Turkey - Third Structural Adjustment Loan Project

Document of ;t *X The World Bank FOR OFFICIAL USE ONLY Report No. P-3273-TU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A THIRD STRUCTURAL ADJUSTMENT LOAN TO THE REPUBLIC OF TURKEY May 7, 1982 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TURKEY CURRENCY EQUIVALENTS (Weighted Average to 1976) Value of US$ 1959 TL 9.00 1970 TL 11.50 1971 TL 14.90 1972 TL 14.15 1973 TL 14.15 1974 TL 13.90 1975 TL 14.45 1976 TL 16.05 1977 September TL 19.45 1978 March TL 25.25 1979 June TL 47.10 1980 January TL 70.00 August TL 80.00 December TL 91.75 1981 April TL 98.20 June T107.50 September TLI21.10 1982 January TL138.00 April TL147.30 FISCAL YEAR Republic of Turkey March 1 to February 28 - through 1981 March 1 to December 31, 1982 January I to December 31 - from 1983 LIST OF ABBREVIATIONS CD Certificate of Deposit DSI State Hydraulic Works DYB State Investment Bank EEC European Economic Community IMF International Monetary Fund ITS Industrialization and Trade Strategy Report MAF Ministry of Agriculture and Forestry OECD Organization for Economic Cooperation and Development PIR Public Investment Review Report SAL Structural Adjustment Loan SDR Special Drawing Rights SEE State Economic Enterprise SPO State Planning Organization TCZB Agriculture Bank TEK Turkish Electricity Authority TKI Turkish Coal Authority TL Turkish Lira TOPRAKSU Soil and Water Agency TPAO Turkish Petroleum Corporation s9  FOR OFFICIAL USE ONLY TURKEY THIRD STRUCTURAL ADJUSTMENT LOAN PRESIDENT'S REPORT TABLE OF CONTENTS Page No. PART I - THE ECONOMY 1 PART II - THE STRUCTURAL ADJUSTMENT PROGRAM 3 Introduction 3 Progress Under SAL II 4 - Macroeconomic Policies 4 - Domestic Resource Mobilization 4 - Balance of Payments 5 - Investment and Sector Policies 5 - SEE Reform 6 The Role of the Bank In Turkey's Structural Adjustment 6 Bank/IMF Cooperation 7 Conclusion - Progress to Date 7 PART III - THE SAL III PROGRAM 8 A. Macroeconomic Policies 8 - Medium-Term Framework 8 - Trade 17 - Exports 19 - Reasons for Performance 21 - Imports 23 - Domestic Resource Mobilization 24 - Cost of Credit 25 - Private Investment 25 - Foreign Investment 26 - External Debt 27 B. Public Investment 27 A - 1982 Public Investment Program 28 - Sectoral Composition 29 - Project Composition 30 - Size 31 - Project Evaluation Capacity 33 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - TABLE OF CONTENTS (Cont'd) Page No. C. State Economic Enterprises 34 - Background 34 - The SAL III Package for SEEs 35 - Financial Results and Prospects 37 D. Agriculture 39 - Background 39 - Export and Production Support Measures 40 - Public Investment 40 - Institutional Developments 41 - Fertilizer Stocks 42 - Prospects 42 E. Energy 43 - Background 43 - Public Investment 44 - Prices 44 - Conservation 45 - Institutions 45 - Prospects 46 F. Overview, Prospects and Future Issues 46 - Overview 46 - Medium-Term Prospects 47 - Creditworthiness 49 - Risks 49 - The Costs of Restructuring 50 PART IV - THE PROPOSED LOAN 51 - Procurement, Disbursements, and Administration 52 - Monitoring 52 PART V - BANK GROUP OPERATIONS IN TURKEY 53 PART VI- LEGAL INSTRUMENTS AND AUTHORITY 55 PART VII - RECOMMENDATION 55  - iii - TABLE OF CONTENTS (Cont'd) Page No. TEXT TABLES Table 1 - Structural Issues and the Scope of SAL III 9 Table 2 - Value of Exports 19 Table 3 - Exports by Destination 20 Table 4 - Public Fixed Investment 1979-82 28 Table 5 - Sectoral Distribution of Public Fixed Investment 29 Table 6 - Change in Fixed Investment 1980-82 30 Table 7 - Financing of Public Investment 1979-82 32 Table 8 - SEE Operating Results and Projections 37 Table 9 - SEE Investment 38 Table 10 - Projections of Selected Economic Indicators 47 Chart I - Structural Change in Turkey's Exports 18 ANNEXES Annex I: Social and Economic Data Sheets Annex II: Status of Bank Group Operations in Turkey Annex III: Supplementary Loan Data Sheet Annex IV-A: Government Letter and Statement of Development Policies - 1982 Annex IV-B: SAL III Action Program Annex V: IMF Transactions Annex VI: SAL II - Status of Actions Envisaged in 1981 Statement of Development Policy Annex VII: Table 1: Operational SEEs - Summary of Financial Results Table 2: Operational SEEs - Financial Results by Firm Table 3: Operational SEEs - Financing of Total Investment Main Sectors Table 4: Major Reductions in 1982 Public Investment Program for Very Large Projects Contained in 1981 Public Investment Program Chart II: Structural Change in Turkey's Exports MAP  .  TURKEY THIRD STRUCTURAL ADJUSTMENT LOAN Loan Summary Borrower : Republic of Turkey Loan Amount US$304.5 million equivalent in various currencies (including the capitalized front-end fee). Terms : 17 years including 4 years grace, with interest at 11.6 percent. Description : The loan would be in further support of Turkey's stabilization and structural adjustment program initiated in January 1980, and designed to restore sustainable growth. This program provided the basis for the $200 million Structural Adjustment Loan I (No. 1818-TU), its $75 million Supplement (No. 1915-TU), and the $300 million Structural Adjustment Loan II (No. 1987-TU). The measures which provide the basis for this new loan are in the areas of: (a) macroeconomic policies--domestic resource mobilization, export promotion, import liberalization, medium-term framework; (b) rationalization of public investment; (c) reform of the State Economic Enterprises; and (d) policies in the agriculture and energy sectors. The loan would finance all imports, except for items financed by other sources and luxury, military or paramilitary items and nuclear reactors. The main risks relate to external uncertainties A facing the growth of trade, and internal developments which might impede the Government's determination to carry out the policy reforms designed to restore domestic and external financial equilibrium, rationalize investment and carry out SEE reform. Estimated Disbursements ; $ Million Bank FY 1982 1983 Annual 50.0 254.5 Cumulative 50.0 304.5  I  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED THIRD STRUCTURAL ADJUSTMENT LOAN TO THE REPUBLIC OF TURKEY 1. I submit the following report and recommendation on a proposed Third Structural Adjustment Loan to the Republic of Turkey for the equivalent of US$304.5 million to support the Government's program of structural reforms designed to restore financial equilibrium and achieve sustainable growth. The loan would have a term of 17 years including 4 years of grace, with interest at 11.6 percent per annum. PART I - THE ECONOMY 2. The last economic report entitled "Turkey: Policies and Prospects for Growth" (No. 2657a-TU) and the Postscript thereto, were distributed to the Executive Directors in December 1979 and March 1980 respectively. Updating of economic prospects as well as in depth economic analysis and dialogue has since been undertaken through the continuing work on structural adjustment loans (SALs) to Turkey, and two special economic missions. The report of the special economic mission in November/December 1980 to evaluate the investment program and entitled "Turkey: Public Sector Investment Review" (No. 3472-TU) was distributed to the Executive Directors in December 1981. The report of another special economic mission in May/June 1981 to review Turkey's industrialization and trade strategy, entitled "Turkey: Industrialization and Trade Strategy" (No. 3641-TU), was distributed to the Executive Directors in March 1982. This report contains several Annexes, which are listed in the Table of Contents. 3. Turkey is about as big as France and Germany combined, with an estimated GNP per capita of $1,460 in 1980. With a population of around 45 million, the density is low (78 per square kilometer of agricultural land), although the rate of urbanization is high (about 45 percent). Population growth is below the median for middle-income countries (2.2 percent per annum). But the employment situation has deteriorated steadily, with an unemployment rate currently about 16 percent, despite rapid economic growth in the mid-70s and substantial emigration of workers to Western Europe and, more recently, to the Middle East. There is little or no absolute poverty, but income distribution is still relatively skewed. Data for more recent periods is incomplete, but indicates a worsening, especially of the position of wage and salary earners over the last few years, with a sharp real decline in the minimum wage. There are also considerable regional differences, and large rural-urban disparities. Educational enrollments have expanded greatly, but the rate of adult literacy remains relatively low (60 percent in 1975). 4. Agriculture is the most important sector in the economy. It contributes 23 percent of GDP (1980), employs about 55 percent of the labor force, and provides about half of merchandise exports. Turkey is one of the very few developing countries which is self-sufficient in food.  -2- Turkish agriculture is dualistic: a modern irrigated sector produces cash crops and most exports; a traditional rainfed agricultural sector emphasizes grains and livestock mainly on the Anatolian plateau where only a small part of the irrigation potential has been developed, despite considerable investment. Turkey has a large potential for expanding agricultural production and exports, but it faces major constraints like small and fragmented farm holdings, inadequate research and extension services, insufficient credit, and poor utilization of irrigated areas. 5. The major emphasis of the past development strategy has been on rapid industrialization. Thus, in the 1970s industry absorbed up to 30 percent of total investment and today accounts for 19 percent of GDP and 48 percent of exports (mainly textiles, processed foods and leather products), but only 14 percent of employment. The private sector is dominant in exports and accounts for some 60 percent of industrial value-added. Industrial policy has sought to achieve self-sufficiency through import substitution, while exports have generally been given a secondary role. The principal policy instruments have been large public investments in State Economic Enterprises (SEEs), and high levels of protection for private investment. These policies yielded high growth rates and domestic production of some key basic and intermediate goods. But they also resulted in the establishment of uncompetitive industries, wasteful of capital and other inputs and with limited export possibilities. Many manufacturing SEEs are characterized by inefficiency and high dependence on imported inputs. 6. Turkey has large underdeveloped energy resources (hydropower and lignite), but little petroleum. Energy consumption has grown in line with GDP, but remains below the per capita average for middle-income developing countries. Oil imports account for over 85 percent of oil consumption and cost $3.6 billion in 1980, equivalent to 122 percent of exports. Hence, the energy situation has become a major preoccupation of the Government. Prices for most products--especially petroleum products--have been brought into line with international prices since 1980. Investments in energy have the largest share in the public investment program. The principal sector issues include institutional constraints, insufficient resources for exploration, poor project implementation capacity and the lack of comprehensive demand management. 7. The economic policies pursued during the seventies led to rapid economic growth, especially in industry, until the mid-1970s. By then the incipient problems were greatly aggravated by the rise in the cost of oil and other imports which led to a sharp deterioration in Turkey's terms of trade. The response was inappropriate--continued expansionary policies and capital-intensive import-substituting investment, based mainly on external borrowing, much of it short-term. By 1977 the budget deficit, as a percentage of GDP, had increased to over 6 percent, external indebtedness to $11.0 billion, of which 56 percent was short-term, and inflation to 25 percent. During the crisis which followed, economic management'remained weak. It was not until January 1980 that the Government launched a policy of structural adjustment towards a greater reliance on market forces and an outward orientation.  - 3 - 8. Following a period of sustained unrest, terrorism and deterioration of the parliamentary process, the military assumed power in September 1980. The new government, like previous military regimes in 1960-61 and 1971-73, has emphasized its commitment to restore civilian rule, set for 1984, following the adoption of a new constitution. A Consultative Assembly has been set up to draft the constitution. It is also empowered to debate issues and legislation submitted to it at the discretion of the government. The Assembly's powers are limited but it is playing an increasingly important role in economic affairs, especially with respect to the reform of SEEs (see para. 71 below) and the budgetary process. PART II - THE STRUCTURAL ADJUSTMENT PROGRAM Introduction 9. The Government's program for restructuring the Turkish economy, initiated in January 1980, is now entering its third year. The original objectives set out in January 1980 included a reduction in the rate of inflation, an increase in foreign exchange inflows, improved domestic resource mobilization through greater public sector efficiency and increased private savings, a more rational public investment program, and better external debt management. The program, and SAL I which supported it, aimed at stabilizing a crisis situation through a series of urgent measures designed to correct serious external and domestic imbalances. By 1981, the Government had evolved a more comprehensive set of adjustment policies with more clearly defined actions with basically the same objectives. These were set out in the Government's Statement of Development Policies dated February 20, 1981, and were described in the President's Report for SAL II (No. P-3034-TU dated April 20, 1981). 10. The adjustment program is designed to restore balance to the economy and achieve sustainable growth over the medium-term. The program includes: (a) the adoption of a realistic and flexible exchange rate; (b) incentives to encourage producers to export; (c) tight monetary conditions to restrain domestic demand; (d) deregulation of interest rates to reflect market conditions and encourage private savings; (e) the strengthening of public finances through tax reform; (f) improved external debt management policies and information systems; (g) steps to improve institutional efficiency in key sectors; (h) a rationalization of the public investment program; and (i) the initiation of reforms of the SEEs designed to reduce their burden on the budget and improve their efficiency. 11. The adjustment program as a whole involves far reaching changes affecting all facets of the Turkish economy. It entails substantial changes in attitudes, institutions, and legal and policy frameworks, all of which will take time and face considerable resistance. Overall, progress to date is satisfactory and in some areas such as trade, domestic resource mobilization and inflation control, extremely encouraging. Progress with respect to the major economic indicators and specific progress against the SAL II objectives is described more fully below.  -4- Progress under SAL II 12. The Second Structural Adjustment Loan focussed on the following policy areas; (a) macroeconomic policies--domestic resource mobilization, export promotion, and import liberalization; (b) investment and sectoral policies--public and private investments, energy and agriculture; and (c) reform of the SEEs. Progress against monitorable actions 1/ in these three areas was reviewed in November 1981 as a condition of tranche release, and reported on to the Executive Directors in the Memorandum entitled "Turkey: Review of the Second Structural Adjustment Loan" (SecM 81-1033) dated December 30, 1981. Progress continues to be satisfactory. The new policies are beginning to show results and, in many cases, actual performance in 1981 met or exceeded the Government's own targets. Macroeconomic Policies: 13. In response to a policy of monetary, credit and fiscal restraints (which the IMF is monitoring), and of strict wage control, domestic demand has been restrained and the average annual rate of inflation has been brought down from 107 percent in 1980, to around 35 percent in 1981. After two years of economic stagnation, and helped by internal security and labor peace, GDP has shown a positive real growth of around 4.4 percent in 1981. While there has been a growth in all sectors, that in the industrial sector amounted to 7.6 percent. A flexible exchange rate policy and export incentives helped to substantially improve the balance of payments. Domestic Resource Mobilization 14. A major tax reform package and policies to stimulate private savings were introduced in early 1981. These measures led to a substantial improvement in tax revenues which, together with better expenditure control, reduced the budget deficit to less than 1 percent of CNP in 1981 as against 5 percent in 1980. Overall, tax revenues increased by 71 percent in 1981 and, as a share of GDP, rose from 17.3 percent to 19.8 percent, good progress towards the Government's target of a 21 percent share by 1982. Tax buoyancy, which had averaged 0.99 percent over the previous five years, increased to 1.6 percent in 1981. Through a restructuring of the income tax there was also some improvement in the distribution of the tax burden, another of the program's objectives. 15. Commercial bank interest rates, deregulated in July 1980, have substantially increased and are now, for non-preferential credits, substantially positive. As a result, total bank deposits increased by 68 percent in 1981 over the 1980 level, with a striking shift in composition towards time deposits which grew by 150 percent and now comprise 33 percent of 1/ For a summary of key actions envisaged under SAL II and their current status see Annex VI. An overview of the SAL program is given in Table 1, pages 9-16.  -5- the total. In addition, certificates of deposit (CDs), which were introduced into the Turkish banking system in 1980, increased seven-fold_in_1981, and no comprise 11 percent of total bank deposits. 16. Since July 1981, private companies have been free to set their own bond rates in competition with the banks, and can use flexible rates if they so choose. As a result of steps to improve SEE financial performance--by freeing most SEE prices and gradually exposing SEEs to market forces--SEE losses are projected to be only TL 7 billion in 1981, compared with TL 23 billion in 1980 and TL 72 billion in 1979, all in current prices. Balance of Payments 17. Developments on the external account have been particularly impressive. Export growth in 1981 of 62 percent in dollar value was substantially higher than projected and was characterized by a shift in destination towards the Middle East, and a concentration in manufactured goods. 1/ A new and rapidly growing source of foreign exchange comes from construction contracts in the Middle East (around $9 billion outstanding by end 1981). These activities are also expected to add to worker remittances, which remained strong throughout 1981. While imports grew in value by 13 percent in 1981, in volume terms they remain below the 1974-77 average. Given these developments, the current account deficit in 1981 is expected to be about $2.4 billion (3 percent of GNP) compared with $3.2 billion in 1980 (5.5 percent of GNP). Investment and Sector Policies 18. There has been substantial progress in the rationalization of the 1982 Public Investment Program, which is discussed fully in paras. 54-56 below. 19. Within the key sectors of agriculture and energy there is measurable progress to report. The reorganization of the Ministry of Agriculture consolidated field services under new provincial directors in 60 of the 67 provinces. Input subsidies have been eliminated on plant protection materials and fertilizer prices increased tenfold since 1980, thereby sharply reducing the margin between retail and cif equivalent prices to about 40 percent. The number of commodities receiving price supports was reduced from 23 to 16 and their application made more flexible. The Government decided to phase in the levying of the full operation and maintenance costs of major irrigation schemes on beneficiaries over a three-year period, 1982 to 1984. Similar measures are being prepared for the recovery of O&M costs for on-farm and small scale systems. 20. A review with the Bank of the energy sector was carried out during September 1981 and the report of this mission is now under discussion. The Government continued to raise petroleum prices to keep pace with international costs and has generally increased other energy prices as well, for example, lignite prices and high voltage electricity tariffs have more than doubled 1/ Export developments are analyzed in more detail in paras. 34-40.  - 6 - while hard coal prices increased by 57 to 96 percent. The draft legislation reorganizing TPAO 1/ and allowing private mining of lignite is still under consideration. The legislation allowing TEK 2/ to take over responsibility for municipal distribution of power was passed in January 1982. About 16 licenses have been issued to foreign oil companies for exploration and two companies have started work. A temporary conservation unit within the Ministry of Energy has been established and a law setting out energy policies drafted. SEE Reform 21. The interim reform measures taken during the course of 1981 have begun to have some impact on SEE performance. SEE losses are now expected to be TL 7 billion in 1981 rather than the projected TL 38 billion, and budgetary transfers for investment to be TL 232 billion rather than the projected TL 249 billion 3/ On the other hand, fixed investments by SEEs in 1981 are estimated to be TL 407 billion compared with the programmed TL 316 billion. About TL 60 billion of this increase reflected exchange rate revaluation factors and the availability of counterpart funds not previously budgeted. -iAoreover, the major share of the increase went to high priority energy projects. Employment in all SEEs declined slightly. A decree permitting multi-year contracts for SEE managers has been passed, but major improvements in this area await the general reform package (see para. 71 below). Monitoring of SEE performance by the High Control Board has been superseded by a quarterly monitoring mechanism at the Prime Ministerial level focussing on profitability and productivity. In sum, while some of the specific measures envisaged in the SAL II package have not been implemented, overall progress has been better than expected. The Role of the Bank in Turkey's Structural Adjustment 22. The Bank's role hitherto in the structural adjustment program has not been limited to the support under SALs I and II. The Bank has undertaken a number of activities including three major economic studies--the Public Sector Investment Review, the Industralization and Trade Strategy Report and the Energy Assessment Survey, which will be completed shortly. The analyses and recommendations of the first two of these reports have helped strengthen policy formulation in the Government and have had an important influence on clarifying Bank objectives. Similar expectations exist with respect to the energy report and the studies of the agricultural and financial sectors scheduled to take place before the end of 1982. Moreover, a substantial amount of the ongoing economic work and the lending program is geared to the realization of the objectives of the structural adjustment program, most notably in the field of industrial policy and the reform of the SEEs. Project lending, technical assistance, economic work, and SALs are complementary and mutually reinforcing instruments to achieve these goals. The Bank will continue with this comprehensive approach to structural adjustment in the coming years. 