitution seeks to achieve innovation development and can reduce unemployment, it also can lead to a diminished quality of products, based on an initially low level of technological development. This can be reinforced by reduced economic efficiency in light of weaker external competition. 32  Construction materials have been classified following New Zealand’s Ministry of Business, Innovation & Employment (GovNZ 2022). Turkmenistan I Economic Report I December 2024 56 Figure A9. Top Ten Nonenergy Exports, Accounting for Figure A10. Sharp Rise in Fertilizer Exports, Four-Quarters of Total Exports Notably to Turkiye Sources: World Bank staff calculations based on mirror trade data. Sources: World Bank staff calculations based on mirror trade data. Figure A11. Few Trade Partners Dominate Figure A12. Rise in Imports, 2022, Largely of Machinery and Equipment Goods Source: World Bank staff calculations based on mirror trade data. Source: World Bank staff calculations based on mirror trade data. Figure A13. Capital Goods and Construction Materials Driving Import Trends Source: World Bank staff calculations based on mirror trade data. Annex 2: Trade Flow Assessment: Reaching New Markets 57 Although imports of each category of agrifood product continue to exceed exports, export growth outweighs import growth—led by vegetables (tomatoes)—for which the trade partners are now almost exclusively regional partners (Figures A14, A15, A16). Turkmenistan has a negative trade balance for agrifood products (US$-468 million in 2022), and it only competitively exports tomatoes and other vegetables, with this trade increasing with regional partners. Nonetheless, imports have decreased notably for potatoes and apples since 2017. Reliance on the import of wheat is high and, along with global prices, wheat import values rose sharply in 2021-22, in large part, on the basis of Russia’s invasion of Ukraine. Following Russia’s invasion of Ukraine, several trade flows of consumer electronics and transport goods led to a drastic increase of such imports in Central Asia and South Caucasus countries—also experienced in Turkmenistan. The re-export value evidenced in mirror trade datasets only reflects published import and export data, and re-exports to Eurasian Economic Union Members are likely higher. In comparison to regional partners, Turkmenistan’s imports from the United Arab Emirates have noticeably risen—likely also from the Islamic Republic of Iran, for which trade data is unavailable (Figure А17). Trends for 2023 likely will follow those of 2022, with imports and fuel exports potentially rising further, while nonfuel exports may decline on the basis of lower fertilizer prices. Given that Central Asia and the South Caucasus, China, the EU, and Turkiye accounted for 91 percent of exports in 2022 (96 percent in 2017-21, on average) and 61 percent of imports (same average), a fairly complete image from these partners can be gleaned of 2023 trade patterns. Nonfuel exports declined in 2023, notably to Turkiye, on the basis of lower fertilizer prices, while exports of cotton and copper products also decreased. The shift in these trade patterns reflects Turkmenistan’s geographic position along trade routes that have experienced increased throughput following Russia’s invasion of Ukraine. Many of the sanctions imposed— notably by the EU and G7 Members against Russia—directly target transport and machinery equipment trade. Turkmenistan is positioned adjacent to the Middle Corridor (trade route) that connects Asia and Europe through the Caspian Sea and to the Southern Corridor that leads to the Indian Ocean via the Islamic Republic of Iran. Its trade along these two routes has increased, with trade facilitating agreements having been signed in 2023. Turkmenbashi International Seaport recorded a 2.5-fold increase in transit cargo volumes in 2022 due to the increase in the transit of petroleum products, metals, cars, machinery, food, spare parts, chemicals, and construction materials (EBRD 2023b). This trend has been accompanied by trade facilitation and cooperation initiatives. Borders were at least partially closed due to Covid-19 from 2020 to early 2022 (IRU 2023a), when trade resumed and rose sharply. In November 2021, Turkmenistan reached an agreement with the World Trade Organization to begin negotiations. This was accompanied by an initiative to create a Single Window for import and export operations, as stated in the Customs Code. Turkmenistan also joined the International Road Transport Electronic Pre-Declarations (IRU TIR-EPD) application as a first step to foster trade and customs procedure digitalization (IRU 2023b). In 2023, Turkmenistan contributed to the launch of the Trade Information Portal with the International Trade