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The technical assistance (TA) will support the Central Bank of Turkmenistan (CBT) in developing modern, best practice legislation on e- signatures and deposit insurance, as well as implementing rules and regulations for e-signatures, deposit insurance, and microfinance.

Impact and Outcome: The impact will be an improved legal framework for delivery of financial services in Turkmenistan. The outcome will be the commencement of the legislative process for draft laws on deposit insurance and e-signatures.

Methodology and Key Activities: The TA will deliver two outputs.

i. Capacity of Central Bank of Turkmenistan staff in deposit insurance, e-signatures, and microfinance strengthened. The TA will finance training of CBT staff in international best practice and principles for deposit insurance (including the principles of the International Association of Deposit Insurers), e-signatures, microfinance, rules and procedures for quality legal drafting, and quality assurance checks. International consultants will provide best practice and examples, and counterpart drafting teams will consist of national experts.

ii. New laws (deposit insurance and e-signatures) and implementing rules and regulations (deposit insurance, e-signatures, and microfinance) finalized. The TA will (a) review existing legal frameworks, and assess and recommend applicability of international best practice and principles on deposit insurance and e-signatures; (b) conduct consultations on incorporating international best practice and principles into deposit insurance and e-signatures with the CBT and other national stakeholders; (c) support the CBT team in preparing draft laws for deposit insurance and e-signatures; (d) support the CBT team in preparing implementing rules and regulations for deposit insurance, e-signatures, and the Law on Microfinance Institutions and Microfinance; (e) conduct validation workshops to present draft laws and implementing rules and regulations to relevant stakeholders; (f) conduct quality assurance checks; and (g) finalize draft laws and implementing rules and regulations. Discussion of regulations and implementation of laws, along with related legislation and how it may need to be aligned with changing local conditions, will be important. International consultants will work with national counterparts from the CBT and other agencies CBT may designate. The partner process will involve information sharing, legislation drafting, on-the-job training, and formal training sessions by consultants. CBT and government lawyers will, in cooperation with consultants, manage the structure and format of the legislation, and align existing and planned laws with implementing rules and regulations.

Currently, the TA scope is being refined with the government at their request. The new TA scope and associated outputs will be posted upon finalization.

Turkmenistan's economy grew 10.2% in 2013, and gross domestic product (GDP) per capita has more than tripled since 2003 to reach the level of upper middle-income economies. Economic growth has been based on hydrocarbon exports and public spending on infrastructure. Oil and gas production and exports are expected to increase in 2014, providing continued funding for the public sector and subsidies for basic goods and services. GDP is forecast to grow 10.7% in 2014 and 12.5% in 2015 with increased public investment and gas exports to the People's Republic of China. Inflation is projected at 5.7% in 2014 and 6.0% in 2015.

The financial system comprises 12 banks (of which 6 are state-owned and target specific sectors such as agriculture and construction), a nascent securities market, and two insurance companies. The State Development Bank of Turkmenistan has been operating since September 2011. Banks collaborating with financial services companies, including Western Union, provide remittance services. Banks dominate the financial system in volume and value of activity. While most bank lending is to state-owned enterprises, credit to the private sector is growing. Government-sponsored programs encourage the growth of small and medium-sized enterprises and agriculture.

Building and strengthening financial infrastructure and increasing access to finance are high on Turkmenistan's development agenda. The CBT is creating better financial market infrastructure for more active private sector engagement in the economy. New banking legislation, regulation, and supervision will improve investments and help broaden growth and financial access. The gradual shift from directed lending to risk-based lending is an important step towards this. All banks are adopting International Financial Reporting Standards. The International Monetary Fund (IMF) noted progress in these areas as well as on the Anti-Money-Laundering/Combating the Financing of Terrorism arrangements. The IMF provided suggestions on reducing bank sector segmentation and interest rate controls, as well as improving statistical standards and data availability.

The government recognizes the need to support private sector development and economic diversification. While large hydrocarbon exports have produced strong economic growth over the past decade, it has also stifled economic diversification. The government aims to increase the private sector's share in the non-hydrocarbon economy from 47.0% in 2010 to 70.0% by 2020. It targets private sector development in construction, transportation, and wholesale and retail trade, as well as agro-industrial processing. Development and financing of non-hydrocarbon value chains is a challenge. An expanded, accessible, and efficient finance sector is necessary to facilitate diversified private sector development. The government expects to modernize banking and the financial system to increase their contribution to overall economic restructuring. In particular, the government wants financial institutions to provide an array of financial services and products to small and medium-sized enterprises.

The CBT is committed to improving the legal environment for the finance sector and has announced a variety of laws to be created and submitted to Parliament. Deposit insurance is in place, but the legal and regulatory framework needs strengthening. The authorities aim to develop regulations to implement the recent microfinance and credit union laws, and to create new institutions for microfinance.

A wide range of legislation will be created by 2017 for which development partner assistance is needed. The government takes about 1 year from the initial plan to the passage of laws. Three major laws have been completed and enacted in 2011 covering the central bank, credit institutions and banking activity, and foreign exchange regulation and control. Current priorities include developing laws on e-signatures and deposit insurance, as well as implementing rules and regulations for e-signatures, deposit insurance, and microfinance. Jointly with other interested public agencies, the CBT will draft laws consistent with international best practice. The authorities seek ADB support in the form of high-quality international consultants to provide capacity building and policy and advisory support on best practice context and examples.