1/ TPAO - Turkish Petroleum Corporation 2/ TEK - Turkish Electricity Authority 3/ Annex VII provides a summary of SEE financial results.  -7- Bank/IMF Cooperation 23. The Bank's structural adjustment program in Turkey has involved a close relationship with the IMF (see also Table 1, pages 9-16). Since June 1980, the IMF has had a three-year Standby Arrangement with the Government of Turkey for a total of SDR 1.25 billion (about $1.6 billion). Under the arrangement Turkey has thus far made seven purchases, totalling SDR 760 million. The main conditions of the Standby are the maintenance of external competitiveness through a flexible exchange rate policy, ceilings on Central Bank credit to control aggregate demand, and limitations on budget transfers to SEEs amounting in 1982 to TL243 billion, a reduction in real terms of more than 20 percent from 1981. The Standby provides for quarterly reviews of performance and tranche release and twice yearly agreement on Central Bank credit limits and budget transfers. The credit limits for the first half of 1982 provide for proportionally more rapid expansion of credit to the private sector. 24. The IMF has recently completed a review for release of the SDR 100 million March 1982 tranche, and found performance in implementing the program to be satisfactory. The Fund concluded: "The standby arrangement for Turkey has now reached its half-way mark. The progress made thus far has clearly matched, if not exceeded, expectations at the outset. Forceful adjustment of the exchange rate and of interest rates has helped to bring about an impressive growth in exports and workers' remittances, as well as a marked turnaround in short-term capital flows. An essential adjunct has been a more resolute program of domestic demand restraint via financial and incomes policies ..... The lessening in both external and internal imbalances that has resulted can be viewed with considerable satisfaction by the authorities." 25. The Fund's attention to the country's overall financial and budgetary situation, aggregate demand, and the financial consequences of SEE performance, has complemented the Bank's efforts to support increased domestic resource mobilization, more efficient use of resources, growth of exports, and constraint on the growth of imports. The Bank endorses the tight monetary policies essential to the stabilization objectives, which are a prerequisite for restoring sustainable growth. Nevertheless, with progress towards growth in the medium-term, the Bank will give increasing prominence to supporting longer term development objectives including those social objectives which, of necessity, have been deferred during the initial period of adjustment. Continued close collaboration between the institutions will remain essential to identify the trade-offs between stabilization and growth. Conclusion - Progress to Date 26. The conclusion may be drawn at this stage that the Government has made very substantial progress in its structural adjustment program. The major achievements are undoubtedly in the area of exchange rate management, monetary policy, inflation control, resource mobilization, and direct efforts to stimulate exports. These successes should not be allowed to conceal the magnitude of the tasks ahead, and the need to establish an updated and more explicit medium-term framework within which the program should unfold. The Government's approach to this and the other outstanding issues is discussed at the beginning of the next section.  - 8 - PART III - THE SAL III PROGRAM 27. The policy measures to be supported by SAL III are set out in an updating Statement of Development Policies-1982, attached to a letter fro-- te'h Deputy Prime Minister to the Bank dated April 24, 1982 (AnnexIV-A), and are summarized below: A. Macroeconomic Policies (paras. 29-53). The preparation of a comprehensive medium-term framework including sectoral master plans while continuing to refine the current macroeconomic policies, in particular domestic resource mobilization and trade liberalization policies; B. Public Investment (paras. 54-68). The rationalization of the public investment program so that its size and composition reflect the priorities of the stabilization and restructuring program, supported by a strengthening of project evaluation capacity; C. SEE Reform (paras. 69-78). The finalization of a major reform package for the State Economic Enterprises (SEEs), designed to improve their economic and financial performance through increasing their autonomy and market orientation, and the continuation of interim reforms designed to increase their efficiency and reduce their drain on the budget; D. Agriculture (paras. 79-91). The promotion of growth in the agricultural sector, including exports; and E. Energy (paras. 92-98). Constraining the growth of energy imports. 28. Each of these areas is discussed more fully below. As with previous Turkish SALs, the SAL III package embraces a number of decisions already taken, as well as others remaining to be implemented in 1982 and early 1983. For convenience, the main actions are summarized in Annex IV-B, and an overview of the structural adjustment program and SAL III is given in Table 1. A. MACROECONOMIC POLICIES I/ Medium-Term Framework 29. In 1982, Turkey is at a stage of transition between stabilization and the beginning of sustainable growth. The Government has put in place many of the policies designed to bring about a fundamental change in the Turkish economy towards greater reliance upon market mechanisms, and a shift from inward directed growth to a more outward oriented economy. This strategy hinges on appropriate actions in three main policy areas: trade, investment, and resource mobilization. However, actions in these areas have to be weighed against other considerations, such as the impact on inflation and employment. 1/ See also paras. 8, 10, and 13 of the Statement of Development Policies - 1982, Annex IV-A.  Table 1: STRUCTURAL ISSUES AND SCOPE OF SAL III I. MACRO-ECONOMIC POLICIES Current Situation, Measures and Actions being Taken Structural Issues Strategy and Recent Developments and Project Lending, SAL III Objectives Progress under Previous SALs Sector Work or IMF Jan-April 1982 Actions Future Actions A. External Resource Balance 1. Exchange Rate Maintenance of Flexible exchange rate IMF Standby. Govern- Policy external competi- policy adopted since ment undertaking to tiveness. January 80 (SAL I). Daily maintain external adjustments since competitiveness. May 81 (SAL II). 2. Financial Encourage exports Exports have responded Bank report suggested Exporting companies en- Tax rebates for exports Incentives for and efficient favorably to the flexible Government simplify titled to hold foreign based on net foreign Exports import substitution exchange rate policy and subsidies and link to exchange at Central exchange earnings from by further refining to increased financial value added; greater Bank for payments and Jan 1, 1983, and tax of incentive incentives (SAL II). use of exchange rate travel; tax rebates for rebates to trading structure. policy. trading companies companies will be based simplified and extended on incremental sales, to fresh fruits and rather than total sales. vegetables; unrestricted duty-free imports by exporters extended to equipment. 3. Institutional Framework for Export Promotion (a) Export Private sector to Limited improvements in Export promotion, Incentives to private Study to set up a Promotion lead. Government Government Export Promo- technical and market- trading firms improved joint public/private Facilities to encourage tion Agency, IGEME, follow- ing assistance pro- (tax rebates simplified export promotion private export ing review (SAL I); fiscal vided under Private and coverage extended). center to be completed promotion through incentives for trading Sector Textiles and by end 1982; introduction incentives. companies have encouraged Export Industries I of legislation to allow rapid growth (SAL II); Projects. bonded warehouses. Istanbul Chamber of Commerce setting up Export Promotion Center. (b) Administrative Continued simplifi- Considerable simplification 1982 Export Regime Continued simplification Procedures for cation of admini- of export procedures, par- removed requirement in administrative Export strative procedures. ticularly the centraliza- that exporters obtain procedures. tion of responsibility for a license to export. export promotion (SAIL I); and more delegation of authority on export credit and foreign exchange to commercial banks.  STRUCTURAL ISSUES AND SCOPE OF SAL III I. MACRO-ECONOMIC POLICIES (cont-inued Current Situation, __ Measures and Actions being Taken Structural Issues Strategy Recent Developments and Project Lending, SAL III and Objectives Progress under Previous SALs Sector Work or IMF Jan-April 1982 Actions Future Actions 4. Import Liberali- To improve the effi- Exporters freed from major Detailed sampling of Further liberalization Commitment to zation ciency of domestic constraints of protection firms underway for of imports through the rationalize the production and pro- system and duties on imports; protection study under 1982 Import Regime, tariff system over vide an optimal first phase of study to direction of Istanbul including simplified the next five pattern of growth. rationalize protection University professor, licensing procedures, vears, in parti- system completed (SAL I) - and with Bank financial and shifting of some cular, to shift 1981 Import Regime abolished and technical assistance. items to the more from a licens- the quota list and shifted liberalized list, which ing system of selected items to more now contains items free import control to liberalized list (SAL II). of tariff and subject to one relying on Reduction in import deposits, a flexible levy. Govern- tariffs. Prepare ment commitment to ex- list of prohibited pand this list in future items and further years. liberalization in 1982. 5. Debt Management To ensure manageable Rescheduling operations have IMF Standby: Government Submission of debt data Improvement in debt service pay- substantially eased debt reaffirmed policy of no biannually in an agreed, external debt ments, and obtain service burden; program to new build up of external simplified format; reporting and 0 additional conces- computerize debt initiated arrears, limits on new December 1981 data computerization sionary assistance (SAL T, Supplement). Conces- non-concessional debt. already received. through adequate and better informa- sionary inflows declining. staffing and hir- tion on debt posi- Debt data better but slow. ing of specialized tion. consultants in the Ministry of Finance by mid-1982. 6. Private Capital To restore credit- Considerable net transfers to Measures to promote Revision of mining, Flows worthiness, promote commercial banks. Some improve- private investment, tourism and petro- private foreign ment in inflow of private including the hiring of leum laws in 1982 investment, and foreign direct investment, but foreign consultants to to reflect recom- obtain substantial mostly through liquidation non- promote investments in mendations of con- funds from commer- guaranteed trade arrears. petroleum, tourism, sultants and cial banks/investors Government re-entered commercial mining, and agro- facilitate foreign on reasonable terms. markets in 1981 with EXIM bank industries as well as investment. loan. relevant laws and regulations. B. Domestic Resource Balance 1. Tax Reform To generate addi- Major tax reform package IMF Standby: Tntention Corporate tax rate Continued improve- tional revenue, legislated (SAL. I & Il); stated by Government to reduced to encourage ment in tax system: improve equity of implementation initiated intensify implementa- investment; gradual re- to increase equity, the tax burden, under SAL II. Transaction tion of measures. duction in personal in- and measures to efficiency of tax tax reduced (SAL II). Tax come minimum tax improve tax admini- administration, revenues increased from 17% bracket to 25% by 1985 stration and and incentive of GDP in 1980 to 20% in to improve equity. Tax revenue collection. structure. 1981. controllers increased from 350 in January to 750 in March, 1982. Buidget for tax collec- tion increased.  STUCTURAL ISSUES AND SCOPE OF SAL III I. MACRO-ECONOMIC POLICIES (continued) Current Situation, Measures and Actions being Taken Structural Issues Strategy Recent Developments and Project Lending, SAL III and Objectives Progress under Previous SALs Sector Work or IMF Jan-April 1982 Actions Future Actions 2. Expenditure To limit budgetary Marked deceleration in infla- IMF Standby. Ceilings on 1982 Budget envisages Constrain deficit Control and deficits/Central tion from 105% in 1980 to less budgetary transfers to continued constraint in to around 1% of GDP. Tnflation Bank credit to public than 40% in 1981. Budget SEEs, on Central Bank growth of expenditures; sector to relieve deficit reduced from 5% of credit to public sector deficit below 1% of inflationary pressures. GDP in 1980 to about 1% in and on net domestic GDP. 1981. assets of the Central Bank. 3. Private Savings (a) Interest Rates Promote private Commercial bank interest IMF Standby: Government Interest equaliza- Interest rates to savings. rates deregulated July 1980 confirmed intends to tion tax reduced. continue to be (SAL I). Rates now positive continue liberalized market determined in real terms; rapid growth interest rate policy. to promote private in deposits, particularly time savings; use of deposits (150%). Increases government bonds to in yields on Government bonds. regularize markets. Private bonds deregulated July 1981 and are now being offered at variable interest rates - (SAL II). (b) Financial To stimulate develop- Bill to establish regulatory Review of financial Sounder capital Encourage reduc- Structure and ment of the capital framework for capital market sector to improve the structure of banks tion of inter- Policy market in an orderly development passed (SAL II). supply of term finance through increased mediation costs. fashion. To bring Lively private bond market; for industry proposed. equity requirements; Stimulate capital competitive pressure development of foreign banks profit-sharing markets. on commercial banks to in Turkey increased to 6. certificates permit- encourage greater ted to provide efficiency. additional finance; regulatory authority for capital markets brought into operation Feb. 1982. 4. Planning/Strategy A more systematic Pressing short-term problems Bank economic mission to Medium-term economic evaluation of policies and rapid changes in key review Government's framework to be and trade offs to parameters have led to year medium-term projections developed by early achieve intended by year planning, but no in June 1982. Improve- 1983. Transport structural adjustment. quantitative and compre- ments in statistical master plan to be hensive medium-term frame- basis, particularly completed by April, work for assessing policies. price indices underway. 1982, iron and steel master plan by January, 1983.  STRUCTURAL ISSUES AND SCOPE OF SAL III II. PUBLIC INVESTMENT Current Situation, Measures and Actions being Taken Structural Issues Strategy Recent Developments and Project Lending, SAL III and Objectives Progress under Previous SALs Sector Work or IMF Jan-April 1982 Actions Future Actions A. Size of Program To restrain public 1982 Program is about TL980 PIR analyzed resource 1q82 program held to Restrain level of investment to levels billion, 11.6% of GDP and about limitations. 6% real increase; pub- public investment justified by maximum sustainable level given lic investment/savings to available resources resources and which resource constraints. deficit reduced from and allow for growth allow for growth of 11% GDP in 1980 to of private investment. private investment. 6.5% in 1981. Benchmark: 1983 pro- gram same real level as 1982. B. Composition Rationalize pro- Reduction from 9,000 to PIR analyzed large pro- Number of projects in Further rationali- (see also grams over 2 to 4 8,000 projects in 1981 and jects, recommended 1982 program reduced zation of program sectors) years to focus on nominal allocation to low focussing on higher from 8,000 to 7,400, in preparing 1983 smaller number of priority projects (SAL I and priority projects. of which over 40% to Program. Focussing high priority pro- II). Project list remains too be completed in 1982. of resources on 86 jects consistent large. Bank Investment Report 84% of funds for of 157 large projects. with resources; (PIR) discussed September 1981 large projects 35 projects being re- speed up implemen- (SAL II) and views reflected in focussed on 86 of 157 viewed to confirm tation. 1982 program. in program. priority. C. Balance/Content To achieve more 1981 Program began shift to PIR supported shift Continual improvement Projects to meet balanced investments; energy agriculture, and trans- of investment program in 1982 sectoral economic criteria in- ~ with more impact on port. Projects overly capital to infrastructure and allocation: manufac- cluding satisfactory net foreign exchange extensive. agricultuire. turing share reduced. rate of return; earnings, employ- energy share in- priority to ongoing ment and growth. creased able transport projects which can be share maintained. completed in 2 years or break bottlenecks. Weight to be given to foreign exchange and employment impact. D. Project Selection Better project Selection and evaluation State Investment Bank Director and deputy Program to upgrade selection and capacity weak. Government (DYB) loan supports of evaluation SPO evaluation unit, evaluation beginning steps to strengthen. improved analysis and department in SPO agencies, and DYB to capacity in SPO, and Tighter screening of projects broaded role. DYB appointed. improve ability to key agencies to en- in preparing 1982 program. prepared draft law to carry out rate of sure adequate rate improve its operations. return analysis. SEEs of return on major to use qualified con- investments. sultants to prepare or review all new projects,  STRUCTURAL ISSUES AND SCOPE OF SAL TIT III. STATE ECONOMIC ENTERPRISES (SEES) Current Situation, Measures and Actions being Taken Structural Issues Strategy Recent Developments and Project Lending, SAL III and Objectives Progress under Previous SAL Sector Work or IMF Jan-April 1982 Actions Future Actions A. General Reform Increase efficiency Government has drafted major Project lending supports Draft law prepared. Passage and imple- and reduce the burden reform bill which would Government's reform Enabling law presented mentation of reform on the budget and change government/SEE rela- objectives with to Consultative Assembly law. economy. tions, increase management specific measures. in April, 1982. autonomy and free personnel policies. B. Investment/Financing Investment program SEE 1982 Investment Program IMF Standby: Government 1982 Program decree Budget transfers to reduced to manageable rationalized. Share of manu- stated budget transfers envisages investment manufacturing SEEs level. Economic facturing reduced. Access to to SEEs will be limited targets as ceilings, to remain below return should be main Central Bank limited to two in 1982 to TL243 billion, gives priority to program 1982 level criteria; industry Agriculture SEEs in 1981 and that direct access current operations. of TL47 billion. SEEs should ultimately (SAL TI). to the Central Bank will raise funds in the be limited to wheat market. agency. C. Management, To create a working Less frequent changes in Project loans seek Salary increase of Reform law to Professional and environment which management and greater specific arrangements 25 percent approved. liberalize employ- Skilled Staff will encourage independence on hiring given to improve staffing of ment and salary greater efficiency. (SAL II). Contracts for project entities. practices. managers offered, but few accepted (SAL II). D. Rationalization of To reduce overmann- Overstaffing and low effici- 1982 Program limits Work Force ing and improve ciency are prevalent in most hiring in 8 major SEEs. productivity. SEEs, at the same time there are shortages of technical staff. Employment levels kept well below ceiling in 1981 (SAL II). Government policy of wage constraint. E. Auditing and Account- To devise better Government instituted mini- Assistance to specific 1982 Program stresses Continued minis- tability/Monitoring measures of perfor- sterial reviews of performance SEEs provided under objective of profit- terial review of mance, hold SEE's in Dec. 1981 (SAL TI). Survey several projects and ability and productivity performance. Reform accountable for perfor- of auditing and accounting recent DYB loan. IMF as primary goals of SEE provides for pub- mance. Profitability being undertaken in 1982 Standby: Government managers. lishing audited and productivity to to propose improvements. confirmed intention to accounts. be main criteria. strengthen monitoring. F. Price/Market Increase efficiency Government liberalized most SEE Reforms in sugar prices, 1982 Program decree Mechanism and reduce unit prices (SAL I and II) and has energy prices, sought stresses international costs by exposing exposed some SEEs to selective in project lending. IMF prices as comparator for SEEs to market prices. competition from imports. Standby: Government monopoly goods. confirmed flexible pricing rolicy.  