Building a Competitive Investment Landscape in Turkmenistan

Executive summary

Turkmenistan has displayed strong growth since independence, but economic diversification will be key to building a resilient economy going forward

Diversification of production, employment and exports will be central to Turkmenistan’s long-term prosperity. While the country continues to record positive economic growth amidst global challenges, it remains very dependent on the export of hydrocarbons, stressing the need to advance economic diversification in a context of increasingly fragmented value chains and accelerating climate change. The extractives sector is also highly capital- rather than labour-intensive. Diversification can help the economy generate more – and more productive – jobs for Turkmenistan’s people.

The opening and diversification of the economy is showing signs of progress. Steps towards WTO membership have intensified since Turkmenistan obtained acceding country status, with technical working groups and legislative reforms under way. Private sector dynamism is growing, as shown by positive trends in non-hydrocarbon exports and business creation. State policies on import substitution and export promotion have helped to expand production in several sectors over the last decade, including fertilisers, inorganic chemicals, fruits and vegetables. In addition to established strong trade ties with China, Turkmenistan is steadily diversifying trade links, both with Central Asian neighbours and beyond. Attracting foreign direct investment (FDI) to non-resource tradable sectors could further stimulate this economic growth but will require further improvements in the business and investment climate.

An OECD survey of the private sector highlights cautious optimism about the evolving business environment

Survey responses from more than 30 local private sector firms complemented by interviews with development partners reflect some positive developments in the business and investment climate. Reforms have made registering a business and paying taxes easier, but excessive documentation, limited digitalisation, and import substitution strategies hamper new market entrants. Respondents report that skills shortages persist, with education and training programmes yet to respond fully to labour market demands. While the digitalisation of customs and trade procedures is advancing, restricted internet access caused by high tariffs and insufficient infrastructure continues to be a significant constraint. The persistence of the de facto dual exchange rate system and convertibility restrictions also represents a significant obstacle for FDI.

To capitalise on recent progress, Turkmenistan should accelerate efforts to ease regulatory barriers, increase internet access and strengthen the competition framework. Easing the regulatory burden for businesses at registration would allow them to be operational faster than at present, while developments in the legal field could strengthen the competition framework and improve access to finance to spur business creation. Human capital shortages could be addressed through the introduction of vocational education and training (VET) programmes involving the private sector, while entrepreneurship education and training (EET) programmes could contribute to help prospective entrepreneurs further foster the market by establishing new businesses. Expanding the advances in digitalisation would require an increase in digital literacy coupled with investment in infrastructure and a reduction of the existing tariffs, levelling the playing field between domestic and international firms. Digitalisation should also be pursued in trade-related matters to simplify the procedures at the customs for transit drivers and to foster cross-border co-operation, as well as for tax payment procedures. Additional reforms, for instance aligning with international standards in the application by state-owned enterprises (SOEs) of reporting standards, the introduction of a fully functional separate office of the Business Ombudsman and the unification of the exchange could reassure investors and render the country’s investment landscape more attractive.

Turkmenistan could benefit from a more proactive approach to FDI attraction through the establishment of an Investment Promotion Agency (IPA)

Turkmenistan manages to attract investment to its extractive sectors but could benefit from a diversification in the nature of investment projects and a streamlined governance framework. The country attracts FDI at the same rate as it neighbours and enjoys a higher investment stock than most of them, a testimony of a solid interest from investors. However, this investment is highly concentrated in hydrocarbons. The country is active on the international stage, organising numerous fora, and it takes part in foreign events to present itself as an attractive destination. However, investment-related competencies are scattered across several governmental and non-governmental institutions.

To realise fully its investment potential, Turkmenistan could establish a specific body dealing with investment – an Investment Promotion Agency (IPA). IPAs are flexible institutions which can adopt various organisational structures and hierarchical subordinations as long as their competencies allow them to realise the objectives set by a targeted national investment strategy that is aligned with the objectives of a national economic strategy. Investment-related matters can be divided in two categories – investment promotion, aiming at sparking the interest in prospective investors, and investment facilitation, being the assistance provided to those that decided to invest. An efficient IPA would need to provide transparent information about the investment landscape and opportunities in the country, but also about its own performance, based on monitoring and evaluation tools, to reach out to prospective investors and serve as an intermediary between the established ones and the government, as well as to present the collected feedback to the government to nurture policy change if it is needed and ensure investment retention. If needed, the IPA could assume additional mandates, such as managing export promotion, but also some less common ones, such as being responsible for economic zones and public-private partnerships (PPP).