Centre, which is a guide for local and foreign entrepreneurs relating to import, export, and transit procedures. The Turkmen government also signed an agreement on the construction of the China-Kyrgyz Republic-Uzbekistan railway corridor and is starting bilateral trade, infrastructure, customs and border procedure cooperation negotiations with these partners, as well as with India (Jalilov 2022), the Islamic Republic of Iran (Bayrami 2023), Pakistan, and Tajikistan. Turkmenistan has relatively high unrealized nonfuel export potential to numerous markets, notably to the larger partners with which it has embarked on bilateral trade cooperation initiatives. Countries with the greatest export potential in absolute terms, excluding fuels, are China, Germany, India, Japan, and the United States. Turkmenistan recently has embarked on trade facilitation initiatives with China, Germany, and India which, together, account for almost US$188 million of trade potential, equivalent to 13 percent of nonfuel exports in 2022. Given Turkmenistan’s export concentration with nearby partners, its unrealized trade potential is larger for partners in Asia and Europe. Mexico and Saudi Arabia stand out, likely based on agrifood product export potential (when including fuels, Turkmenistan is predicted to have an “overtraded” relationship with China). Turkmenistan I Economic Report I December 2024 58 Figure A14. Outpace of Export versus Import Growth and Regional Partner Domination Sources: Own calculations based on mirror trade data. Figure A15. Most Top Vegetable Imports Show a Figure A16. Electronics and Transport Goods as Decreasing CAGR* Largest Imports, 2022 Source: World Bank staff calculations based on mirror trade data. Source: World Bank staff calculations based on mirror trade data. Notes: Label shows CAGR 2017–22. * Compound Annual Growth Rate. Figure A17. Import Sources of Machinery, Equipment, and Transport Goods Shift to the Middle East and North Africa Source: World Bank staff calculations based on mirror trade data. Annex 2: Trade Flow Assessment: Reaching New Markets 59 Figure A18. Quarterly Trade Flows with Key Partners Indicate a Continuation of 2022 Trends into 2023 Sources: World Bank staff calculations based on mirror trade data. Note: CASC = Central Asia and the South Caucasus (data currently only available until the third quarter of 2023). Figure A19. Turkmenistan’s Unrealized Export Potential (excluding Fuel Exports) Source: World Bank staff calculations, following gravity methodology in Mulabdic and Yasar (2021); and WDI. Note: The model has been simplified due to limited trade and tariff data availability for Turkmenistan. Figure A20. Regional Partners Have Similarly Low Coverage Rations in Existing Preferential Trade Arrangements Source: World Bank staff calculations based on mirror trade data. Turkmenistan I Economic Report I December 2024 60 Turkmenistan has few preferential trade arrangements (PTA) with geographically close partners, where export potential is limited. These, however, tend to be exceptionally shallow. The four PTA agreements have cover the same five areas of cooperation (Table A2), whereby that with Azerbaijan includes economic policy dialogue. A similar provision is incorporated in a Trade and Investment Framework Agreement with Kazakhstan, the Kyrgyz Republic, Tajikistan, Uzbekistan, and the United States, which was signed in 2024 and establishes a platform for trade and investment policy dialogue. In terms of taxation, Turkmenistan is relatively open to trade, with no export tax (except for gas and oil) and a 2 per cent import tax. Approximately 50 items are subject to a specific customs duty that ranges from 5 percent to 100 per cent, depending on the product (GovTM 2024). A customs clearance fee of 0.2 per cent also applies. Turkmenistan already is utilizing the momentum to establish cooperation along trade corridors; it should consider deepening and broadening trade agreements to promote export competitiveness. Along with expanding export potential to existing and new destinations, the economy would benefit from targeting new and sustainable export sectors, in line with its export promoting program (beyond vegetables). Numerous studies show that a deepening of trade agreements is associated with higher performance of export-oriented firms in global value chain sectors (although caution and support needs to be granted to the development of small firms), with the highest welfare gains accrued to countries that undertook the deepest liberalizations in nontariff as well as tariff barriers (Freeman 2021; Neri-Lainé, Orefice, and Ruta 2023). Other priorities lie in removing exchange rate distortions to improve export competitiveness and increase data transparency and accessibility. Table