STRUCTURAL ISSUES AND SCOPE OF SAL IIT TV. ENERGY Current Situation, Measures and Actions being Taken Structural Issues Strategy Recent Developments and Project Lending, SAL III and Objectives Progress under Previous SALs Sector Work or IMF Jan-April 1982 Actions Future Actions A. Energy Investment Make better use of 1982 energy investment pro- Project lending supports Improved program for Review of Assess- existing plant, focus gram is better focussed and key investments. Energy 1982 with increased ment findings with investment program gives greater attention to Assessment will suggest expenditures for Bank in 1982. to maximize results, spare parts and distribution. improved sector transmission and Development of better planning of strategies. fuelwood. 5-year sector plan. complementary in- vestments. B. Demand Management and Conservation 1. Pricing Encourage conser- Petroleum products reflect Energy Assessment review- Petroleum prices raised Continuing frequent vation and sub- international costs with fre- ing price policies. 5% in Feb. 1982. Coal price adjustments stitution for other quent adjustment (SAL II). Power tariffs being re- prices increased 20% to reflect inter- fuels by appropriate Significant real lignite viewed under existing in March 1982. Power national resource pricing. and power price increases projects. prices, increased by costs. but little contribution to 26% in Dec. 1981 and 2% investment, partly because in March, 1982. of high costs. 2. Conservation Encourage greater Government plans to establish Assessment mission Passage of conser- conservation and energy survey administration reviewed conservation vation law in 1982. reduce consump- (SAL II) and draft law program and will propose tion of energy. prepared. Retrofitting pro- improvements. Petro- jects in steel, fertilizers, leum project provides cement, and paper being fund for audits. studied or underway. Audit program being organized. C. Institutions Greater efficiency in Law reorganizing distri- Assessment mission re- Law consolidating General SEE reform (See also SEEs) institutions; greater bution of electricity viewed institutions municipal distribution will include energy production of power, passed, while law allowing capabilities, will of power passed. SEEs. oil and lignite. private mining of lignite is recommend improvements. at advanced stage (SAL II). Lending program includes Reorganization of TPAO await- projects with TER, TKI, ing general reform. and TPAO.  STRUCTURAL ISSUES AND SCOPE OF SAL lIT V. AGRICULTURE Current Situation, Measures and Actions being Taken Structural Issues Strategy Recent Developments and Project Lending, SAL III and Objectives Progress under Previous SALs Sector Work or IMF Jan-April 1982 Actions Future Actions A. Agriculture Investment Support optimum pro- 1982 Investment Program con- Support for irrigation Improved quantity and duction and exports tinues high support for sector. and agricultural services balance of investment by improved balance Program is better balanced with in proposed irrigation expenditures for 1982. of investments; much greater share for rehabilitation and greater emphasis on services. extension projects. services, forestry. B. Export Support Stimulate agri- Investment incentives, tax Sector mission in mid- Export incentives ex- Support for live- Policies cultural exports. holidays based on perfor- 1982 to review adequacy tended to agriculture. stock production mance, and prefinancing of of new policies. and exports through exporters working capital improved feed needs extended to agriculture. supply. C. Prices and Subsidies Reduce subsidies' Number of supported commodities Sector mission in mid All plant protection burden on budget, reduced from 25 to 16, and sub- 1982 will analyze subsidies phased out. while stimulating dies to consumers reduced. further. Fertilizer Wheat organization's more appropriate (SAL II). Fertilizer sub- price and demand study role modified to em- production and ex- sidies reduced to about 35% in under fertilizer pro- phasize price stabili- ports. Phase out September 1981 (SAL II). ject. zation, reduce consumer fertilizer subsi- support. dies over 5 years. D. Cost Recovery Efficient use of Decision to phase in full O&M Proposed irrigation resources. Full O&M cost of major irrigation over lending will follow for major works, 4 years (SAL II). developments. begin cost recovery for minor works. E. Institutional Reforms Better delivery of Proposal for reoganization Establishment of Government bill passed Implementation of research and ex- of MAP approved (SAL II). research institute enabling MAF MAF reorganization. tension services Steps underway to implement under proposed research reorganization. Strengthened pro- on farm. interim arrangements; new pro- project. Support for vincial services to vincial directors appointed regional extension be in place in all for 60 of 67 provinces to co- projects. 67 provinces by end ordinate services. 1982. F. Finances and Credit Improve TCZB's TCZB's paid in capital Loans under discussion TCZB's lending to give TCZB reorganization financial and lend- increased and loans focused supporting these improved increased emphasis to to be commenced in ing capability and more on agriculture. credit to sector. agriculture. 1982. Tighter con- efficiency; trol of fertilizer separate lending stocks. operations from sub- sidy operations. Reduce costs of fertilizer stocks.  STRUCTURAL ISSUES AND SCOPE OF SAL III VI. INDUSTRY Current Situation, Measures and Actions being Taken Structural Issues Strategy Recent Developments and Project Lending, SAL III and Objectives Progress under Previous SALs Sector Work or IMF Jan-April 1982 Actions Future Actions A. Public Investment Reduce program to Manufacturing share reduced Portfolio of public pro- Improvements to Program in Industry manageable size. to 16% in 1982 program. jects reduced by 25% selection process (see also SEEs) Encourage private in value and substan- for public sector investment in manu- tially rationalized. industrial facturing; defer low investments. priority investment. B. Private Investment Allow asset re- Legislation to allow revalua- IFC supports asset valuation to get tion of assets under consi- revaluation changes. better measures deration (SAL II). of profits, encourage appro- priate investment. C. Incentives Simplify system Preliminary steps to rationa- Trade and investment Tax rebates to be (See also Macro) while providing lize have been taken. mission recommended based on net inicentives to further improvements. foreign exchange infant industries earnings from for restructuring. January 1983. D. Industrial Finance To encourage saving Substantial progress made with Financial Sector Survey Interest equalization and investment, the freeing of interest rates planned to review issues tax reduced from 15% interest rates deter- and passage of the capital and recommend improve- to 10%. mined by market and market legislation (SAL II). ments. financial inter- Transaction taxes reduced mediation costs from 25% to 15% and deve- reduced. lopment banks exempted (SAL II).  - 17 - 30. Growth in exports is needed to finance essential imports and support economic recovery. If it is to be obtained, policies favoring exports and discouraging inefficient import substitution must be continued. By far the most important is the maintenance of a realistic exchange rate. In the short-run, special incentives are also required to induce domestic producers to look outward and establish new markets. In the medium-term, import restrictions, which tend to encourage inefficient domestic production, have to be reformed by shifting to a system based on tariffs. 31. Since Turkey's exports depend heavily on products produced by the private sector, export growth will ultimately require additional investment by the private sector in agriculture, industry, and transport. Thus, to complement the trade policies, policies to encourage such investments are required. Bottlenecks to production and exports, especially in energy, agriculture and transportation, require complementary investments by the public sector. To achieve quicker results, public investment must be focussed on a more limited number of high priority projects. The limitations on external resources require policies to increase domestic savings. In the public sector, these should cover tax and other fiscal matters and greater efficiency in the SEEs. To increase private savings, steps to reduce the costs of financial intermediation, and the development of capital markets, would complement the efforts already made, such as the deregulation of interest rates. 32. The inter-relationship of these various policy instruments should be more explicitly examined by the development of a medium-term policy framework. Because of the rapidly changing situation and the lack of stability in relationships undergoing structural change, the Government has found it difficult to prepare a meaningful medium-term framework until recently. It now plans to use the 1981 results as a basis and expects to have such a framework completed by early 1983. This framework would examine the tradeoffs between various options and help in assessing the impact of various policies on sectoral, employment and social objectives, debt service and borrowing capacity. It would also provide clearer benchmarks for monitoring performance towards the medium-term objectives. 1/ Trade 33. The promotion of export growth and efficient import substitution continues to play a prominent role in Turkey's development strategy. The remarkable performance in 1981--exports up by 62 percent to $4.7 billion while imports grew only 13 percent to $8.9 billion--is the result of the fundamental shift in policy towards outward orientation as well as certain special factors. Two key issues are the sustainability of this export growth and the reduction of excessive protection. These are discussed in paras. 37-40, and 43 below. 1/ In paras. 102-105 below, the report discusses a preliminary medium-term projection made by the Bank.  - 18 - CHART I STRUCTURAL CHANGE IN TURKEY'S EXPORTS AGRICULTURAL EXPORTS S1979 EXPORT S-t2261.M MINING EXPORTS S INDUSTRIAL EXPORTS AGRICULTURAL EXPORTS COTTON UVU'rocK ~~~~~~~~~~~~~1981 EXPORTS-$4702.9M OTHER AGIIC PROCUTS MINING EXPORTSXR_ OTHER IND. GOODS AGRO-INDUSTRIAL GOODS - - ~~~~~~~~~~~~ETALS &METAL GOS TEXTILES VEHICLES CEMENT MACIMERY INDUSTRIAL EXPORTS  - 19 - Exports 34. The growth in exports has two distinct characteristics: it has been industry-led and there has been a marked shift in destination away from the EEC and towards the Middle East. Industrial exports grew by 119 percent in 1981 (Table 2) and, for the first time ever, now comprise a larger share of exports than agriculture. 1/ Table 2: Value of Exports 1980 1981 Percentage $M % share $M % share increase Agriculture Exports 1,672 57 2,219 47 33 Industrial Exports 1,047 36 2,290 49 119 Mining Exports 191 7 194 4 2 Total 2,910 100 4,703 100 62 Source: SPO 35. Agricultural exports grew by 33 percent despite declines in the prices of hazelnuts, figs and raisins, and due largely to increases in livestock, fruits and vegetables, and industrial crops, especially tobacco. There has also been a marked diversification in manufactured export goods. Among such exports, those with a higher value-added have performed particularly well: agro-industrial exports, for example, doubled during this period; textiles grew by 85 percent, especially ready-to-wear garments (167 percent) and rugs and carpets (85 percent), and transport vehicles and non-electrical machinery have also done well. 36. In 1981, exports to the Middle East more than doubled, reaching 40 percent of the total, and accounted for 70 percent of the increase in that year. The EEC received 32 percent, down from 43 percent. This trend has helped offset the oil imports from Middle East countries. Turkey also holds construction contracts in the area worth around $9 billion. Libya, Iraq, Iran and Saudi Arabia received 26 percent of Turkey's exports in 1981, three times their share in 1980, and Iraq is now rivaling Germany as Turkey's chief export market. Turkey's exports to the Middle East include traditional exports such as livestock and grain as well as a new and more diversified range of products--processed agricultural goods, carpets, ready-made clothes, glass and ceramics, leather and hide products, metal goods, electrical appliances and machinery, buses and trucks, and cement (Table 3). 1/ The structural change in exports is shown in Chart I, page 19 and the shift in share between major groups in Annex VII, Chart II.  - 20 - Table 3: Exports by Destination ($ million) 1980 1981 Percentage $Million % Share $Million %Share Increase OECD Countries 1,679.7 57.7 2,263.7 48.1 34.8 EEC Countries 1,242.1 42.7 1,502.9 31.9 21.0 Germany 604.0 20.7 643.2 13.7 6.5 Other 636.1 22.0 859.7 18.2 35.2 Other OECD 437.6 15.0 760.8 16.2 73.8 Middle East Countries 610.8 21.0 1,892.0 40.2 209.8 Iraq 134.8 4.6 559.0 11.9 314.7 Iran 84.8 2.9 233.7 5.0 175.5 Libya 60.3 2.1 441.5 9.4 632.0 Saudi Arabia 43.6 1.5 187.4 4.0 330.2 Others 287.3 9.8 470.4 10.0 63.7 Other Countries 619.6 21.3 547.2 11.6 -11.7 TOTAL 2,910.1 100.0 4,702.9 100.0 61.6 MEMO: Value of Main Exports to the Major Middle East Markets - Jan-Nov. 1981 ($ million) Iran Iraq Libya Saudi Arabia Cereals, Pulses, Cotton, Tobacco 43.3 47.7 26.9 18.8 Sheep, Meat 8.8 12.1 28.4 69.3 Processed Agric. Prod. 12.2 23.5 38.7 4.2 Cement 4.7 117.1 17.6 0.3 Carpets 0.2 2.3 2.3 8.0 Ready-made Garments 0.1 8.0 88.8 1.7 Buses 0.7 54.1 0.5 0.2 Other Non-Traditional 121.5 198.4 173.5 54.2 TOTAL 193.3 473.2 377.1 156.7 Source: SPO  - 21 - Reasons for Performance 37. Much has been done to improve export incentives since January 1980, By far the most significant change has been the introduction and maintenance of a realistic exchange rate, adjusted daily since May 1981 against a trade-weighted basket of currencies. Low cost export credits, indirect tax rebates, and privileged access to foreign exchange and imports have further increased the attractiveness of exports. 1/ Altogether, the average subsidy rate on industrial exports was 11 percent in mid-1981, helping to offset the bias in the protection system towards domestic production as well as the costs for inexperienced Turkish firms of learning to penetrate export markets. While it is difficult to assess precisely the impact of the incentives on exports, around 70 percent of realized exports in 1981 were pledged against incentives (assuming that incentives granted in 1981 were utilized the same year). Most important were low-interest credits, which amounted to around 30 percent of total export value and tax rebates, which amounted to around 5 percent of total export value. 38. Some special circumstances have also influenced export growth. First, industrialists have been encouraged by domestic factors to look abroad for markets. Following the banning of strikes and better supply of imported inputs, production of almost all key industrial commodities was up from 1980 levels. However, after more than a year of monetary restraint, domestic demand was stagnant. Because of Government concern about rising unemployment, non-voluntary redundancies were not allowed and high severance payments further discouraged layoffs. High interest rates make it extremely costly to hold stocks. In short, growing output and slack domestic demand combined with the high costs of maintaining stocks, have encouraged exports. Second, the Iran-Iraq war has contributed to the growth of exports of goods and earnings from freight and transportation. With these two countries' Gulf ports closed, the volume of transit trade through Turkey has grown rapidly, and there is heavy demand from these countries for goods ranging from foodstuffs to building materials, particularly cement. 39. The prospects for Turkish exports over the next few years are good. Although export growth is likely to be considerably lower than in 1981, given the low 1980 base and gradual restoration of domestic demand, an average annual increase of around 15 percent during 1982-85 seems attainable. 2/ This projection is conditional upon a continuation of the current export-oriented policies and, in the medium-term, on new investment in export activities. It is supported by the following favorable factors. First, exports to Middle Eastern markets are unlikely to be significantly affected by an end to the war since they consist mostly of necessities (foodstuffs, clothing, transport vehicles, machinery). Second, considerable experience has now been gained by exporters in a new activity involving a fundamental change in attitude, 1/ A fuller description of these incentives and their importance is given in the SAL II President's Report and the ITS Report, Chapter 2. 2/ The Government projects a 23 percent increase in 1982. Exports in January-February 1982 were 36 percent above the same period in 1981.  - 22 - product design and quality control. Third, the diversification of exports, and the number of new products (twice the number of items as compared to 1977/78) reduces the susceptibility to market changes. Fourth, Turkish construction companies now hold contracts worth about $9 billion and increasingly rely on Turkish inputs. 1/ Fifth, the growth of trading companies, which accounted for about 10 percent of the increase in exports in 1981, and which have sufficient expertise and resources to develop new markets, will help underpin future growth. Sixth, excess capacity still exists in some industries, although supply constraints are being felt in the production of carpets, leather goods, and buses. 40. The Government's continuing efforts to maintain external competitiveness through a flexible exchange rate policy, further improvements in export incentives and various measures to encourage freer trade are part of the SAL III package (see para. 8 of the Draft Statement). The Government plans to continue its daily exchange rate adjustments to ensure that external competitiveness is maintained. Export incentives are being rationalized through the following measures: (a) tax rebates for exports from January 1983 will be based on net foreign exchange earnings from exports rather than full export value and export credit incentives will take value added into account; (b) tax rebates applicable to trading companies are being simplified and their coverage extended to fresh fruits and vegetables; (c) administrative procedures have been considerably simplified in the 1982 Export Regime and the requirement that potential exporters obtain a license to export removed; and (d) the unrestricted duty-free import of inputs by exporters will continue and has been extended to equipment and investment goods for export production. Further, exporters are now entitled to hold foreign exchange at the Central Bank to facilitate payments and business travel. A study to set up a joint public/private export promotion center should be completed by the end of this year; a small privately-operated center is already functioning. The Government is also in the process of introducing legislation to allow bonded warehouses. The range of export incentives is, thus, reasonably comprehensive, and there has been continuous improvement in the administrative arrangements affecting exports. 1/ About 150,000 Turkish workers are employed in the Middle East (about 20 percent of the number in Europe). Their remittances comprise a larger share of income than their European counterparts, and are of growing importance.  - 23 - Imports 41. The Government has been taking legal and administrative steps to liberalize the import regime over the last year including abolition of the quota list and the shifting of about 200 items from Liberalized List II to the more liberalized List I. 1/ Liberalized List I includes items which are noncompetitive with domestic production and freely admitted. List II items require a license, issued normally if the goods cannot be supplied locally in comparable quantity and quality. During 1981, the Government increasingly administered List II to provide some additional de facto liberalization, i.e. by allowing imports of items domestically produced which were indirectly needed for exports or to keep domestic prices down through competitive pressure (e.g. steel and PVC). Moreover, the duty-free importation of inputs going into exports, which bypass the normal regime, increased from $172 million in 1980 to $356 million in 1981. The 1982 Import Regime continues the policy by shifting another 35 items, with import value of about $110 million in 1981, to List I. More significant, it introduces a new list, a levy list, initially of about 15 goods which can be imported without restriction, subject only to a flexible levy, which will be adjusted from time to time. The levy list provides a more flexible instrument for further liberalization of protected items primarily those produced domestically which are indirectly important for exports; e.g., animal feed. It will also be used to keep pressure on domestic prices and help control inflation. The licensing and administrative procedures for imports have also been further simplified. 42. In 1981, imports amounted to $8.9 billion, of which 25 percent were capital goods, and 40 percent, oil and oil products. Import duties as a share of total imports have declined substantially in recent years, from 37.8 percent in 1979 to an estimated 13.7 percent in 1980, due mainly to the increase in the value of fuel imports. The 1982 Import Program projects imports of $10 billion, of which 22 percent are expected to be capital goods and 42 percent oil. 43. The Government has made clear its intention to open the Turkish economy to competition from abroad. Its long-term policy is that import restrictions will not be used to protect domestic producers. 2/ It is keenly aware that efforts to reduce the effective level of protection and the bias towards domestic production are essential to the efforts to restructure the Turkish economy and stimulate competitive exports to support growth. Nevertheless, because of foreign exchange constraints, entrenched domestic forces dependent on protection and international trade restrictions, it recognizes the process will, of necessity, be gradual. The Government's intention is thus to gradually shift from a licensing system of import 1/ The relaxation of certain restrictions in 1980 and 1981 was described in the SAL II President's Report (paras. 57-64). The importance of import liberalization to-the overall strategy was also highlighted in the Industrialization and Trade Strategy (ITS) Report, which describes the procedures in greater detail. 2/ See also paras. 6 and 8 of the Statement of Development Policies - 1982, Annex IV-A.  - 24 - control to one relying on tariffs and to reduce these tariffs over the next five years. In doing this, it will draw on the results of the protection study started under SAL I, which is expected to be completed by the end of 1982. One of the difficulties in assessing the remaining quantitative restrictions is that some items which are domestically produced are not included on the liberalized lists, and thus are effectively prohibited. The Government has indicated that it will prepare a list of such items in the next few months and that during the course of 1982 and in preparing the 1983 Import Program, it expects to continue the process of gradual liberalization towards its medium-term objectives. Because of the importance of continued progress to the structural adjustment objectives, satisfactory progress in import liberalization would be a condition of tranche release (Loan Agreement, Schedule 4). Domestic Resource Mobilization 44. After several years of deteriorating domestic savings performance, the Government has taken a number of steps to raise domestic savings, including a major tax reform, steps to improve the financial performance of the SEEs, the liberalization of interest rates, and institutional improvements in the capital markets. 1/ These measures, supported by SAL II, have had a considerable measure of success. In early 1982, the Government introduced further modifications to the tax system to improve both revenues and equity. To lessen the tax burden on lower income groups, there will be a gradual reduction in the minimum tax bracket, from 40 percent in 1981 to 25 percent by 1985. To help alleviate the financial difficulties of the private corporate sector and to encourage private investment, the corporation tax has been reduced from 50 to 40 percent. 45. To more fully realize the potential yield from the 1981 tax reform, the Government is embarking on a major effort to improve the efficiency of tax collection. The budget allocation for tax administration 1982 has been increased in real terms over the 1981 level. Additional tax offices will be established in key tax generating areas. By end-April, 1982, the number of district tax controllers had been increased from the January 1982 level of 350 to the 1982 year-end target of about 750, and the Government now expects to reach 1,000 by year-end. The enactment of the chartered accountancy law permitting chartered accountants to notarize tax declarations will further reduce the burden on the Government. Computerization of tax returns is making progress with German technical assistance. Real estate taxation, which has generated less than 3 percent of tax revenue but absorbed 45 percent of the collection budget, has been simplified by a minimum payment scheme. As a result of these efforts, the Government expects tax revenues to reach TL 1,440 billion for the ten-month 1982 fiscal year, an increase of 10 percent in real terms over 1981. The budget deficit in 1982 is expected to be held at less than 1 percent of GNP. 1/ These are described in paras. 14-16 above and in the SAL II President's Report, paras. 32-40.  - 25 - Cost of Credit 46. The liberalization of various interest rates, has been extremely effective in mobilizing resources but has also raised the cost of funds (para. 15). Moreover, for a variety of reasons (a bank cartel agreement, the inefficiency of the banks, taxes and charges on loans, and high reserve requirements), the costs of financial intermediation are high--more than 30 percentage points. As a result, non-preferential interest rates are positive in real terms by as much as 20 to 25 percent. Because of the extensive system of preferential interest rates, notably for investment and exporters' working capital, the main impact of these high rates falls on non-export working capital loans. While this discourages stock accumulation, which is desirable, it also substantially reduces the profitability of production, and could be a major factor detering the recovery of investment. On the other hand, selective high rates may be a necessary instrument to pressure the private sector to reorient outward. Because of the importance of the right kind of private investment to the medium-term strategy, a study of the financial sector is tentatively scheduled for late 1982, to provide, inter alia, a better understanding of this issue. 47. In the meantime, the Government has adopted a variety of measures to reduce financial intermediation costs and encourage investments in high priority activities. Government bond rates and rediscount rates are being used to influence market rates. By a combination of persuasion, increased capital requirements, and competition from foreign banks, the Government is bringing pressure on banks to improve their efficiency. Preferential interest rates are given to priority activities, such as production credits for exporters and for investment. In addition, the Government reduced the transaction tax on loans in mid-1981 from 25 percent of interest to 15 percent and waived it on loans by development banks and, recently, for loans to exporters. Complete elimination of this tax is not likely before 1983 because of budgetary considerations. The interest equalization charge has been reduced from 15 percent to 10 percent. Finally, the development of alternative instruments, such as the new "profit sharing certificates" or nonvoting stock is being encouraged. The new Capital Market Regulatory Commission came into being only in February 1982, so it is too early to assess the impact of the new regulatory framework. Private Investment 48. Private investment in subsectors supporting export growth and employment is a key element of the Government's long-term restructuring strategy. Overall, private investment, which comprises of 43 percent of total investment, is not expected to increase significantly in 1982. Preliminary estimates for 1981 show a modest 2 percent real increase in private investment in manufacturing to TL 137 billion (30 percent below 1977), and a 17 percent increase in private transport investment to TL 77 billion, reflecting the growing importance of trade. However, housing, the major component at TL 243 billion, continued to decline. 49. The restoration of growth of private investment faces several difficulties. Capacity utilization is estimated by a major industry  - 26 - association to have been about 60 percent in 1981, only a moderate increase from 1980. The 119 percent increase in manufactured exports in 1981 has allowed individual firms to operate at capacity; however, exports comprise only 6 percent of industrial production. Bottlenecks in energy, industrial infrastructure, and lack of inputs also deter recovery. The financial structure of most firms is heavily dependent on debt, now costly in real terms. Equity markets, weak to begin with, have been decimated by the failure of dividends to keep pace with inflation. Equity has been further eroded by taxes based on nominal profits, although the law to permit revaluation is under consideration. Debts of firms which borrowed foreign exchange have soared due to a more rapid depreciation of the lira than the rise in domestic prices. Though commercial banks have substantially increased their medium and long-term lending to the private sector, much of this has been for working capital. Under these circumstances, many firms, especially if they are not associated with a bank/holding group, have found it difficult to obtain local financing, and banks are insisting on more stringent financial standards for their project lending. 50. Despite these problems, the private sector investment activity that is taking place is encouraging. The Government is making major efforts to promote a change of ingrained attitudes toward outward orientation among private investors. Besides incentives, efforts include frequent high level government/business trade missions. The overall investment figures obscure the shift that is taking place in response to these efforts. A significantly higher percentage of projects in development bank pipelines is for modernization, efficiency improvement, extensions to make better use of existing capacity or in sectors where Turkey has a long-run comparative advantage, such as food processing and engineering. Moreover, many of these projects are being planned and financed by new outward-oriented investment groups. Conversely, project cancellations, which have grown during the past year, have mostly been for large new projects where the returns are no longer sufficient. The export obligations of projects receiving investment certificates have more than tripled in the past year. While levels of private manufacturing investment must increase in the medium-term to sustain growth, past investment levels, based on capital-intensive import substitution, are not a guide to the future. Feasible growth scenarios suggest investment growth rates of 8 to 10 percent would suffice. A significant increase in private sector investment seems likely in 1983 as confidence grows, but further expansion to desirable levels will probably require several years more. Foreign Investment 51. If the export drive is to be sustained, Turkey will need technology, access to markets and substantial investments which are beyond the capacity of the domestic private sector and the State. There is thus a need to attract substantial foreign investment. Foreign investors have been slow to respond to the variety of new incentives which the Government offers. In 1981, 109 foreign companies received licenses to invest $334 million, up from $92 million in 1980, but $290 million of this was financed by purchases of Turkish lira abroad from holders of non-guaranteed trade arrear obligations. Foreign investors have been discouraged by earlier experiences in Turkey, and by the investment approval process, which still remains cumbersome, despite well intentioned efforts to streamline it.  - 27 - 52. To further stimulate foreign investment, the Central Bank has hired an investment banking consortium (Lazard Freres, Kuhn Loeb Lehman Brothers, and S.G. Warburg & Co.) to promote foreign investment in petroleum, tourism, mining and agroindustries, as well as to review the relevant laws and regulations. To date, the most promising area seems to be petroleum exploration. In addition, to facilitate foreign investment, the Government is planning to revise the laws pertaining to investments in mining and petroleum and has recently revised the law regarding tourism. However, results are likely to be long-term given the current depressed world economy and the competition for investable funds. External Debt 53. External debt management in Turkey has been hindered by manual tabulation of data. Under SAL I the Bank supported a program to computerize it. Progress to date has been slow, due mainly to staff shortages. The Government plans to strengthen this program by providing additional full-time staff and by hiring specialized consultants in the Ministry of Finance by mid-1982. In addition, in order to obtain summary debt information more promptly, the Government agreed to provide debt information to the Bank in a simplified format every six months, beginning with December 1981. The December 1981 data has been received and is being analyzed. B. PUBLIC INVESTMENT 1/ 54. The management of the public investment program presents one of the most difficult challenges for the Government's structural adjustment program. Decisions on the appropriate size of the program, its composition, and focus are not easy and often involve conflicting considerations. The size of the annual allocation must balance the need for demand management, the need to remove bottlenecks to growth and the need to provide for the restoration of private investment over the medium-term. The composition must reflect an appropriate balance among sectors and within sectors, while at the same time laying the basis for the adjustment of the economic structure. Moreover, these decisions must be taken in circumstances where the room for maneuver, in the short-term, is limited by past decisions, contractual commitments, and the sheer size of the program. 55. Within these constraints, the Government is using the public investment program as a major instrument for restructuring the economy. The major objectives are to: (i) reduce the relative size of public sector investment in total investment over the 1982-85 period; (ii) constrain the volume of public investment to a level that can be financed domestically without adding to inflationary pressures and, externally, without adding imprudently to the debt burden; 1/ The Government's program is described in paras. 14-17 of the Statement of Development Policies - 1982, Annex IV-A.  - 28 - (iii) focus on high priority projects in infrastructure, agriculture, and energy, with manufacturing increasingly left to the private sector; and (iv) concentrate the public investment program on a smaller number of projects to shorten completion times. 56. SAL III supports these objectives. It must be recognized, however, that they can only be attained over a number of years. The sheer size of the program, some 7,400 ongoing projects costing about $65 billion, means it can only be modified to a limited extent in any single year. This problem is aggravated by the overhang of a large number of projects, many of uncertain merit which cannot be fully funded given current resources. Despite a major effort to trim the program for 1981, and especially for 1982, considerable work remains to be done. The Government estimates it will take another three to four years to fully rationalize the program and achieve the objective of a better balance between public and private investment. 1982 Public Investment Program 57. The level of public fixed investment programmed for calendar 1982 is TL 978 billion (about $7 billion), and represents a 6 percent real increase over the estimated actual level for 1981, but only 9 percent above the level of investment in 1979 (See Table 4). 1/ As a share of total fixed investment, the 1982 program remains about the same as in the two previous years, but somewhat higher than in 1979 and should be expected to decline in future years towards the 1979 level in line with the Government's policy. As a share of GDP, the 1982 program is not significantly different from that of recent years. Table 4: Public Fixed Investment, 1979-82 Actual Estimated Program 1977 1979 1980 1981 1982 Public Fixed Investment TL billion Current Prices 108 238 482 735 978 TL billion 1981 Prices 323 712 695 735 779 Annual Real Growth Rate (%) 13.2 5.2 -2.4 5.7 6.0 Share of Total Fixed Investment (%) 55.4 51.2 56.2 57.4 58.0 Share of GDP (%) 13.0 11.4 11.3 11.4 11.6 /1 A factor complicating comparisons is the shift in 1982 from a March - February fiscal year to the calendar year. As a result, public investment in fiscal 1982 is programmed at TL 922 billion for the 10-month period, March-December. It has been adjusted to 12-months by including January and February 1982.  - 29 - Sectoral Composition 58. The changing sectoral composition of public investment is shown in Table 5. Most noteworthy is the steady increase in the allocation for energy over the period. That for transport and communications is maintained, while manufacturing drops significantly from 19.3 percent in 1980 to 16.3 percent in 1982. Table 5 also shows how the sectoral pattern of the public investment program for 1982 compares with a pattern for 1982-85 suggested in the Bank's Public Investment Review (PIR) Report, which entailed increases in energy and agriculture and a decline in manufacturing. The share of energy for 1982 already exceeds the suggested share. In agriculture, the smaller allocation reflects absorptive capacity problems in the sector. The share for manufacturing is reduced, reflecting the Government's effort to reduce the role of manufacturing SEEs. Table 5: Sectoral Distribution of Public Fixed Investment (Percent) Actual Estimated Program 1/1 Suggested 2! 1980 1981 1982 - 1982-85 Agriculture 10.0 12.6 11.0 | 13.0 Mining 2.7 2.5 2.1 I n/a Manufacturing 19.3 18.3 16.3 | 13.0 Energy 3/ 30.1 31.9 34.4 | 33.2 Transport/Communications 18.8 17.9 18.0 I 18.5 Tourism 0.8 0.6 0.8 I n/a Housing 2.2 2.0 2.1 I 2.2 Education & Health 8.2 6.3 6.4 | 5.3 Other Public Services 7.9 7.9 8.9 I n/a TOTAL 100.0 100.0 100.0 | 100.0 1/ Adjusted to 12 months basis. 2/ A suggested distribution developed in the Bank's Public Investment Review (PIR) Report. 3/ Includes power, coal and lignite mining, petroleum exploration and development, refining and distribution. 59. The significance of the changes in sectoral distribution of public investment can be better gauged from the following table which shows how the absolute change in fixed investment over 1980-82, was distributed among major sectors. The increased emphasis on energy, the decline in manufacturing, and the limited allocation to social infrastructure are clearly evident.  - 30 - Table 6: Change in Fixed Investment 1980-82 Net Absolute Change % share of I Average % share 1980-1982 net absolutel of 1980-82 (TL billion in increase I total investment 1981 prices) _ Agriculture +16.2 +19.2 I 11.2 Manufacturing - 7.1 - 8.4 | 18.0 Energy +58.8 +69.7 I 32.1 Transportation and Communication + 9.5 +11.3 | 18.2 Other, Incl. Social + 7.0 8.2 | 20.5 TOTAL 84.4 100.0 | 100.0 Project Composition 60. In November 1981, the Council of Ministers reviewed the draft 1982 Public Investment Program. Priority was assigned to projects according to the following criteria: (a) those having high rates of return and capable of being completed within two years; (b) those which will help develop indigenous energy resources; (c) those which rehabilitate or extend the infrastructure in energy, transport and agriculture, and exports generally; and (d) those which help overcome output bottlenecks. 61. The 1982 Investment Program reflects the application of these criteria. About one-quarter of the 139 major projects 1/ in the 1981 program has been dropped, deferred for restudy or substantially reduced in scope in the 1982 Investment Program (Annex VIII, Table 4). These changes reduced the total cost of projects in the program by about $15 billion, or about 23 percent. In addition, many lower priority projects still in the program in 1982 have been given nominal allocations for the year to allow fuller funding of the higher priority projects. The 1982 program still contains several major projects which would not be started in current circumstances, but which were retained in the program after intensive review because of their advanced stage of execution and contractual commitments. Execution of most of these is being stretched out and they have been allocated less than 5 percent of the funds. 1/ Major projects are those costing more than TL 5 billion each. In the 1981 program, this was equivalent to about $60 million, in 1982 to about $47 million.  - 31 - 62. The degree of project rationalization is well illustrated by the manufacturing sector, a key sector in the Government's restructuring strategy. About a dozen major projects, with a total cost of TL 230 billion (about $2 billion), have been eliminated. In addition, nominal amounts have been allocated to a number of other low priority very large projects, including Sivas Steel and Iskenderun Steel Expansion, while many projects (e.g. tractors, diesel engines, steam boilers, etc.) have been scaled down.The elimination or reduction in scope of various projects has reduced the portfolio of projects in manufacturing by 25 percent in value and has helped the Government concentrate its limited resources on hastening completion of priority projects. Of the 795 manufacturing projects in the 1982 program, 331 or 42 percent are scheduled to be completed in 1982 compared to 35 percent in the 1981 program. Furthermore, the 1982 allocation represents 12.4 percent of the remaining cost of all manufacturing projects in the portfolio, compared to the 1981 allocation which represented only 8.4 percent. 63. The Government recognizes that the project list is still not fully satisfactory and expects to further rationalize it over the next several years. About 35 of the major projects in the 1982 program, 22 percent of the total, are expected to be re-examined to confirm their priority before they are fully funded. In selecting projects for funding in future investment programs, the Government intends to ensure they meet satisfactory economic criteria and has indicated it would continue to use a satisfactory rate of return criteria for this purpose. The Iron and Steel Master Plan, scheduled for completion in January 1983, will re-evaluate the Sivas Steel and Iskenderun Steel Phase II Expansion, which together account for almost 30 percent of the remaining manufacturing portfolio. 64. The 1982 program also reflects a determined effort to speed up the project completion rate by focussing funds on a more limited number of projects. For the four major sectors (agriculture, energy, transport and manufacturing), about 35 percent of the projects, accounting for almost 30 percent of the programmed investment, are to be completed in 1982. Of the 157 major projects (costing over TL 5 billion each), about 60, or 38 percent, are expected to be completed by 1984, although such projections have been inaccurate in the past. Eighty-Six of the 157 major projects are considered the highest priority and are programmed to receive 84 percent of the funds going to the major projects. As a condition for tranche release, we would seek evidence of the Government continuing to focus funds on higher priority projects pursuant to the policy of rationalizing the Public Investment Program (Loan Agreement, Schedule 4). An appropriate benchmark would be that the mid-year investment review should confirm that more than 80 percent of the funds expected to be spent on these major projects would go to the 86 highest priority projects as programmed. Size 65. Despite the concerted effort to constrain the real growth of public investment, the size of the 1982 program is 6 percent higher in real terms than the estimated 1981 levels (Table 4). The Government has argued that this is justified for four reasons: (a) there is a need to rehabilitate and expand infrastructure in support of exports stemming from a rundown of the capital stock, and a pressing demand for facilities. Between 1977 and  - 32 - 1980, fixed investment in transport declined by 18 percent per year and in agriculture by 22 percent, leading to a serious deterioration in the capital stock of these sectors. Existing transport facilities--ports, highways and storage--have comne under additional pressure because of the expansion in Turkey's trade and transit trade destined for the Middle East; (b) there is a need to remove bottlenecks in energy production. A recent survey of some 230 Turkish businessmen throughout the country indicated limited energy supply was among the most important impediments to expanding production and undertaking investment. In these circumstances, a major effort to increase investment in energy is understandable; (c) the major improvement in domestic resource mobilization in 1981 and expected in 1982, enables financing a larger investment program without adding to inflationary pressures, pre-empting resources destined for financing private sector investment, or encouraging imprudent borrowing abroad. Preliminary estimates (Table 7) show a steady increase in public savings from 5.3 percent of GDP in 1980 to 7.0 percent in 1981 and 9 percent in 1982. Table 7: Financing of Public Investment 1979-82 (TL billion in current prices) Estimated Programmed 1980 1981 1982 /I Resource Requirements 702.0 868.0 1,053 Fixed Public Investment 482.4 735.0 978 Stock changes 219.6 133.0 75 Financing Public Sector Savings 227.8 451.4 718 Public Borrowing 474.2 416.6 335 Domestic 315.7 250.3 260 o/w Central Bank (159.0) (107.2) (70) Other (156.7) (143.1) (190) Foreign (net) 158.5 166.3 76 Amortization (-46.7) (-76.5) (-115) Memorandum Items Tax Revenue/GDP % 17.6 19.8 21 Public Savings/Resource Requirements % 32.5 52.0 68 Public Savings/GDP 5.3 7.0 9 Public Savings/Public Fixed Investment % 47.2 61.4 73 Public Investment - Savings Deficit/GDP % 11.0 6.5 4 Source: SPO; Ministry of Finance; IMF, and Bank Staff estimates. 