A2. Coverage of Preferential Trade Agreements by Deep Trade Agreement Category Armenia Georgia Russia Ukraine 1996 2000 1993 1995 Free Trade Agreement Free Trade Agreement: Industrial ✔ ✔ ✔ ✔ Free Trade Agreement: Agricultural ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ World Trade Organization, plus Customs Export Taxes ✔ ✔ ✔ ✔ Sanitary and phytosanitary ✖ ✖ ✖ ✖ Technical barriers to trade ✖ ✖ ✖ ✖ State trading enterprises ✖ ✖ ✖ ✖ Antidumping ✖ ✖ ✖ ✖ Countervailing measures ✖ ✖ ✖ ✖ State Aid ✖ ✖ ✖ ✖ Public Procurement ✖ ✖ ✖ ✖ Trade in services agreement (GATS) ✖ ✖ ✖ ✖ Trade-related intellectual property rights ✖ ✖ ✖ ✖ Competition Policy ✔ ✔ ✔ ✔ Intellectual Property Rights ✖ ✖ ✖ ✖ Organization, World Trade Movement of Capital ✖ ✖ ✖ ✖ extra Agriculture ✖ ✖ ✖ ✖ Approximation of Legislation ✖ ✖ ✖ ✖ Economic Policy Dialogue ✔ ✖ ✖ ✖ Source: World Bank (2024b). Annex 2: Trade Flow Assessment: Reaching New Markets 61 ANNEX 3: Good practices in addressing challenges in economies similar to Turkmenistan Challenges of Turkmenistan as a resource-rich country Box 1A: Challenges of a resource-rich country and basic strategies to manage resource revenues. Main challenges faced by a resource-rich country in diversifying its economy: 1. Overreliance on resource exports: Resource-rich countries often become overly dependent on exporting raw materials and commodities, making it difficult to develop other industries and diversify the economy. 2. Dutch Disease: The influx of resource revenues can cause a country's currency to appreciate in real terms, making other exports uncompetitive and hindering the development of non-resource sectors. 3. Lack of economic complexity and capabilities: Resource-rich countries tend to have less economic complexity and fewer capabilities to move up the value chain and diversify into more sophisticated products and services. 4. Weak institutions and governance: Poor governance, corruption, and rent-seeking behavior can undermine efforts to invest resource revenues productively and promote diversification. 5. Macroeconomic volatility: Fluctuations in global commodity prices create economic instability and make it difficult to sustain investment in non-resource sectors. 6. Inadequate human capital and skills: Resource-rich countries often lack the skilled workforce and technical capabilities needed to diversify the economy beyond the resource sector. 7. Vested interests and resistance to change: Powerful elites who benefit from the status quo can obstruct reforms and policies aimed at diversification. 8. Insufficient infrastructure and logistics: Underdeveloped transportation, communication, and other critical infrastructure can hinder the growth of non-resource industries. Overcoming these challenges requires a comprehensive strategy focused on building economic complexity, strengthening institutions, investing in human capital, and managing resource revenues prudently. Diversification is a long-term process that needs sustained commitment and the right policies. Managing hydrocarbon revenues in a resource-rich country. By taking these steps, resource-rich countries can transform hydrocarbon revenues into long-term prosperity rather than falling victim to the resource curse through the following strategies: 1. Establish transparent, accountable systems to manage hydrocarbon revenues. This requires assessing the extent of government control over resource-rich areas, addressing vested interests, and deploying resources like forensic accountants. Turkmenistan I Economic Report I December 2024 62 2. Create sovereign wealth funds to delink public spending from volatile oil and gas revenues. These funds should have clear objectives, mandates, and governance structures to insulate them from political interference. Fiscal rules and stabilization funds: Governments can establish funds that reserve part of resource income as saving hydrocarbons revenues during periods of high prices and drawing down on the savings during difficult periods to insulate the public budget from price volatility. 3. Implement progressive tax regimes on extractive industries, with the complexity depending on the government's administrative capacity. The optimal hydrocarbon fiscal regime should aim to attract investment while securing a reasonable share of economic rent for the government. Negotiating tax rates directly with companies is ineffective. Production-based and profit-based instruments or equity participation: Governments collect revenue from the oil and gas sector through tax and non-tax instruments, primarily production-based (e.g. royalties) or profit-based (e.g. resource rent taxes) over the life of the project. Some governments participate more directly in oil and gas projects by taking an equity interest, in addition to collecting revenue through taxes and other instruments. 