1/ Adjusted to an annual basis.  - 33 - This improved savings performance reflects an improvement in the tax effort, better expenditure control and improved SEE performance. Public saving is thus financing an increasing share of public investment; from 47 percent in 1980 to 61 percent in 1981 and an expected 73 percent in 1982. Domestic and foreign borrowing to finance the investment program has been correspondingly reduced; in particular, borrowing from the Central Bank in 1982 is expected to be less than half in nominal terms than in 1980. The declining requirement for foreign borrowing is a contributing factor to the strengthening of Turkey's creditworthiness; (d) there is a need to maintain the overall level of investment in the economy in view of the sluggishness in aggregate private investment (para. 48). Indeed, the increases in public investment and exports are the major driving force underlying the 4.4 percent growth rate in output between 1980 and 1982 and in helping to prevent a further deterioration in the employment situation. Although there is a potential risk that the public sector could crowd out private investment by pre-empting investment opportunities and resources, public and private investment are also complementary. The restoration of private investment depends on the availability of essential inputs, such as power, infrastructure and basic materials, that can only be provided by the public sector. The public sector is also a major market for private producers such as the electrical supply and engineering industries, which have done reasonably well because of the expanded public energy program. These forward and backward linkages mean that to some extent private investment will grow in parallel with public investment. 66. While these reasons justify the increase of public fixed investment programmed for 1982, a continued growth of public investment is clearly inconsistent with the Government's stated objectives to stimulate private investment and to constrain investment to levels justified by available resources, as well as the expectation that the share of public in total investment would decline over the 1982 to 1985 period. Moreover, the improvement in resource availability in 1982 was in part due to a once and for all transfer from the private sector through more realistic SEE prices. Taking these factors into account, restraint of the growth of public investment in future would be essential. A possible benchmark for judging progress in achieving these objectives would be to program public investment in 1983 at the same level in real terms as that in 1982. With this benchmark as background, satisfactory progress towards the Government's objectives of constraining the level of public investment to conform with available resources, and to allow for stimulating the growth of private investment, would be a condition of tranche release (Loan Agreement, Schedule 4). Project Evaluation Capacity. 67. The Government's capacity for project preparation, evaluation, and selection was weakened in the 1970's and is one of the reasons for the questionable quality of some projects in the investment program. Given the  - 34 - practical difficulties of reassessing ongoing projects, the Government has taken a reasonable approach over the last two years of qualitative reassessment based on such factors as the stage of completion, the need to make better use of existing capacity and the need for infrastructure to support export growth. There remains, however, a need to rebuild the Government's capacity to more systematically re-examine the large number of projects at very early stages of execution, especially those which have been deferred, as well as to provide for the proper selection of new projects, to ensure adequate rates of return on public investment. 68. Given the complexity of the Turkish economy and the size of the investment program, the Government does not believe a centralized "project office" is appropriate. Rather, it plans to: (a) build up a core evaluation capacity in the SPO which will provide guidelines for project evaluation and selection and ensure overall consistency; (b) strengthen the project preparation and selection capacity of the key ministries and agencies; (c) upgrade the State Investment Bank's (DYB) ability to appraise and supervise state projects; (d) require all new SEE projects to be prepared or vetted by qualified consultants and to meet the same standards for investment incentives as private projects; and (e) rely on market forces for manufacturing SEEs to determine their investments within their financial capabilities. The head of the evaluation department and his deputy have recently been appointed. Training courses, possibly with EDI assistance, are to be organized for SPO and the other ministries. In the meantime, DYB has prepared a draft law, in connection with the State Industrial Finance Project, to improve its operations, which is expected to be considered by the Government following the passage of the SEE reform law. Adequate progress in developing the Government's procedures and mechanisms for project preparation, evaluation, and selection would be a condition for tranche release (Loan Agreement, Schedule 4). In particular, the Bank would examine the steps being taken to enable the key agencies to better carry out rate of return calculations for new and restudied projects. C. STATE ECONOMIC ENTERPRISES I/ Background 69. The State Economic Enterprises (SEEs) are significant factors in manufacturing as well as in traditional public utilities, transport, and agriculture marketing and supply. They account for a substantial share of 1/ The Government's program is described in paras. 18 and 19 of the Statement of Development Policies - 1982, Annex IV-A.  - 35 - investment, value-added and employment. Since the late 1970s, their operating losses and growing investment demands have put intolerable burdens on the budget and added to inflationary pressures. While some SEEs were well run and profitable, in aggregate they showed increasing losses. The sources of these difficulties were well known. 1/ They include price controls, uneconomic and excessive investments, overstaffing, lack of autonomy, frequent changes of management, inadequate salaries for managerial and technical staff, over-centralization of decision making, and a confusion between economic, social, and political goals. 70. The reduction of the financial burden of the SEEs and improvements in their efficiency are major goals of the structural adjustment program. In view of the importance of the SEEs in the Turkish system, the Government has taken a gradual, but steady, approach to reform. Its strategy is to fundamentally change attitudes in Turkey to reach a consensus that the SEEs' prime objectives should be profitability and productivity, that their operations should be under professional, not political, management, and that their investments should be primarily in infrastructure, agriculture and energy, with manufacturing increasingly left to the private sector. The Government is implementing a number of interim measures to improve short-term financial performance, redirect their investment programs and finance them increasingly from non-budget sources, and undertaking legal reforms to institutionalize these changes. The first step, in early 1980, was to liberalize prices with a view to generating additional financial resources. This was followed, in 1981, by several additional measures designed to begin to improve efficiency, reduce costs and constrain investment. 2/ The SAL III Package for SEEs 71. The centerpiece of the Government's program for SEEs in SAL III (described in para. 19 of the attached Statement) is a significant reform package. While the Government recognizes the challenge is to change attitudes, not laws, the draft law has considerable symbolic importance. Moreover, it specifically addresses many of the key problems underlying SEE inefficiency. The law is complemented by the strengthening of interim measures to improve performance (para. 18 of the Statement). While results should not be expected quickly, the legal reform lays the groundwork for substantially improving SEE performance over time. The Government has presented a general enabling law to the Consultative Assembly in April 1982. Following its enactment, expected shortly, the Government intends to enact the SEE reform by decree law. Satisfactory progress on SEE reform would be a condition of tranche release (Loan Agreement, Schedule 4). The essential features of the reform law and the probable effects are as follows: (a) the SEEs, initially in energy and manufacturing, are to be re-established under the commercial code, free from the restrictions of the SEE Law (440) and the State Personnel 1/ SAL II President's Report and Chapter 6 of the ITS Report. 2/ These are described in detail in the SAL II President's Report paras. 135-155. Progress on these interim measures has been generally satisfactory, and is summarized in para. 21 and Annex VII.  - 36 - Law (657). This will permit them considerably greater freedom on salaries and incentives, particularly for management and technical personnel. It will give management far greater responsibility for minor investment and operational decisions; (b) these SEEs will be removed from direct ministerial control, and their main interaction with Government will be through an annual shareholders meeting. The provision for hiring managers and boards for fixed terms will encourage management continuity; (c) manufacturing SEEs will be increasingly responsible for financing their investments, which should result in more viable investments; and (d) they will be permitted to sell shares to the public and required to publish financial statements. The broader scrutiny of their operations, currently veiled from the public view until long after the fact, will increase the pressure to perform, as will the presence of private shareholders interested in financial results. 72. In addition, an interim package was implemented by decree on November 27, 1981 (described in para. 18 of the Statement), which continued the progress started under SAL II. Its most significant features were: (a) the priority given to operational results and improvements in productivity, with investment targets being given a secondary role; (b) the stress on profitability and productivity being the primary function of SEE managers and the institution of a Prime Ministerial level quarterly review of performance; (c) the continuation of the policy restricting the replacement of employees in eight key SEEs to 50 percent of the positions becoming vacant through attrition; (d) the limiting of budgetary transfers to the SEEs in 1982 to TL 243 billion, 1/ a significant reduction in real terms from 1981, with the proportion going to the manufacturing SEEs reduced in both real and nominal terms; and (e) the frequent adjustment of prices to reflect market conditions and, for monopoly or semi-monopoly firms, to take explicit account of international price levels. 1/ Being monitored by the DMF.  - 37 - 73. The above set of interim measures and legal reforms constitutes an appropriate set of actions pursuant to the long-term objectives of economy c2 efficiency. It addresses key problems such as delinking operations from day-to-day government control, and greater autonomy on personnel, product an, investment decisions, which have long been identified as critical to improved performance. The reform package does not envisage breaking up the large manufacturing SEE holding companies, although their monopoly power is being curtailed by allowing selective imports, underscoring the importance of impo-r- liberalization to future efficiency. While the SEEs are expected to have greater responsibility for investment decisions, especially in manufacturing, the Government's efforts to improve project selection are important to ensure government funds go to soundly conceived projects. Encouraging the SEEs to tap other sources for their needs will encourage financial discipline, but poses the question of the availability of these resources and the possible impact on private activities. The reform law is a broad enabling instrument and many of the practical details will have to be worked out in future in the course of implementation. These include more detailed guidance on the issuance of shares, improvements in the mechanics for monitoring performance, especially for the SEEs not covered by the law, and the development of specific criteria for Government equity participation. Financial Results and Prospects 74. The financial position of the operational SEEs both individually and as a group, together with the Government's projections for 1982, is provided in Annex VII. The positive trends in most key indicators, noted in para. 21, which have emerged in 1981, are expected to continue. These are summarized in Table 8 below: Table 8: SEE Operating Results and Projections Profit and Loss (% of sales) 1979 1980 1981 1982 Est. Prog. Expenditures 116.0 102.0 100.3 98.2 of which: wages and salaries 33.2 20.8 18.0 14.6 goods and services 78.1 78.3 79.6 80.8 Profits -16.7 -2.0 -0.4 1.8 Employment ('000) 550.0 543.0 541.0 The improvement in profitability is largely due to price increases, higher capacity utilization and wage constraints, which reduced the share of wages and salaries as a percentage of sales from 33 percent in 1979 to 18 percent in 1981. The decline in employment (1.3 percent since 1979) also helped. Wage bill increases were held to an overall 35 percent in 1981. The Government's projections for 1982 assume wage increases averaging 30 percent, price increases of 25 percent, and a 20 percent increase in production.  - 38 - 75. The breakdown of performance by sectors and firms is needed to understand the underlying movement (Annex VII, Table 2). Price liberalization led to profits in manufacturing in 1980, but declining domestic demand and increasing competition reduced these in 1981. The energy sector experienced substantial profit increases in 1981 as price increases in petroleum and power took effect. Losses have been concentrated in the trading and transport SEEs, where prices continue to be subsidized. The main losers in 1981 were the fertilizer trading companies (TL 61 billion), the railways and maritime companies (TL 11 billion), the coal company (TL 9 billion), and the steel company (TL 6 billion), while substantial profits were shown by the power company (TL 21 billion), the petroleum company (TL 50 billion), the post and telegraphs (TL 10 billion), and the mining company (TL 6 billion). The losses of the fertilizer trading company were offset by about TL 75 billion transferred from a fertilizer fund financed by an indirect export levy on agriculture products. 76. The cutting edge of the Government's policy for improving SEE performance is the investment program. After years of growth, the size of the program, as a percent of GNP, is being reduced, projects dropped or re-evaluated, self-financing increased and funds are being directed away from manufacturing towards infrastructure. This is shown in Annex VII and summarized in Table 9 below: Table 9; SEE Investment (percentages) 1979 1980 1981 1982 Est. Proj. SEE Fixed Investment/GNP 5.8 6.5 6.3 5.6 Own Sources/Fixed Investment -43.7 0.0 6.6 20.5 Share of SEE Investment Industry SEEs 37 32 26 Energy SEEs 47 49 53 Transport SEEs 11 13 15 Despite these improvements, there are still problems. The financing plan for SEE investment, although improved, still depends on "short term borrowing and net arrears", for about 23 percent of the funds, although down from 27 percent in 1981. 1/ Financing by arrears seems to have abated: Accounts payable to non-SEE sources, including arrears, are estimated to have declined from 9.4 percent of sales in 1980 to 5.7 percent in 1981. The financial burden of carrying stocks--they increased by TL 126 billion in 1981, is of concern to the Government and it is trying to reduce the increase in 1982 to TL68 billion, primarily by reducing the stock of fertilizers (see para. 87). 1/ This is a residual category, which also includes substantial off-budget transfers from special funds, such as the fertilizer fund. See also Annex VII, Tables I and 3.  - 39 - 77. To bring SEE financing under tighter control, the 1982 SEE investment decree set out a new policy: that fulfillment of investment targets is no longer a justification for additional government funds. If operating results fall short of projections, investment expenditures are expected to be cut. Budget transfers have been severely limited, with those to manufacturing reduced from TL62 billion in 1981 to a programmed TL47 billion in 1982, a realdecline of 32 percent. In addition, the Ministry of Finance has made it clear that "short-term borrowings and net arrears" should be reduced by price increases, cost savings, or further reductions in investment. Failure to pay debts to the Treasury, tax offices and foreign creditors will lead to deductions from programmed transfers. The IMF is monitoring the overall budget transfers to the SEEs. Since the manufacturing SEEs are where the savings are significant, the Government's performance in containing the level of transfers to manufacturing SEEs to the budgeted level for 1982, would be a condition for tranche release (Loan Agreement, Schedule 4). 78. In the medium-term, improved profitability is not the sole objective of SEE reform, since their monopoly or semi-monopoly position often enables them to conceal inefficiencies. Increased efficiency must also be a paramount objective. If efficiency could be increased by 10 percent, enough resources would be generated (TL 255 billion in 1982) to offset the need for budget transfers. In the short-run, profitability may also be adversely affected by the reforms. Salaries for high level staff may have to be tripled or quadrupled to reach competitive levels. Liberalization of imports will put pressure on prices, and wage costs may accelerate once union activity is restored. On balance, the reform package nevertheless offers good prospects for reaching the objectives of increased efficiency and enhanced profitability. D. AGRICULTURE 1/ Background 79. Besides meeting domestic food needs, agriculture directly accounts for about half of all exports ($2.2 billion in 1981) and indirectly supports a substantial part of industrial exports as well. Possessing a strong comparative advantage in a vast array of crops, especially fruit and vegetables and some cereals, Turkey's long-term potential for expansion of production and exports is excellent. The Bank's ITS Report estimated potential exports in 1985 could reach $4 billion if appropriate medium term policies are followed. The Government's objectives in agriculture include promoting rapid and sustained export growth, ensuring domestic food supplies and domestic materials for industry. These objectives often conflict and involve difficult trade-offs. Its policies in agriculture aim at reducing the market distortions and interventions of past policies and include export incentives, investment and production incentives for agroindustries, the reduction or elimination of input subsidies and pricing subsidies, higher real interest rates, and higher water charges. These policies are complemented by a more flexible administration of floor prices and by a reorganization of the major agencies to emphasize farmer support services. 1/ See also para. 20 of the Statement of Development Policies - 1982, Annex IV-A.  - 40 - 80. Developments in 1981 related to the SAL II program have been described in para. 19 above. The real growth rates of agriculture production, both gross value and value added, continued to decline in 1981 to about 1.3 percent and 0.5 percent p.a. respectively. This was principally due co lower production of olives and tobacco and higher input prices. Farmgate prices are projected to catch up in 1982 and restore growth of value added to the historical level of 3 percent p.a. Export performance in 1981 was nevertheless excellent, a 33 percent increase. Of particular significance was the diversification of export crops and the opening of new markets, largely by a group of new exporters (see also Annex VII, Chart II). This growth was achieved in spite of a 16 percent decline in hazelnuts which formerly accounted for about one fourth of agriculture export value. Exports of lentils and other pulses were dramatically increased, the large but partially recorded earnings from livestock exports were legalized, 1/ and the export of barley expanded. Favorable prices for cotton and tobacco also helped. Preliminary government estimates of increases in private on-farm investment are not supported by lending data and private investment seems to have remained stagnant and declined as a share of total investment. 81. During 1981, the Government eliminated urban food subsidies and required the agriculture marketing SEEs to cover their operating costs and contribute to their capital expenditures. About 300,000 tons of wheat were imported and sold at cost to stabilize wheat markets and draw out stocks being speculatively held by private traders. The financing of agriculture support prices designed to encourage production and stabilize farmer income was rationalized in 1981 by eliminating direct budgetary transfers. Prices are now set as floor prices without a subsidy element. Total financial outlays were TL 180 billion, primarily to finance purchases of stocks. This was about the same in real terms as in 1980, and most was for three major exports: cotton, hazelnuts, and tobacco, and to sugarbeets, a key import substitute. Export and Production Support Measures 82. The Government recognizes that the potential for future growth of exports requires capacity expansion. Thus, incentives to encourage production, particularly for export, are being expanded. The Agriculture Bank's (TCZB's) authorized lending volume for medium and long-term credits in 1982 was increased by 136.4 percent, which will help alleviate the current severe shortages in the supply of investable funds. Specific investment incentives were announced for integrated livestock fattening, slaughterhouses and export marketing facilities. New programs are being instituted to augment the supply of critical inputs, particularly high quality planting materials and animal feeds. Seed and feed imports are now being permitted. Public Investment 83. The public investment program for agriculture in 1982, about 11 percent of the total program, is better balanced between subsectors and focussed on a more limited number of projects. It has been established under 1/ Livestock exports increased from $108 million in 1980, to $258 million in 1981, or about 27 percent of the increase in agriculture exports.  - 41 - more realistic assumptions regarding the absorptive capacities of the implementing agencies than in 1981, when they were expected to double their expenditures. Irrigation development will absorb 66 percent of sectoral allocation, forest industries and grain storage 19 percent and agriculture support and other services, 15 percent. Of particular significance is the increased share given to extension and livestock services, from 1 percent in 1981 to 10 percent in 1982. The existing irrigation program has been significantly rationalized; no new project starts are programmed and 2 of the 18 large relatively new projects have been dropped, and 15 either assigned token allocations, scaled back significantly, or substantially accelerated. As a result, 17 of the 69 major irrigation projects in the 1982 program are expected to be completed by 1983. Institutional Developments 84. Progress in 1981 in the reform of the Ministry of Agriculture (MAF), designed to consolidate fragmented services and thus provide better service to the sector, has been described in para. 19. Provincial agricultural services will be further consolidated in 1982 by decentralizing budgeting and programming activities to them. In February 1982, a Government reorganization decree enabled the general directorates in the MAF to be reduced from 35 to 13 and regrouped along functional, rather than commodity, lines, which should considerably improve the delivery of services. Most important, the extension services are being expanded and reorganized to provide integrated support to farmers, adapted to the different regional conditions in Turkey. The planning phase was completed in 1981 and the shifting of personnel and equipment from surplus to deficit regions has been initiated. This effort, which is supported by the Bank, involves about 15,000 of the Ministry's staff. While well prepared at the national level, implementation problems may arise in the field unless a more selective approach is evolved which focusses initial efforts on high priority areas. 85. The Agriculture Bank (TCZB), has been severely hampered by resource constraints, a weak internal organization, cumbersome procedures, and substandard accounting and financial controls. In 1981, the Government installed new top management in TCZB and tripled its paid-in capital. TCZB's 1982 lending program gives increased emphasis to agriculture lending. In January 1982, the new management regrouped its head office departments according to functions, thereby eliminating overlapping responsibilities. It intends to simplify its chain of command with branches and decentralize authority to its seven regional offices. To further improve coordination with the Ministry of Agriculture, a modification of TCZB's foundation law was submitted to the Council of Ministers in early 1982 which would reserve a seat on TCZB's Board of Directors for a representative of the Minister of Agriculture. 86. While agriculture SEEs are not currently part of the SEE reform package, it is anticipated that the reforms would be extended to them in the future. They need to be allowed to function primarily as commercial entities, dispose of inefficient or poorly located plant and equipment, and be relatively free to rationalize their price and cost structures. In the  - 42 - meantime, the consumer support role of the wheat purchasing agency is being reduced, and emphasis given to food security and price stabilization. These institutional matters will be further reviewed in an agricultural sector mission scheduled for May/June 1982. Fertilizer Stocks 87. Stocks of fertilizers increased substantially in 1981 creating a financial burden. Year-end stocks were roughly 2.3 million product tons, with a value of about $300 million, about one-half the anticipated yearly consumption, with the main excess in phosphatic fertilizers. This resulted from faster than anticipated growth of production, lower consumption due to the substantial price increases in 1980 and 1981, a decline in the use of phosphatic fertilizers, an overestimation of the needs for wheat production, and an undue, if understandable, caution in cutting back fertilizer imports too quickly. The Government has instituted a program to reduce the level of stocks to 1.5 million product tons by year-end through relaxed eligibility requirements for fertilizer credits, a delay in further retail price increases, a reduction of the import program, and encouragement to producers to export about 300,000 tons of phosphatic fertilizers. The Government recognizes that it has to strike a careful balance between maintaining agricultural production by adequate fertilizer supplies and reducing the substantial costs of carrying stocks. The Government program is based on 1982 sales of 4.3 million product tons, 20 percent higher than 1981, and 6 percent higher than the previous peak in 1979, which may be optimistic. In the event spring purchases remain low, additional measures will have to be taken. Prospects 88. In the short run, the reduction of input and price subsidies is likely to have a negative effect on production and value-added. In the medium-term, the removal of market distortions, more realistic pricing policies, and the better provision of services should lead to the production of a higher value mix of crops. The Government expects the growth of production to recover to 3 percent in 1982 and exports to grow 14 percent. To continue growth at these rates, a number of weaknesses in the program will have to be addressed. The sector's good export performance in 1980 and 1981 was realized largely through diversion of current production to foreign markets, a pattern which can not provide a basis for sustained export growth. In the medium-term, the Government expects agriculture to play an important role in meeting a number of conflicting policy objectives, including exports, food security, employment, raw materials for manufacturing, and imbalances in regional incomes. While the implicit trade-offs amongst these objectives are complex and need to be more rigorously examined, some preliminary judgements can be made. 89. Broadbased productivity increases will be needed to meet production and export targets. Thus, private investment must increase, and additional measures to stimulate investor confidence will have to be considered if recovery does not begin in 1982. In order to sustain export growth of 10-12 percent and resume past sectoral GDP growth of 3-3.5 percent p.a., the  - 43 - composition of production will have increasingly to emphasize industrial and cash crops at the expense of food crop production. Turkey needs to re-examine its food policies which presently emphasize secure supplies of wheat, sugar and vegetable oils from domestic sources, since substantial food imports may be required to offset shifts in land use to cash and non-food crops. Plans for further expansion of inefficient import substitutes such as sugarbeet and some oil crops may have to be dropped. Further clarification is also required of the sector's role as a source of low cost raw materials for industry, i.e. the trade off between production of inputs for industry and for direct exports. Implicitly, the provision of raw materials for industry has been given high priority. The current pattern of export incentives does not reward primary commodities, including agricultural produce, which may not be optimum. 90. In the immediate future, the policy-making procedure for farm price supports should be further refined to ensure that resource costs are kept under control and production is encouraged where needed. In particular, farm income support could be further de-emphasized as an objective, the number of supported commodities could be further reduced, and a better statistical basis for pricing decisions created. The new policy analysis unit in the Ministry of Agriculture may provide the future basis for better quantitative analysis and a more vigorous determination of support prices. 91. In summary, the SAL program will underpin requirements for the restructuring of the sector, and are important departures from the past. These particularly include the plan to reorganize TCZB and improve its financial capability, the reorientation of public investment priorities, the reorganization of technical support services, and insistence that agricultural marketing SEEs operate as financially viable entities. Nevertheless, more needs to be done, and further actions to clarify the presently conflicting set of sectoral objectives, and the related policies and incentives needed to reach the Government's objectives will be reviewed in the planned sector mission. The actions being undertaken in 1982 provide an essential foundation for sustained export expansion and the recovery of sectoral GDP growth over the medium-term. E. ENERGY 1/ Background 92. Turkey's dependence on imported energy, primarily petroleum, is one of the main contributing factors to the structural imbalance in the external accounts. Petroleum imports amounted to about $3.6 billion in 1980, and are estimated at about the same level in 1981, about 40 percent of all imports. 1/ The program was set out in the Statement of Development Policy for SAL II and described in the President's Report for that loan. The updating Statement of Development Policies - 1982, para. 20 in Annex IV-A, provides additional details on the evolution of these policies.  - 44 - On the other hand, Turkey is relatively well endowed with hydropower and low quality lignite, both relatively unexploited. The Government's policy is to constrain the growth of energy imports by more quickly developing these domestic resources while restraining the growth of consumption through demanid management. This policy is supported both by the SALs and an intensive program of project lending. The elements of the program include: investmentsin high priority projects, conservation measures including frequent price adjustments, encouragement of oil exploration, and institutional changes devised to increase domestic capacity and efficiency. 93. Energy consumption in Turkey in 1981, was estimated at about 33.2 million tons of oil equivalent, a modest increase over 1980, of which about 42 percent, was imported. The per capita level of consumption, 0.7 mtoe, is somewhat below the average for middle income countries. Domestic production of lignite, hard coal and hydropower is estimated to have increased over the 1980 levels by 10 to 15 percent, and total domestic production of energy is estimated to be up 8 percent. Imports of oil and petroleum products in 1981, dropped in volume by 12 percent and in value by 3.7 percent. In 1980, system losses in the generation and distribution of electricity amounted to about 15 percent of total power consumption. This has been reduced to an estimated 13.5 percent in 1981 and further reductions are expected. The Bank is currently working on an assessment of energy supply and demand and the implications for energy policy, for discussion with the Government in the first half of 1982. The preliminary findings indicate that to contain the energy gap at sustainable levels along with reasonable economic growth, a vigorous program to increase domestic supplies and pursue appropriate demand management policies will have to be carried out. Public Investment 94. The 1982 public investment program reflects the priority accorded energy, with the allocation for energy investments increased to 34 percent of the total compared with 32 percent in 1981. The ratio of yearly allocation to total project costs increased from about 7 percent in 1981, to about 10 percent in 1982. Several major projects of lower priority have either been dropped or given a nominal allocation, notably the Elbistan B project. The program also provides increased resources for reducing losses by improvements to transmission and urban distribution systems, and to make better use of existing plant capacity by providing more funds for spare parts. Several energy projects of lower priority, such as the refinery projects, are still included in the program, however, because of their advanced stage of construction and contractual commitments. Overall, these changes mark progress in the direction of weeding out marginal projects, giving emphasis to priority projects, and making better use of existing facilities. Prices 95. During 1982, the Government plans to continue its policy of adjusting energy prices to reflect changes in the cost of energy to the national economy. Frequent adjustments are being made to petroleum prices to keep pace with international prices and the changes in the exchange rate, i.e. by an  - 45 - average 8 percent in December 1981 and another 5 perce-nt in February 1982. Price levels for petroleum products, while not as high as some European countries, are above international costs, e.g. over $2.0/gallon for gasoline. Other energy prices are also being increased to cover costs: coal prices were increased in March 1982 by an average 20 percent. Despite past substantial increases, electricity tariffs and lignite prices do not contribute sufficiently to future expansion needs due, in part, to the relative inefficiency of coal and lignite operations. Moreover, to encourage substitution of domestic resources for imported energy, a possible alternative would be to introduce a tax element into the price levels of imported fuels. Conservation 96. The maintenance of petroleum prices above international costs has already had a modest impact on the consumption of petroleum products in 1981, now estimated to be slightly below the 1980 level. To improve public awareness of the need for conservation, a publicity campaign is now underway. A financial incentive scheme was introduced in January 1981 to encourage private energy savings. The current institutional and incentive arrangements for encouraging energy efficiency, while well intended and heading in the right direction, will require considerable augmentation if energy wastage is to be substantially reduced. A vigorous, well staffed, energy efficiency program is needed to carry out energy surveys, set efficiency targets, and enforce regulations. A new conservation law is expected to be enacted in 1982, which will define the objectives and guidelines for energy conservation in all sectors and will contain information, incentives, monitoring and enforcement procedures. Once the scope for energy saving is better identified, a program of retrofitting investments designed to achieve these savings should be carried out. Institutions 97. The essential increase in domestic production depends heavily on improvement in the capabilities of the energy SEEs and the greater mobilization of private resources, especially in oil and geothermal development. Besides the SEE reform package, which will cover energy SEEs, several additional measures are being taken to strengthen energy institutions, but improvement is likely to be slow. The amendment to the mining law permitting private exploitation of lignite is in an advanced stage of consideration and expected to be enacted in the course of 1982. In the meantime, to overcome its capacity limitations, TKI 1/ has begun to make greater use of private contractors in removing the overburden for lignite mine development and for some mining as well. Improvements to the petroleum law to encourage more foreign oil exploration are under consideration. Steps have recently been taken in connection with the Elbistan project to improve the implementation through the greater use of contracted management. The institutional capability in the energy sector, nevertheless, still remains weak, and will have to be further strengthened if it is to cope with the 10 percent per year expansion required to meet expected needs. 1/ Turkish Coal Authority.  - 46 - Prospects 98. Overall, the Government's balance of incentives, institutional measures and investment policies in the energy sector has shown a significant improvement over the last year, but much more remains to be done. The most serious limitation on the Government's energy program continues to be institutional, with a number of deep-seated problems. The improvement in the performance of the public energy agencies is fundamental to the success of the energy development program and the containment of the increasing energy deficit that Turkey faces. There is, however, a limit to what the coal and power companies can be expected to accomplish, even if all the proposed reforms are carried out quickly and effectively. In order to reduce dependence on imported energy sources, a higher priority will have to be placed on energy conservation, interfuel substitution, and the'development of other energy resources. The potential exists for increasing the recovery of oil from proven reservoirs, exploiting identified geothermal fields, and the more extensive use of forestry resources and wood plantations for fuelwood. Such developments would require a substantial expansion of the financial and technical resources currently committed to these fields. The Bank's energy assessment report and planned lending for energy and structural adjustment will support additional measures to expand domestic energy production and strengthen the major institutions as well as further improvements in conservation and pricing policies. F. OVERVIEW, PROSPECTS AND FUTURE ISSUES Overview 99. The Government's structural adjustment program as further refined in the revised Statement of Development Policy for SAL III, represents a comprehensive package addressing many of the key issues impeding Turkish recovery and development. The development of a medium-term framework is essential to guide and assess future policy development, particularly the difficult trade-offs between objectives and the fine-tuning of existing policies. Because external resource constraints are a major impediment to raising the future growth rate and improving creditworthiness, the trade policies are central to the program. The package of incentives and institutional actions, together with constraints on domestic demand, is a powerful stimulus for reorienting Turkish producers towards the external markets. Trade liberalization is a necessary complement to ensure that the bias towards domestic markets and uncompetitive production does not re-emerge once domestic demand revives. 100. The domestic resource measures are designed to generate the savings needed for investment to support future growth. The tax reform package and follow-up administrative measures, SEE reforms, interest liberalization, and capital markets regulations are generating additional savings, although the weakness of private financial markets remains an issue for future attention. The efforts to reform the Public Investment Program will ease its drag on the Turkish economy and speed the removal of bottlenecks to future output growth and export development. The measures to constrain aggregate demand have led  - 47 - to idle capacity and limited private investment recovery. Nevertheless, the investment which is taking place is largely outward oriented, reflecting the current incentives for private investment. The efforts to attract foreign private investment are appropriate to complement domestic savings. The interim and long-term measures for SEE reform are also essential to improve public sector efficiency. 101. The policies and actions in agriculture represent an appropriate mix designed to improve the institutions serving the sector and support the growth of production, the major resource base for Turkish exports. Turkey may have to become an importer of food, if it is to obtain the maximum potential from agriculture exports. The policies and actions in the energy sector should increase energy savings and improve production, thus reducing the growth of energy imports, although the main institutions in the sector remain weak, despite steps to improve them. Medium Term Prospects 102. A more systematic assessment of these policies, taking account of the progress to date, has been prepared using a simple economic model. The results of these projections are summarized in Table 10 below. Table 10: Projections of Selected Economic Indicators Average Annual Levels Real Growth Rates 1975 1980 1981 1985 1975-80 1982-85 (Units) Actual Estimate Projected GDP 1980 TLbil 3,818 4,325 4,516 5,411 2.8 4.6 Consumption " 3,234 3,660 3,737 4,304 2.5 3.6 Investment " 905 995 1,039 1,244 1.9 4.6 Exports of Goods Current $mil 1,402 2,910 4,700 10,400 4.6 15.5 Imports of Goods " 4,739 7,909 8,900 14,700 -3.7 5.7 Trade Balance 3,337 -4,999 -4,200 -4,300 Current Account Balance Current $mil -1,892 -3,196 -2,459 -1,642 Gross Capital Inflows Current $mil 2,067 4,057 4,370 5,050 Ratios Investment/GDP Z 23.7 23.0 23.0 23.0 Savings/GDP Z 15.3 15.4 17.1 19.7 Exports of Goods/GDP % 3.2 5.2 7.5 11.0 Current Account Deficit/GDP Z 5.1 5.5 3.9 1.6 Debt Service Ratio /1 % 8.0 11.5 18.0 27.0 J1 Total debt service as percent exports of goods + NFS + workers' remittances.  - 48 - These projections are more optimistic than those presented with SAL II and in recent reports, largely because of the favorable results in 1981; exports reached $4.7 billion, $500 million more than earlier projections, oil imports were $200 million lower than earlier projections and GDP grew at 4.4 perccnt instead of 3.5 percent. In addition, the new projections take specific account of the dramatic increase in overseas contracting in 1981 by forecasting additional profit remittances in 1982-85 of about $300 million per year and by increasing workers' remittances by 3 percent per year in real terms. On the other hand, these projections continue to be conservative about the prospects for containing oil imports, which are projected at $6.4 billion in 1985. 