4. Ensure that hydrocarbon wealth benefits all citizens through sustainable economic development, not just political elites. International actors can support this by making proper wealth management a condition for aid. 5. Create the conditions for high-quality spending on public goods like healthcare and education. Establish pre- qualification of bidders, fair and open tenders, and active monitoring of project implementation. 6. Refresh local content policies to prioritize workforce training, continuing education, and vocational programs to strengthen the quality of human capital. 7. Investing abroad: Governments can invest a substantial portion of oil and gas export revenues abroad through a sovereign wealth fund to insulate the domestic economy from oil price volatility and Dutch disease effects. Source: World Bank staff elaboration, based on Edouard Mien, Michael Goujon, 40 Years of Dutch Disease Literature: Lessons for Developing Countries. Comparative Economic Studies (2022) 64:351-383. Annex 3: Good practices in addressing challenges in economies similar to Turkmenistan 63 Challenges of Turkmenistan as a developing country Box 2A: Prosperity, Competitiveness, and Transition to the Next Stage of Development Prosperity of a country depends on its competitiveness, i.e. ability to increase productivity with which the country uses its labor, capital, and natural resources to produce goods and services. The competitiveness is a set of institutions, policies, and factors that determine the level of productivity of a country. High productivity depends on stable political and legal institutions, sound macroeconomic policies, quality of business environment, and development of economic clusters. The productivity level also determines the rates of return obtained by investments in an economy, which in turn are the fundamental drivers of its growth rates. Therefore, national competitiveness strategies should contain a set of synergizing policies in all these dimensions. The advanced countries are generally more competitive than most developing countries as they were able to achieve higher productivity as evidenced in their GDP per capita levels. Competitiveness has become a central topic of both advanced and developing countries in an increasingly open and integrated world economy. Countries compete to offer the most productive environment for business, because only business can create wealth, not the government. Thus, the government needs to create the enabling institutional environment necessary for business needs and convince business managers that it will stay that way. The quality of business environment enables companies to increase productivity include the following elements: (1) Access to high quality business inputs (Human resources, Capital availability/access to finance - foreign and local currency, Physical infrastructure, Administrative and information infrastructure - e.g. registration, permitting, transparency, Scientific and Technological Infrastructure, Efficient access to natural endowments); (2) Supporting Industries (availability of suppliers and supporting industries); (3) Context for firm strategy and rivalry - local incentives that encourage investment and productivity, e.g. wages, labor mobility, incentives for capital investments, property protection, corporate governance standards, open local competition, open foreign competition, competition law, absence of corruption. (4) Demand conditions (sophisticated and demanding local customers and needs, e.g. strict quality, safety, and environmental standards, consumer protection laws). In addition, it is necessary to develop clusters - a critical mass of firms and institutions in each sector of economy to synergize the efficiencies and externalities across related enterprises and organizations for education, research, market information, export promotions, and import of advanced technology. The World Economic Forum (WEF), which produces the yearly Global Competitiveness Index, assesses policy priorities for countries to enhance their competitiveness, taking into account the broad stages of development in which countries find themselves. Policy priorities and drivers of competitiveness vary at each stage of development. The WEF places factor-driven economies in the first stage of development. Their value added comes mostly from the mobilization of endowments with outcomes dependent on (i) the availability and abundance of these endowments; and (ii) the presence of basic requirements (macroeconomic stability, basic physical and human capital). Such economies are characterized by low productivity and low wages. At the second stage of development, efficiency-driven