103. The projections indicate that, if appropriate policies continue to be followed, the economy could regain a growth rate of about 5 percent by 1985 without unduly straining the balance of payments or domestic financial stability. The current account deficit in 1985 is projected at $1.6 billion, the gross capital inflows about $5 billion, and the debt service ratio at about 27 percent. These results would be even more favorable if oil prices decline; a $1/barrel drop in the price of oil would reduce the import bill by *100 million. The high debt service ratios in the mid to late 1980s, are partly the result of repayment of rescheduled debt which would amount to about $1.0 billion in 1985 alone. The Government's targets for 1982 are consistent with these projections (see para. 7 of the Statement of Development Policies - 1982). They expect exports to increase 25 percent to $5.9 billion and imports to increase 12 percent to $10 billion. With workers' remittances projected to increase to $2.8 billion, the current account deficit is expected to be around $2 billion in 1982. GDP is projected to grow at 4.4 percent and inflation to average 25 percent. 104. The scenario for 1985 assumes no unfavorable developments in the external environment and a stable domestic political climate. The crucial assumption is an average annual export growth rate of about 15 percent in real terms during 1982-85, highlighting the importance of the trade and investment policies discussed earlier. Given the emerging trends, notably the factors set out in para. 39, export growth of this magnitude is feasible. In the later years, the recovery of private investment in both manufacturing and agriculture is needed to support this growth. A second key assumption is the modest growth of imports, about 6 percent in real terms, which depends on the success of the Government's program to constrain energy imports. If export growth is significantly lower, or import growth significantly higher, the balance of payments problems will continue into the mid 1980s. The projections also highlight the importance of financing growth increasingly with domestic savings. The scenario assumes that improved creditworthiness in 1982 would lead to access to medium and long-term credits from commercial sources starting in 1983, which would gradually replace the current dependence on concessional and official support. The eased foreign exchange situation could permit a significant dismantling of the protection system, beginning in 1983-84. 105. The cumulative impact of the tax reform and follow-up administrative measures should keep the Government's budget deficit within manageable levels, and the overall tax effort at above 20 percent of GNP. The massive  - 49 - investments in infrastructure, particularly in energy, should begin bearing fruit by 1985, and ease some of the constraints on production emanating from bottlenecks and shortages. Continued but gradual improvement in the financia performance of the SEEs may be expected, with profitability perhaps reaching 5 percent of sales and the contribution to investment from revenues staying above 20 percent. Creditworthiness 106. At the end of 1978, Turkey faced an overwhelming debt burden of $7.5 billion in short-term debt and $6.8 billion in M&LT debt. Turkey was faced with service payment obligations (mostly on short-term debt) of $5.1 billion (including arrears), or nearly three times the value of merchandise exports in 1977. Over the last three years a series of large scale reschedulings have been worked out including: $3.0 billion of commercial and convertible Turkish lira debt finalized in March 1982 (repayments from 1985 to 1990); three consecutive reschedulings by OECD creditors of $1.0, $1.1 and $2.5 billion respectively in 1978, 1979 and 1980; and the consolidation of about $1 billion of unguaranteed trade credits (8 to 10 year terms). Without these reschedulings, the debt service ratio would have been around 29 percent instead of 12 percent at the end of 1980, or short-term debt of $2.8 billion and M&LT debt of $14.3 billion. Nevertheless debt service obligations are likely to remain high in the mid to late 1980's, partly the result of repayments of rescheduled debt, which will amount to about $1.0 billion in 1985 alone, and partly due to the need for additional borrowing to enable the economy to achieve a modest level of growth. The debt service ratio is projected at 27 percent in 1985 on the assumptions made in paras. 102-104. However, the debt burden should remain manageable, provided current policies are successfully implemented, the export drive is sustained, and Turkey continues to receive further international support from private and official donors. Turkey is beginning to explore with commercial banks the timing of re-entry to the medium term commercial markets, possibly in early 1983. In February 1982, Turkey raised its first medium term credit from commercial sources since 1979 in the form of a $76.5 million loan with US EX-IM Bank. The non-guaranteed portion was raised from a syndicate of international banks at 1.5 percent over LIBOR for five years. To better coordinate external borrowing by public and private agencies, a committee has recently been formed under the Central Bank to review applications for external borrowing. Risks 107. The Turkish economy is at a transitional point in its structural adjustment process. Prospects are favorable but the risks are nevertheless substantial and a reversal still possible. The risks include external factors such as oil prices and the trade environment, the fragility of private investment, the overhang of public investment and institutional weaknesses in the Turkish economy particularly in key sectors like energy. There are also costs to the adjustment process in the form, for example, of increased unemployment and a decline in real wages which, if not addressed, may imperil social stability.  - 50 - 108. The factors underlying the remarkable growth of exports over the last year have been analyzed in previous paragraphs. Factors which threaten the sustainability of future export growth include the possible impact of a revival of domestic demand, the instability of some of the new markets, the sluggishness of private investment and the difficulties of increased penetration in traditional markets at a time of a world-wide recession. These risks are not inconsequential since the recovery of the Turkish economy and its ability to service a reasonable level of debt, depends heavily on a successful expansion of exports. Failure of the export drive, given the dependence on imports, could mean that Turkey would have to resort to a strategy of reduced growth as the mechanism of adjustment. 109. Another major risk concerns the adequate response of private investment to the adjustment process. Future export growth is dependent on the revival and redirection of private investment in the medium-term. Perhaps an inevitable consequence of the current stabilization process is the current low level of private investment, although there are some signs of recovery. The weakness of domestic demand, the inadequacy of the Turkish financial and capital markets, high interest rates, and the lack of equity funds are the major medium-term issues facing this recovery. For the immediate future, the existence of substantially underutilized capacity in many industries offers the prospect for expansion of production without further investment. But in the medium-term, the current low level of investment will have to be reversed. 110. The most important uncertainty is whether the Government's determination to carry out some of the structural reforms will weaken, leading perhaps to a resurgence of the old import-substitution and excessively controlled style of economic management. The awareness of this risk perhaps explains the emphasis being placed on institutional reform, especially within the SEEs. This report has already noted that, whatever else, such reform requires a fundamental change of attitudes, never an easy objective to attain. Ill. On balance, while these risks are serious, they are not insurmountable. The demonstrated capacity of the Turkish government to carry forward its program, devise flexible responses to new circumstances, and hold steadfast to essential policies, gives confidence that the Turkish adjustment program will continue to show commendable progress. The authorities are well aware that 1982 and 1983 are key years for the success of the program. The prospects of declining concessional funds and the increased need to resort to the commercial markets, make it all the more important that the program be kept on track. The Costs of Restructuring 112. The adjustment measures underway have entailed considerable transitional costs, primarily in terms of depressed economic growth, increased unemployment and distortion in income distribution. Despite some recovery from the severely-depressed levels of 1980, economic activity in 1981 has been constrained by stagnant domestic demand, and only marginal improvement can be expected in 1982. Over the medium-term, if there is to be substantial economic growth, private investment will clearly have to recover, particularly as it has the greatest potential for export growth.  - 51 - 113. While data on employment remain poor, they indicate a disturbing deterioration in the employment situation, with unemployment increasing from 13.9 percent in 1979, to 15 percent in 1980 to the current 16.6 percent. Around 600,000 new workers look for jobs each year, in addition to the large number of currently underemployed. The economic slowdown has aggravated the situation, although the rural-urban migration has apparently slowed due to the high cost of living in the cities. The Government's concern with the problem is clear from their mandate banning dismissal of workers in the private sector (although it is continuing to reduce employment in SEEs). It is taking more positive steps through a new Social Housing Law, requiring an allocation of not less than 5 percent of consolidated budget expenditure to a Social Housing Fund each fiscal year, beginning in FY82. Over the medium-term, the Government believes that the real solution to the problem is through a resumption of economic growth. 114. The available data on income distribution, indicate that there have been marked changes associated with the acceleration of inflation in recent years, in particular, a steady deterioration in the position of Government employees and, to a lesser extent, industrial workers. Civil servants' salaries have declined 53 percent in real terms since 1977 and are currently less than half the 1970 level in real terms. Organized industrial workers' salaries have declined by 48 percent since 1977 and are 60 percent below the 1970 level. Although the data are weak, it is probable the position of agricultural workers has also deteriorated. The groups who have benefitted from the rapid inflation are those in the service sector, particularly the recipients of speculative profits. The substantial deceleration in inflation in 1981 and the further decline expected in 1982, together with the recent tax changes, have helped somewhat to reduce the skewness in income distribution, but it will clearly take time before any major improvement is evident. PART IV - THE PROPOSED LOAN 115. The proposed loan is the third in a series of loans supporting the Government's structural adjustment efforts, begun in January of 1980. The main developments of the program have been described elsewhere in this report. A letter from the Deputy Prime Minister dated April 24, 1982, sets out the major refinements in the program and the new policy actions envisaged for 1982 and early 1983. The letter and its updating Statement of Development Policies - 1982, are attached as Annex IV-A. Preliminary discussions on the possible content of the SAL III package were held with the Government in November 1981, and the proposed loan was appraised in January 1982. Negotiations were held in Washington in April 26 to May 3, 1982. The Government delegation was headed by Mr. Altinok, Chief Financial and Economic Counselor of the Turkish Embassy. 116. The proposed loan of $304.5 million (including the capitalized front-end fee) would finance about 3 percent of Turkey's total merchandise imports, and about 7 percent of the gross capital inflows over the disbursement period (mid-1982 to mid-1983). The loan, a decrease in real terms when compared with SAL II, is designed to continue Bank support through the critical structural transition period of 1982 and early 1983 and has been determined partly in light of the overall size of the Bank's lending program for Turkey.  - 52 - 117. Unlike previous loans to Turkey, the proposed loan would finance all goods to be imported into Turkey except for goods financed by other sources and a specific list of excluded items such as military or paramilitary items and luxury goods such as tobacco, precious stones and jewelry, gold, and nuclear reactors and parts. Counterpart funds would be deposited in a special account with the Central Bank; the Government would use these to help finance expenditures included in its development programs, as under previous loans. While the Bank has not sought to influence the Government in its allocation of funds, the Government has indicated that it would expect to continue to allocate the funds to the most important energy projects including the Bank-financed Elbistan and Karakaya projects. Procurement, Disbursements, and Administration 118. The satisfactory administrative arrangements made for SALs I and II would be continued, with the Ministry of Finance, and the Central Bank bearing the main responsibility for administering the proposed loan. Procurement and disbursement performance has been entirely satisfactory. To speed disbursements, the Government intends to continue its relations with two foreign commercial banks who are providing bridge financing to cover the period between payments and reimbursements from the proposed loan and providing certain administrative services to facilitate the preparation of withdrawal applications. To further simplify disbursement, the minimum amount of invoices and withdrawal applications established under the previous loans, $5,000 and $25,000 respectively, are being retained (Loan Agreement Schedule 1, Para. l(e), Section 2.10(b)). The loan would be disbursed against only foreign expenditures, with retroactive financing permitted up to $40 million of expenditures made after March 1, 1982 (Loan Agreement Schedule 1, Para. l(c)). The retroactive financing is to ensure a smooth flow of commitments and payments during the transition period between the second and third loans. 119. Imports would be made directly by actual users with imports costing $10 million or more procured through international competitive bidding in accordance with the Bank's Guidelines for Procurement. Certain commonly-traded commodities may be purchased through price quotations from organized international commodity markets. All contracts of lesser value would be awarded through normal trade channels on the basis of normal procurement procedures of the public and private sector firms concerned. The procurement procedures of public sector firms provide for substantial international bidding or shopping and are satisfactory. Firms in Turkey have adequate choice of international suppliers to ensure reasonable availability and price. Monitoring 120. Monitoring of performance under the SALs involves essentially two complementary and inter-related activities: a more general monitoring of the progress on implementing the program and the monitoring of specific progress as a condition of tranche release. 1/ Time and data considerations place 1/ The Government's objectives are summarized in paras. 10 and 27.  - 53 - limits on the actions that can be meaningfully monitored before tranche release. Proposed conditions for release of the second tranche of $100 million include: (a) satisfactory progress in the SEE reform including progress on SEE legal reforms and progress in maintaining the level of budget transfers to manufacturing SEEs below the budgeted level of TL 47 billion for 1982 (paras. 71 and 77); and (b) satisfactory progress towards rationalizing public investments, and constraining the level of public investment to conform to available resources and stimulate the growth of private investment, in accordance with the Government's objectives (paras. 64 and 66); (c) satisfactory progress in developing the Government's procedures and capabilities for preparation, evaluation, and selection of investment projects (para. 68); and (d) satisfactory progress in import liberalization (para. 43). 121. Despite the considerable progress to date, and the comprehensive nature of the structural adjustment program, a number of issues and emerging concerns are likely to be addressed more explicitly in future SALs. These include further steps to reduce the impact of energy on the balance of payments, to improve production and exports in agriculture, to address the problems of financial intermediation and private capital formulation, and to increase employment. PART V - BANK GROUP OPERATIONS IN TURKEY 122. The Bank/IDA has to date lent about $3,476 million, through 68 projects. Agriculture accounts for 20 percent of funds lent, industry and DFCs (including structural adjustment) for 41 percent, power for 12 percent, and urban development, transportation, education and tourism for the rest. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1982, with notes on the execution of ongoing projects. 123. The implementation of private sector projects has been satisfactory. Political instability, limited coordination amongst ministries, staffing problems and the serious external and domestic financial crisis since 1977 have seriously affected project implementation in the public sector. A system of joint project reviews between Turkey and the Bank was instituted in June 1975. This has resulted in distinct, but modest, improvements. The broad reform of the public sector launched in January 1980, and pursued with new measures since then, allows cautious optimism that performance can be gradually improved further, provided it is not eroded by new factors, including shortages of resources. As of December 31, 1981, overall disbursements amounted to 68 percent of appraisal estimates, which compares favorably with other countries in the Region. This figure includes structural adjustment lending which tends to disburse more rapidly than other project  - 54 - funds, and also reflects good disbursement performance in the power, industry/DFC and water supply sectors. Disbursements have been fair in the agricultural sector and rather poor in the urban, energy and railways sectors, due mostly to project-specific problems that are being addressed through ongoing supervision efforts. 124. Bank lending is aimed at supporting the economic policies initiated in January 1980, especially: the pursuit of an export-oriented development strategy; and domestic economic policies aimed at establishing a macro-economic balance, increasing domestic savings, restraining public investment and reorienting it to reflect the new Government priorities (completion of ongoing projects, emphasis on quick-yielding new investments, and balance of payments impact). The Bank has discussed with the Government how its overall lending can best contribute to the latter's medium-term objectives, and help remove past policy and institutional constraints. A series of structural adjustment loans (SALs) is being implemented, at the Government's request, to support the program of structural adjustments. Agriculture, industry and energy will be the key sectors for project lending. In agriculture, projects emphasize livestock, exports, and rural development; in industry (including DFCs), the emphasis is on promotion of exports and employment, and the gradual strengthening of the SEEs. Energy projects underway are in power generation based on domestic hydro and lignite resources; future projects will emphasize the oil/gas sub-sector and coal/lignite. Projects for urban development and public utilities may supplement these efforts. The close macroeconomic and sector dialogue established with the Government in recent years is expected to be pursued on key issues. The economic and sector work undertaken over the last 15 months includes special studies of the public investment program, of industrialization and foreign trade strategy, and of the energy sector, and completion of sector memoranda on agriculture and industry. In addition, the progress made in fostering structural adjustment will be monitored in the context of each future structural adjustment loan. 125. Besides the proposed loan, the remaining loans expected to be ready for consideration by the Executive Directors in this fiscal year are for sewage disposal and highway rehabilitation. Other projects being processed include agricultural credit, irrigation completion, development of gas reserves, rehabilitation of the paper and cement industries, and a supplement to the Elbistan loan. 126. The Bank Group's share of the estimated total external debt was 6 percent in 1980, and is expected to grow to about 13 percent by 1985. Its share of service payments is projected to increase from about 10 percent in 1980 to about 12 percent in 1985. 127. IFC has invested in synthetic yarns, pulp and paper, glass, aluminum, iron and steel products, motor bicycle engines, piston rings and cylinder liners, and tourism. It has also invested in the Turkish Industrial Development Bank (TSKB). As of March 31, 1982, gross IFC commitments totalled about $226 million, of which $87 million were still held by IFC. New investment opportunities are being pursued.  - 55 - PART VI - LEGAL INSTRUMENTS AND AUTHORITY 128. The draft Loan Agreement between the Republic of Turkey and the Bank and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. Features of special interest are described in paras 43, 64, 66, 68, 71, 77, and 120 and listed in Section III of Annex III of this Report. 129. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 130. I recommend that the Executive Directors approve the proposed loan. A.W. Clausen President Attachments May 7, 1982 Washington, D.C.  - 56 - ANNEX I TABLE 3A Page 1 of 5 TURKEY - SOCIAL INDICATORS DATA SHEET TUREEY REFERENCE GROUPS (WEIGHTED AVRAGES LANL AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)- TOTAL 780.6 MOST RECENT MIDDLE INCOME INDUSTRIALIZED ACRICULTiRAL 554.5 * 1960 /b 1970 /b ESTIMATE /b EUROPE MARKET ECONOMIES *.NP PER CAPITA (155) 300.0 550.0 1330.0 2609.1 9444.0 ENERGY CONSUMPTION PER CAPITA (KTI.O/RAMS OP COAL. EOUTVALFNT) 2S4.3 504.1 806.5 2368.4 7896.6 POPULATION AND VITAL STATISTICS IP/CLATION, MID-YEAR (THOUSANDS) 27509.0 35321.0 44237.0 [ROAN POPULATION (PERCENT OF TOTAL) 29.7 38.4 46.5 53.2 76.4 9 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 69.1 STATIONARY POPULATION (MILLIONS) 114.0 YEAR STATIONARY POPULATION IS REACHED 2075 . FOPULATIGN DENS ITY PER SQ. KM. 35.2 45.2 56.7 80.6 142.7 PEE SQ. KN. AGRICULTURAL LAND 51.0 64.0 77.8 133.9 523.3 POPULATION AGE STRUCTURE (PERCENT) u-14 YRS. 41.2 41.0 39.2 30.1 22.8 15-64 YRT. 55.2 54.3 56.3 61.5 65.6 65 YRS. AND ABOVE 3.6 4.2 4.5 8.3 11.6 POPULAI'ON uROWTH RATE (PERCENT) IOTAL 2.8 2.5 2.5 1.5 0.8 URBAN 6.1 5.1 4.6 3.1 1.3 CRUDE BIRmI RATS (PER THOUSAND) 42.5 38.0 34.2 22.9 14.5 CRUDE DEATH RAT: (PER THOUSAND) 15.5 12.5 9.7 9.1 9.5 GROSS REPRODUCTION RAIL 3.1 2.6 2.3 1.6 0.9 RAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) . . 