economies promote growth primarily by improvements in the efficiency with which production is organized, and product quality. For countries at this stage, the requirements include those basic requirements and efficiency enhancers. The final stage of development corresponds to innovation-driven (advanced) economies, where firms compete mostly through producing new and unique products at the highest possible level of efficiency. For countries at this stage, the requirements include those for two previous stages of development, plus innovation and sophistication factors. Turkmenistan I Economic Report I December 2024 64 GLOBAL COMPETITIVENESS INDEX Efficiency enhancers Innovation and sophistication Basic requirements subindex subindex factors subindex Pillar 5. Higher education and training Pillar 1. Institutions Pillar 6. Goods market efficiency Pillar 2. Infrastructure Pillar 7. Labor market efficiency Pillar 11. Business Pillar 3. Macroeconomic Pillar 8. Financial market sophistication environment development Pillar 12. Innovation Pillar 4. Health and primary Pillar 9. Technological education readiness Pillar 10. Market size Key for Key for Key for factor-driven efficiency-driven innovation-driven economies economies economies Sources: The Global Competitiveness Report 2017-2018, World Economic Forum, September 2017; World Bank staff elaboration Annex 3: Good practices in addressing challenges in economies similar to Turkmenistan 65 Challenges of Turkmenistan as a transition economy Box 3A: Challenges and Policies of a Transition Economy A transition economy is one that is changing from central planning to free markets. Since the collapse of communism in the late 1980s, countries of the former Soviet Union, and its satellite states, sought to embrace market capitalism and abandon central planning. The following steps are required to transit from central planning to a market economy: 1. Demonopolization and restructuring of state-owned enterprises (SOEs) and state-owned banks (SOBs), imposing hard budget constraints on SOEs, which provide incentives to improve efficiency; creation of markets by establishing many producers via allowing market entry by local private and foreign entities. 2. Liberalization of domestic prices on goods, inputs (raw materials market, labor market, financial market, foreign exchange market*), services, and of international trade to allow reallocating resources to their most efficient use. 3. Macroeconomic stabilization – bringing inflation under control and lowering it over time, after the initial burst of high inflation that follows from liberalization and the release of pent-up demand. This process requires discipline over the government budget (fiscal policy) and the growth of money and credit (monetary policy). 4. Establish antimonopoly body and market regulators in each sector to prevent monopolization, maintain competition and functioning of market mechanism. 5. Privatization of SOEs in competitive markets (small-scale privatization, large-scale privatization) and SOBs to ensure the dominance of private companies over state-owned and achieving effective enterprise management and economic efficiency. 6. Legal and institutional reforms – to secure private property rights, redefine role of the state in the market economy (changing it from producer to strategic regulator of markets and facilitator), establish the rule of law, anti-corruption, transparent market-entry regulations. 7. Banking reform and interest rate liberalization. 8. Develop securities markets and non-bank financial institutions. Sources: World Bank staff elaboration based on "Transition Economies: An IMF Perspective on Progress and Prospects". IMF. 3 November 2000. Retrieved 9 March 2009. Havrylyshyn, Oleh; Wolf, Thomas. Determinants of Growth in Transition Countries, Finance & Development Magazine, June 1999, Volume 36, Number 2 by the International Monetary Fund. Note: Parallel market has obvious adverse effects that reinforces a strong case for promoting greater exchange rate flexibility and relaxing foreign exchange restrictions. First, there is the cost of policing illegal activities. Second, there is a loss of import tariff revenue as a result of illegal activities such as smuggling and under-invoicing of import contracts, and a reduced flow of foreign exchange to the central bank. Third, the existence of a parallel market encourages corruption and rent-seeking. Fourth, high parallel-market premium might negatively affect inward FDIs and increase dollarization. Fifth, the persisting high unofficial foreign exchange market margin contributes to inflation expectations about future exchange rate depreciation that contributes to inflation. These adverse effects reinforce a strong case for promoting greater exchange rate flexibility and relaxing foreign exchange restrictions, allowing the market forces to guide the exchange rate. This move would help break up inflationary expectations and foster unification of the official and unofficial exchange rates that will improve export competitiveness and attract more FDI. The sizable buffers provide ample room for a gradual removal of foreign exchange restrictions while maintaining adequate levels of international reserves. Turkmenistan I Economic Report I December 2024 66 Challenges of Turkmenistan in the era of global climate change and decarbonization Box 4A: Challenges and Policies of Oil and Gas Producers 1. In recent years, the energy sector has drastically increased its focus on sustainable, resilient assets and renewable energy sources. As a result, the energy mix is shifting. The world is increasingly electrifying, with renewable energy sources expected to meet up to 80 percent of global demand by 2050. Climate goals of the advanced countries governments, NGOs and investors require a significant reduction in fossil fuel production and consumption that threaten the long-term survival of Turkmenistan il and gas companies. 2. An increasing number of countries and companies are pledging to become carbon neutral by 2050, and fossil- fuel supply and demand are set to decline, particularly in oil and gas. Of the two, gas appears to be more resilient in the years to come, especially liquefied natural gas, but even LNG will ultimately be substituted by renewable energy sources Fossil fuel demand will remain high in the medium term. 3. In the face of changing perspectives on fossil fuels and increasing electrification, the oil and gas industry needs to take immediate action to prepare for the years to come. One such action is increasing the share of natural gas in portfolios. The gas, unlike other fossil fuels, will experience growing demand until the mid- 2030s. In a 1.5-degree climate pathway scenario, natural gas will be more resilient than other fossil fuels for another five to ten years. This is primarily because natural gas is among the cleanest fossil fuels, so it will be the last to be replaced as part of the energy transition. 4. Rapid overall energy demand growth in Asian markets (coal-to-gas switching program) and chemical sector growth will contribute to gas-demand growth until 2035. Gas demand will peak in the mid- to late 2030s, and LNG demand will peak about a decade later. 5. Ultimately, however, the need to reduce emissions across the board will affect all fossil fuels, including gas and LNG. As a result, demand will decline. Much uncertainty remains regarding which geographies and sectors will act first, as well as how quickly demand will decline. For example, McKinsey’s 1.5-degree outlook shows demand at 72 percent below 2016 levels by 2050. Gas and LNG companies must take action to stay ahead of the curve. A clear 10-15-year strategy can help leaders determine priorities over the longer term. With this in mind, leaders should focus on the following priorities: • Integrate emissions costs into business decisions. Companies need to accept and acknowledge risk by incorporating emissions into their calculations of returns on project investments. This means looking at new investments from the perspective of both cost and emissions. Companies need to accept and acknowledge risk by incorporating economic impact of emissions into their calculations of returns on project investments. • Build a resilient portfolio. Investments made today should aim to lower production costs. When demand for gas declines, expensive sources will become uncompetitive and ultimately be the first to stop supplying customers. Meanwhile, reducing the relative emissions intensity of a project will also serve to reduce costs if and when carbon taxes are introduced. Gaining certainty in future demand can be achieved by focusing on geographies where gas demand is expected to play a role in displacing coal and continue growing over the longer term, particularly in Asia. This also includes sectors in which gas plays a role in reducing emissions from existing technologies, such as LNG bunkering, and where gas will be difficult to displace, such as some industrial activities. Sources: The impact of decarbonization on the gas and LNG industry, McKinsey & Company, June 30, 2021. https://www.mckinsey.com/industries/oil-and-gas/our-insights/the-impact-of-decarbonization-on-the-gas-and-lng-industry?cid=eml-web Annex 3: Good practices in addressing challenges in economies similar to Turkmenistan 67 REFERENCES Auty, R. 2002. Sustaining Development in Mineral Economies: The Resource Curse Thesis. DOI:10.4324/9780203422595. 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