65.6 66.6 USERS (PERCENT OF MARRIED WOEIN) 5.3 8.2 38.0 OOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71=100) 96.0 100.0 112.0 119.8 112.7 I'EE CA-PITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 110.0 111.0 115.0 125.7 131.4 PROTEINS (GRAMS PER DAY) 81.0 80.0 82.0 92.5 98.1 OP WHICH ANIMAL AND PULSE 24.0 26.0 24.0 39.7 62.2 CHILD (AGES 1-4) HORTALITY RATS 23.0 15.0 9.0 3.4 0.6 REALIH LIPF EXPECTANCY AT BIRTH (YEARS) 50.8 57.1 61.6 68.9 73.8 INFANT MYORTALITY RATE (PER THUUSAND) 194-0 153.0/c . . 25.2 12.9 ACCESS TO SAFE *ATER (PERCENT OF POPULATION) TOTAL . 52.0 75.0 URS/A . . . 51.0 70.0 RURAL . . 53.0 80.0 AC/LIS TO EXCRETA DISPOSAL (PER('FNT OF POPULATION) TOTAL .. .. URBAN .. .. 20.0 RURAL .. .. .. . POPULSAIIO PER PYIlSICIAN 2799.6 2227.6 1770.3 973.3 621.2 POPULATION PEE NURSING PERSON .. 1883.8 1461.3 896.6 217.4 POPULATION PER HOSPITAL BED TOTAL 590.0/d 490.3 505.8 262.3 119.4 URBAN 190.0/d 313.4 312.5 191.8 . 120.9 RURAL .. 5912.2 AOMISSIONS PER HOSPITAI BED . . 20.2 22.3 18.2 17.9 HOUSINU AVERACE SIZE OF HOISEHOLD TOTAL 5.7 5.9 URSAN .. .. RURA. .. .. AVERAGE N/MBER OF PERSONS PER ROOM TOTAL .. 2.2 LRBAN 2.0 1.9 RURAL .. .. ACCESS To ELECTRICITY (PERCENT OF DWELLI.NGSD) TOTAL 29.0 41.1 57.0 . URBAN .. 78.2 .. RURAL 2.0 18.0 ..  - 57 - ANNEX I TABLE 3APae2o TURKEY - SOCIAL INDICATORS DATA SHEET Page 2 of 5 TURKEY - REFERENCE GROUPS (WEIGHTED AVERAGES - MOST RECENT ESTIMATE)- MOST RECENT MIDDLE INCOME INDUSTRIALIZED 1960 /b 1970 /b ESTIMATE /b EUROPE MARKET ECONOMIES EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 75.0 110.0 105.0 105.9 99.6 MALE 90.0 124.0 115.0 109.6 102.1 FEMALE 58.0 94.0 95.0 102.2 101.8 SECONDARY: TOTAL 14.0 27.0 41.0 66.3 89.3 MALE 20.0 38.0 57.0 73.2 83.3 FEMALE 8.0 15.0 26.0 59.5 85.0 VOCATIONAL ENROL. (E OF SECONDARY) 18.0 14.0 18.0 28.4 18.1 PUPIL-TEACHER RATIO PRIMARY 46.0 38.0 30.0 26.8 21.2 SECONDARY 19.0 28.0 27.0 23.6 16.4 ADULT LITERACY RATE (PERCENT) 38.0 55.5/e 60.3/h 75.4 98.9 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 2.0 3.9 11.5 83.9 349.7 RADIO RECEIVERS PER THOUSAND POPULATION 49.1 87.7 101.3 181.6 1018.0 TV RECEIVERS PER THOUSAND POPULATION 0.0 1.8 54.0 131.1 400.1 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 51.0 .. .. 123.8 336.7 CINEMA ANNUAL ATTENDANCE PER CAPITA 1.1 6.7 .. 5.7 4.3 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 13782.1 15817.7 19220.1 FEMALE (PERCENT) 40.2 37.2 36.3 32.9 36.6 AGRICULTURE (PERCENT) 78.0 67.7 54.3 34.0 6.1 INDUSTRY (PERCENT) 11.0 12.1 12.9 28.7 37.7 PARTICIPATION RATE (PERCENT) TOTAL 50.1 44.8 43.4 42.3 45.7 MALE 58.7 55.7 54.4 56.5 58.9 FEMALE 41.2 33.6 32.1 28.5 33.0 ECONOMIC DEPENDENCY RATIO 0.9 1.0 1.0 0.9 0.8 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 33.0/f 32.8/ NIGHEST 20 PERCENT OF HOUSEHOLDS 61.07f 60.6Tg 56.5/i LOWEST 20 PERCENT OF HOUSEHOLDS 4.27/ 2.97j 3.47- LOWEST 40 PERCENT OF HOUSEHOLDS 10.67 * 9-4Sa 11.47i POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 342.0 RURAL .. .. 270.0 ESTIMATED RELATIVE POVERTY INCOME LEVEL (USs PER CAPITA) URBAN .. RURAL .. .. 220.0 385.1 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. RURAL .. Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1976 and 1979. /c 1967; /d 1962; /e Six years and over; /f 1963; /S 1968; /h 1975; /i 1973. May, 1981  - 58 - ANNEX I DEIIrN FSOCIAL INDICATORS Page 3 of 5 tf-eea Although the deten met 0to a aun-. grera y jdged the s.tateehrciead reliabl, it should a. he noted that tthey Ta not he inter- neI, t lcopeehebecus of the lath of Ieg dtt .dttd attl.ed t-etpte teed by different ..o.t toe. it -11-teotg th data.. The data are,nes te.. .tf2td...ctth rer feent.d idt ftred.. and tIIIe...eraoojo tfcacc bteoouets gh..fr .to rop ar (1) oIt saI -o-ty grou of the subject t..utry cud () aouor gou ich a....ehec high-a vrg I--o-m It--- to coutry ge-p ofte jcecutr -antyt fo Capital hutylus Oli Iaproee ,gou ehere "Pliddle Zcoosa ho-h Afnto atd Ifiddle loa" le th.-r h-tu- oferne aooto.. -cufa affipte.lnl.aut p the referent, grou data the avrgs.ar ycualo ightad arlthe-ic ea... for eth plditchu and ni_o tIpluhe a_ snoutce.ouIo ttbe ete_ld it reatn e Itg ci oneIndcn t nte Th..e __eR.e oct only ..ceful in ora t _tth .cc of on 'ldueo.e elseaec the cuntr end eeerenc getup,...e.'' " 'i~I . i lI' fetal - Thea strfeoo . arsotobl ud -ao ond inland netera. ura,edrrl tie y fhi.r repet bn oo f hoapital hede' E.rtluri-Rtomat. of a-olualee ci eporl ccperuataly o_sl.labeIt publi; and Pnctetrnanovycetd h.epif cicd for -ope, Pceture, tarknt to bitohatgneac to Ri. felIce; 1979 ont.. hbubllttacncecrore hospita atte ettabIahrtornnl nffed IND Pci CaITA, (iLS - Gfep pnr oapea retinne, an -utet market potoa. cI- d.al cure .r. ntilded. Rur- iaiae1hoot cti health cuee y atme 1 to -erRo enofd as acrId lack dIeu. (1977-19iel; 1960, nod di-Ica -et-r c pers_trcly era ffedbyApyicr(hot by a 191 0, eci 1919 deca.d.1.. ieic t-utecn,oce.idi, c)nihofect-aonces- 1195007 CifSlfPTIlfl PER CZAPd - doa ...nI ueption of -oneniae..eogy (oal-1a yot- ue urbettepcl leolode De p rpal/.Ignnnti hopiclt end lignite, pet-cl.ue. vaturaI gse and hydr-, ocolea etd geethereslelec- nod ...o tyfai Ioe or. rots)_ hoapinsl an d ordic-l ccetend tiiy hrkilogteee of col qloletpIr -sr'.t; anti, 1910 . od 1979 cet Se proieied boeptol ste i-ouded .,ay order itt.l, iota. i~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~dn.iseo or. iytl Rd - Toce1 ounfttc of odeloecca... o dfchatgee Tonl oroacoc,ol-fer th doels - A. of July 1; 1960. 1970, and 1979 MDUItit irhan PtoRic(occ f total) -RIfic ci b oriat tote pupolotioc; ftiotod ctil i .ro f citoi tic~ tharoi icoo qustor difteruot deftictone of cofeocee naqY ofiec- -o -raility of deta o.hi ct ee i torri r ldg u orna ceh lecloded in agig ouctin; ihd 17, il deco the h-ceetld fur toticIyrorv repolitno n roe 0700 - Crrv rupulairp Itiotoa r bot on 1980 ho;oaproc_pp ot i i rat, e rore copoed neca toa uctlnby age ao ec sod thei mortali1ty acI fortilityrce.deilg,ory..'ay..elig tcld onpre It _etront and itlife enecacIt bRoth le....seiog wtch oocoy 'a perpants loote ho tunc .lncIctc (ccnon of dJEltoto) - ccI,- othe. et rural - le-e, otd fecale life eeotn Inh.otet7. rr. The Peru- Cooeii- a iliig ocielctictyititlI qeEera metosio fe'tl, icy ruen ale- have thone .- Incl sae..ng drolite lo of nls. ocha, sod cora lonollinge eycii fertility __doiho no cocoo Lor and Paa- fnily ploonoog pretr Ztar __uto' le thtt oe.igor nro tbee io -ohosit of _rety RIIRTIOO end fe-tllty Itenda dot -n7cio"uI ose. dluetod Eoci1ltrct Rotbo nsteoatn. t hee_ T e cobteond cly efoet fereiiiey rate deitsi pri-ny e-h-e-tgc popcl.i...on; cooily ico-dir chtldree aged eli Ito eycenc -lot o ifuo -ctc-pn-dociocrce eie eah geo--ite roar. boo odjoecd for dfiferrot lcrgthe cO prlcoredoo-nio; for It the Yost liii, Rn tInb rtof dec~line of forI"licy roe nplac- eodr echoeS -tot -eLe cud feealt - Caucdsehreao -eey tet evl eucoloc oroe ecI Itsuentfour YIat of opprorni pr;ty, intructon; tent totioarr rrolono itcrop ed -The yato ohet u-ur ...ay population proollee Sotoel"c-Atiant. or testbeh caie incertntiot. for pupa) eton tag b-r reched. us-alr of 12 cc 11 or-re of age; ot.....tc ttt ate generally Per_ at. hr. - Pfid-y-e ppc&to .t..ur ki-ree (lyehe care of_ctiona etroll_at fen_oet of-aetedat" fuaics eltotioo total area; 1960, 1910 t,) 1919 data. lo-ludetneheica1, tieel,u oth-n ocoa- which oPe--c iciered- let et . ho..tttoutl ed - (enp_cc oe ebec fora- coo licci nctlp or at depsr.taet of e-cocley la itu t.. only; 19110, 1970 ad 1979 dare. Puell-teahercl .oiuc . ati eondaty -T.'oI etdec etroltd in i_oeto bee S_r_Reur. _rett - Children (0-14 yruru) 1, nrk 1-ae 5- prImay end e...ttIry lecele dicided by tambe- of eeheai nb 91 cehca). aId -tei-d (65 yeere an oct01 eaI ecRtg f eid-yrr "P.p- .u.ocepondlogle e lato; 9R,11,ed1979 dat. adult llceac raslroc Itrt d-nlf ora e ie aultit icoec Rat. (acnn -tnl- At..Iu RV ge tt ' er of coe aid- asPette.tug o. f Itota adult ptpuietiun aged 15 yecta aed orr. yea pueloe .o 1900-RI, Lg67-10, ccd 1971-79. - Poculstito IctEth hunt (o--en - urbat -do--o greet te f arh- Per- CtOtNfUPTION latlot dot 197-90, l9RR-7i0, acm 1970-79. Peeece ar or boao toletc P.. -Pactrcr opias -toe (nude hitch Ear (ret .......nd) - Auonui iive bOttle per tbuec of eid-yea.assale.eete,egcprcn ecideeaioecehece n pup~titoic; 1967, 1977, sod 1979 dan, tito vbola (code D-tth Putt plrrth--eodl - btuuel d-ntha pot tiou...d o.f e14-peerRaid hetione(e Ahuenleultol Rtypeso rarr for tait oplco;1967, 197i, oci 1919 lace, boticen ognrlpbi e boedo.oasct oideo GIce Rerdu -o he-bvrop-n nuon uf dau9btreaeI eoeil bes io Itonted rcieeIn ....t ite si.I yrr bherg_ toino s racily rlnott-otecoe.oAnai(tos .d . iata ouItne ofacper Tb heeote1cpttundn itiot-3 TV'ronor cot broodes to If of birth-I-0cro de-icee - .. uc teI_r on ce_ oi_ ftmiy ploio..ig p-ofru.gont. publIc ce bc- t ynh pieetc: our-oiioe...ed TO -eceoer PeolloPlococe-lara Ircceocof nurlnd oceci- rerc-cog r Itaried toconc Iead in ynsr ofeh. 9arnno TV cone acece ffeoe ocoec f citl-breriguge (1-44 cane)wo ceebirch-totero deocc- toIaeoo iplahnfe thpo-st ruoo..laco, Sh-ce ..a-eaergerf- all stoind oueci cet g fcrop. cu_lon uf "da'Iy . eetl htereen cocynP. " dni toed Ie peio.dical oobil tccttt mooted ptleary to n-codinggeerItoe,I itaI.. ceiiere cn-dctlo ofel for .d ciodtea-rdocitcooc r uc -feed sod nict acId do-ng the ye.... totladinca udodeto... to di--ic ctteme isc ariryou beaie..Coittuo'onycety goode (e.g. a-grc-y and mabln -tit.. ttc f -caar ohich are edible cod c_itacrec (IrE. offe a-d telcleeeoPTncdoctiylc tig-lhte; 1991961"'. 1'970,. sd 1919 ista.TooLarrtr Ictuattial - fo-c,tnLtl -oi-e Ptp.rr, colading lrr iotta urtleof coorire(octroc ofreucienett) - PCoeute fc.amd ocec cnIcyd ft t e-riudiog -ueeoe ed-e. I---, otoetyrqioaietn f nec fud cury-teoo bdic Ie -ocotoy Per -apaco oern pop'll o o tO.1I I aga etotoei -ato1- onte r otday. rAlio.bintl fe oapio.o,t;cprdocon aprc ..e not ... ocpefle; 1967. 19770n 97 eo e-trn, atd chaogee fo stoc,ht- upie tddeol ford,-aedi, resaleiro - Peon a1 nfcct ytocenugr nI.ctco 1nhbr Eere. qutotin coed it food prcuto-gs,. ad loe.n it ioriueo . Reir- ..i.eum(eteo -) LaborfotoR itcag-cerr e g nod gre uer tt-etn by MGd boc..d on oraicloglo-l -eede fot ptnous ec- fiubopoepocncg af conel lafcfurce i90, 1910 and 1919 dst. -di ecu ditItn i-uto o poplto,cdeleing iiproo cot tacee at and nIrtIriciny tace cv.)e aeerenag of rural laborfr; bt Ittueclolditoel; 191-il, t7P, aI. itO dae 1970 ec 1919 lute. Inccaio crobtfrttec fce erdarl P- Poctet c-o- of Per capita -I~ yriopabo Putt Coereol - totel, -It, ond fecel - retiein,tit- or ,It Yrl of food per day, Net r-tply t food ia defiord se spr.t- R.-otottiyntIesereou-putdt otn-al, tote, and fet1i Itboc for- . qoteccc for all .o.otIir e-hbliched by USDA p,-code f-o totte,.II onceege f totel, tale and fecal populatio of o.Il ages -~p-ttrly; elloe...e ont g-e If toaloocu 2e e ci rt ofatna acMh., 19170, cod i99 deot, iTer. ev ba-d c ierrocrr ue puler rotec, of tich 1 truc ehould he IonIpoti.l teeti re-oggeetnutoc o. f tinyyltcr n oorieted eriee tcrch,t etose or 75 gRate of -ss protea sod tO atn offnesire arfo oooa ..tte actua pnoetn s rsoerge frt 'he esrId, rr-rp-t by PAl ic thelbtd ioeoierecotnc-Pucto f 1rtulst- under 15 and 65 end -oc Oonld rood -ura; 1961-65, f977 .nd 1977 dots, t the Ict1 Labor forc. Per-uito orocef ecroi oEt enla und -ular- fPotS ou.pply of fctd dc- riod ir_ _nhal sod Puue to gtno -e doy; 1~961-65, 19170 sod 1977,. lat. D hyITRIBMOiy Child ita1-41 ) oetoht rrtoeoy-Sns drueb per tito-d Ic Prrnoof PyteeIi ca(oh-0ce a oi R-itoncd bprtic~h- eg" gou 1-4 cn to cfhild-e ir rh I. oge grop forto deooi ot per-rco ricte- 20 pert-o no 7pcet, 2 sodpore 40 per-e- ertee det. dri-d fyce life tabtee; 1960, 1970 an 1~979 6,dat,o oshia 015,<10 POVRfTY TARGET G ROUPS' toft ioEccuocr an hh (Mar -Ai ...e t-ne of ea- of lIfe ooco The fo1icig aciun r rysrooet eepao oetyleat en birch 1960, 197e 1919dnta. sod obould hr lottryntod o7th oedrieooie ItotfotuiyRt (o hoanl-douidah f teecdooopc itocdthooorreo toc on 11hed anl ttnon ue he tpryo(ttl oit adrra)oI, eacal soetthon oroiolyueucnlr po tncit o-oo taleat.t o finodablo. canr copi (ioldearesel orfcacsrre r octcne ha ooottsltc ~ rtonaed elaccopor..iI..rn.avl.(.I cr arool- ubannoItotlI eae e- c cha(t.toot yrceed boroolna cyti-oc. o ea fcayoiila oursd.ltrico oen ton iii n- ol ororptor tercouee o ehtrreyecice pop-oictrt. 2WIn e oa ores a_public pero_a ~'i-ct cf tin -totey. Utbsc 1o-e le d-iond f.con ta Mtona _teaMnnhlanouo dhfpyca h hou=senoibp1.fef cc eskr- of th. househld Pr ua ett i ousln(oa n nael C te'ielc do no h o t _ _o dieP-proprtts- Parr on hr lay It f-thbig tnb-a d -) tl AOoceeEecaN-ta Ocaou tereo cfIppultlc-rorsO urban, and rut1 - useof Pearl.noa,cbo and rutul)l --re b eott diapo...I a per-ennage of their ra-p-ti-ia epie -n Port doapo.a. ea Ineod 0cth llotoncd iatoncI, 'aleb or rcbrc Irenoe ci hu-.ce -nnt oncic and tolal eats Occasion andreee-ntenby ane-tooe parea rIhe a of pit prtvht and aloh trnocnalcrad poetoaepte Ian tneccllettone. Nap~~~~~~~~~~~~~~~~~~~~K iii I Ocutltn orPhcite -Popico dite yonbee of yn-tlnleg phyal- ctaevaiooefrmecdtaiebcl nuc _aetylanel ProletoclerPuein Poen - oplatondhotded by naber of poachicing aee and femal en-do-cnotoc, -rars-I ure,cIdauea, uc  - 59 - ANNEX I Page 4 of 5 TURKEY-COUNTRY DATA Population: 44.8 million (1980) GNP Per Capita. USil460 (1980) Amount Average Annual Increase (8) Share of GDP at Market Prices (X) (million US$ (at constant 1980 prices) (at current prices) Indicator at current prices) 1980 1965-70 1970-75 1975-80 1965 1970 1975 1980 NATIONAL ACCOUNTS Gross domestic product /a 56,617 6.6 7.5 2.8 100.0 100.0 100.0 100.0 Agriculture 12,112 3.1 4.4 2.7 30.7 26.4 26.2 21.4 Industry /b 13,529 9.5 9.5 2.9 16.6 17.2 18.0 23.9 Services 27,925 8.2 8.0 3.7 42.9 46.5 46.0 54.5 Consumption 45,920 5.8 7.0 2.5 84.6 82.8 84.8 81.1 Gross investment 15,132 11.7 12.9 1.8 16.7 20.1 23.7 26.7 Exports of goods and NFS 4,090 7.9 7.3 0.9 6.1 5.8 6.1 7.2 Imports of goods and NFS 8,526 11.2 13.8 -3.5 7.4 8.7 14.5 15.1 Gross national savings 12,096 11.6 11.9 3.3 15.8 18.8 18.4 21.4 Average Annual Increase (2) Composition of Merchandise Trade (X) (at constant 1980 prices) (at current prices) 1970-75 1975-80 1965 1970 1975 1980 MERCHANDISE TRADE Merchandise exports 2,910 -0.8 4.6 100.0 100.0 100.0 100.0 Primary /c 1,863 -4.3 4.6 80.0 83.0 64.1 64.0 Industrial products 1,047 17.0 4.7 20.0 17.0 35.9 36.0 Merchandise imports 7,909 12.4 -4.1 100.0 100.0 100.0 100.0 Food 308 9.9 -17.6 6.0 9.3 8.3 4.0 Petroleum 3,862 18.5 11.2 10.0 7.0 17.0 48.8 Machinery & equipment /d 1,435 9.9 -16.2 39.9 39.8 38.5 18.1 Other 2,304 12.1 -6.4 44.1 43.9 36.2 29.1 1975 1976 1977 1978 1979 1980 PRICES AND TERMS OF TRADE GDP deflator 15.1 17.7 22.1 30.2 48.3 100.0 Exchange rate 14.4 16.1 18.0 24.3 36.4 76.4 Export price index 60.4 62.8 68.9 73.0 85.9 100.0 Import price index 48.6 49.1 54.2 61.7 72.8 100.0 Terms of trade index 124.3 127.9 127.1 118.3 118.0 100.0 As % of GDP (at current prices) 1965 1970 1975 1980 PUBLIC FINANCE Current revenue 15.0 22.6 22.0 19.8 Current expenditure 10.0 11.8 12.6 11.5 Surplus (+) or deficit (-) -2.0 -2.3 -0.4 -4.8 Investment expenditure 4.7 5.7 4.2 3.9 Transfers 5.0 7.5 5.5 9.2 Foreign financing 1.8 1.6 0.3 0.2 1965-70 1970-75 1975-80 OTHER INDICATORS GNP growth rate (%) 6.8 7.7 2.6 GNP per capita growth rate (%) 4.1 5.0 0.3 ICOR 2.9 2.9 5.7 Marginal savings rate (2) 28.2 19.5 30.8 Import elasticity 1.7 1.8 -1.3 /a At market prices; components are expressed at factor cost and will not add due to exclusion of net indirect taxes and subsidies. 7W Includes mining and quarrying, manufacturing, and electricity, gas, and water. /c Includes agricultsre and mining and quarrying. 7W Includes metal products and machinery, electrical appliances, and transportation vehicles. EM2DA 5/7/82  - 60 - AMEE I PA" 5 of 5 TURKEY-AIlANCF OF PAYYENTS, EXTERNAL CAPITAL AND DEBT (million US5 at current prices) Population: 44.8 million (1980) GNP Per Capita: USS1460 (1980) Actual Projected 1970 1975 1976 1977 1978 1979 1-980 19-81 1983 1985 BALANCE OF PAYtERNIS Res.urco B rlan 342 3067 2993 3880 1953 2442 4293 3674 3476 3295 Exportu of goodo 6 NFS 754 2152 2742 2556 3106 3257 4102 5937 8996 12743 Ieporta of goods & NFS 1096 5219 5735 6436 5059 5699 8396 9611 12497 16038 Workers' Remittances 273 1312 983 982 983 1694 2071 2550 3135 3500 Net transfers 91 23 15 12 - - - - - - Current account bhlance -58 -1892 -2295 -3572 -1710 -1771 -3196 -2459 -2092 -1642 Direct priv-te investment 92 251 163 169 147 200 195 220 284 369 Public M7LT (g-oss) /a 271 334 720 997 1017 4321 /d 2489 2794 3305 3809 Aeortioation on MHLT ,/ (end. debt relief) -146 -175 -203 -234 -336 -414 -914 -1099 -1992 -2297 Public MYLT (net) /I 125 159 517 763 681 3907 1575 1695 1313 1512 Debt Relief (amortioutiOn only) - - - - - - 814 533 811 -224 Othor capital /b 27 1065 1503 2074 1030 -2410 1004 289 -81 278 Change in reserv is (- incre-ae) -186 417 112 566 -148 74 -392 -278 -235 -292 Inrernarionnl roucrIce 612 1404 1292 726 874 800 1192 1470 1907 2455 Reservus as nonths of inports 7 3 3 1 2 2 2 2 2 2 1972 1975 1976 1977 1978 1979 1980 GROSS DISBURSEMENTS Officiul grants Cross diebureesests of Y4LT Lo-ns 372 324 720 997 1017 4321 /c 2489 Co.cea Sio.al 261 100 167 193 227 596 909 Bilateral 139 69 81 130 192 510 849 IDA 4 18 21 19 8 3 - Other noltilateral 118 13 65 44 27 R3 60 N8on-oncessiuna1 111 224 553 804 790 3725 /c 1580 Official esport credits 1 47 57 47 91 202 283 ISRD 25 91 117 146 165 277 313 Other .ultilateral 27 48 54 5 35 11 35 Priva-t /c 58 38 325 606 499 3235 /c 949 XITER15AL DEBT Debt outstanding acd diubursod Id 2538 4475 6883 10943 14313 15791 17119 Official 2273 2980 3275 3648 5970 7198 9265 IBoD 92 288 391 512 648 890 1157 IDA 99 144 163 181 188 190 - 184 Other 2082 2548 2721 2955 5134 6118 7924 Private /o 246 340 558 1104 1144 4101 Ie 5007 Short-tern 19 1155 3050 6191 7199 4492 2847 Debt autat-odiog including -udishbrsed (public and private) 3560 6086 9207 13736 17554 19794 22875 DE5T SERVICE Total dubt service Jo 224 291 368 418 532 689 712 Pay-nts 161 175 203 234 336 414 108 Intere- t 63 116 165 184 196 275 612 Tutol debt service as Z exports of goods NFS * aurkers' re-ittances 11.8 8.4 9.9 11.8 13.0 13.9 11.5 Total debt service as GI P 1.3 0.8 0.9 0.9 1.0 1.2 1.2 Averagc interet rate an new loans it) 4.4 7.3 7.2 7.6 6.9 11.2 8.5 Official 4.5 6.4 7.1 7.6 6.3 4.4 Private 6.8 8.7 7.8 7.6 8.2 13.7 Average natority of sev loans (years) 22.1 13.1 12.7 11.7 13.2 11.1 8.2 Official 26.0 18.6 17.3 14.5 15.6 23.5 Privute 11.0 5.1 10.2 8.9 7.6 7.1 BANtI GROUP EXPOSURE (Z 1BRD DOD/total DOD 3.7 8.7 10.2 10.8 9.5 7.7 6.8 IBRD diubucso-nts/total grous dibhursneste 6.7 27.2 16.3 14.6 16.2 6.4 12.5 rBRD debt service/total dabt service /e 5.1 10.5 11.7 15.0 15.4 15.3 18.8 IDA DOD/total DOD 3.9 4.3 4.3 3.8 2.7 1.6 1.1 IDA dibhurueoe-te/rotal gross dieburerenest 1.1 5.4 2.9 1.9 0.8 0.1 - IDA debt uervice/total debt service /s 0.4 0.6 0.6 0.5 0.4 0.4 0.4 A. Z of Debt Oststa-ding at End of Moat Recent Year (1980) TERMS STRUCTURE Yaturity otructare of debt cutstanding It) Muturitiet duo within 5 ye-rs 40.7 Maturities due within 10 years 60.3 Interest atructre of debt o-tt-tading (Z) Intereut doe vithis first year 5.7 /a Includes private guara-teed and coo-guaranteed debt. /b Includes errors and emissions, cod for projected years it includes set IMF, and unidentified capital inflos. /o Includes $2,638 nillion of consolidated short-term debt. 7; Includes stock of ahort-term, and debt relief, but escludes IMF borroving. /e Takeu account of debt relief due to debt res.heduling, aed excludes interest on shert-tars debt. EY2DA 5/7182  - 61 - ANNEX II Page I of 9 STATUS OF BANK GROUP OPERATIONS IN TURKEY STATEMENT OF BANK LOANS AND IDA CREDITS (As of March 31, 1982) Loan Number Year Borrower Purpose Bank IDA Undisbursed Thirty loans and fourteen credits fully disbursed 1097.7 177.4 883-TU 1973 Republic of Turkey Ceyhan Aslantas 44.0 12.3 Q57-TU 1974 Republic of Turkey Antalya Forestry 40.0 0.1 1023-TU 1974 TEK/TKI Elbistan Power 148.0 25.8 1130-TU 1975 Republic of Turkey Rural Development 75.0 28.0 1194-TU 1976 TEK Power Transmission II 56.0 0.7 1248-TU 1976 Agriculture Bank of Turkey (TCZB) Agriculture Credit 54.3 27.2 1258-TU 1Q76 State Pulp and Paper Industry (SEKA) Newsprint 70.0 4.1 1265-TU 1976 Republic of Turkey Livestock III 21.5 8.1 1310-TU 1976 Republic of Turkey Tourism 26.0 19.3 1379-TU 1977 DYB Industry 70.0 12.1 15R5-TU 197R Republic of Turkey Northern Forestry 86.0 56.6 1586-TU 197R Republic of Turkey Livestock IV 24.0 19.4 1606-TU 1978 Republic of Turkey Erdemir Steel Stage II 95.0 49.6 1741-TU 1979 Republic of Turkey Ports Rehabilitation 75.0 60.1 1742-TU 1979 Republic of Turkey Grain Storage 85.0 84.3 1748-TU 1979 TSKB Industry 60.0 35.9 1754-TU 1979 TSKB Private Sector Textiles 65.0 48.5 1755-TU 1979 SYKB Private Sector Textiles 15.0 13.7 S-15-TU 1979 Republic of Turkey Ankara Air Pollution Control 6.0 5.7 1844-TU 1980 Republic of Turkey Karakaya Hydropower 120.0 104.7 1847-TU 1980 Republic of Turkey Sumerbank Cotton Textiles 83.0 80.2 1862-TU 1980 Republic of Turkey Livestock V 51.0 50.9 1916-TU 1980 Republic of Turkey Petroleum Exploration 25.0 24.6 1917-TU 1980 Republic of Turkey Oil Recovery 62.0 55.2 1Q52-TU L981 Republic of Turkey Labor Intensive Industry 40.0 40.0 1967-TU 1981 Republic of Turkey Second Fruit and Vegetables 40.0 39.8 1985-TU 1981 Republic of Turkey Fertilizer Industry Rehabilitation 110.0 109.2 19S7-TU 1981 Republic of Turkey Second Structural Adjustment 300.0 60.7 1998-TU 1981 Republic of Turkey State Industrial Enterprise Finance 70.0 70.0 2093-TU 1982 TSKB Export-Oriented Industries 100.0 100.0 2094-TU 1982 Republic of Turkey Erzurum Rural Development 40.0 40.0 Total 3254.5 /b 177.4 1286.8 of which has been repaid 298.1 8.1 Total now outstanding 2956.4 169.3 Amount sold 3.6 of which has been repaid 3.6 - 0 - - 0 - Total now held by Bank and IDA /a 2956.4 169.3 Total undisbursed 1286.8 -0- 1286.8 /a Prior to exchange adjustments. /b In addition a loan for $44.1 million for a second Fertilizer Rehabilitation project was approved by the Board on April 27, 1982.  - 62 - ANNEX II Page 2 of 9 STATUS OF BANK GROUP OPERATIONS IN TURKEY STATEMENT OF IFC INVESTMENTS (As of March 31, 1982) Fiscal Amount in US$ Million Year Obligor Type of Business Loan Equity Total 1964 TSKB DFC - 0.92 0.92 1966 SIFAS I Nylon Yarn 0.90 0.47 1.37 1967 TSKB II DFC - 0.34 0.34 1969 TSKB III DFC - 0.41 0.41 1969 SIFAS II Nylon Yarn 1.50 0.43 1.93 1970 Viking I Pulp and Paper 2.50 0.67 3.17 1970 ACS Glass 10.00 1.58 11.58 1971 NASAS Aluminum 7.00 1.37 8.37 1971 SIFAS III Nylon Yarn 0.75 - 0.75 1971 Viking II Pulp and Paper - 0.14 0.14 1972 SIFAS IV Nylon Yarn - 0.52 0.52 1972 TSKB IV DFC - 0.43 0.43 1973 TSKB V DFC 10.00 - 10.00 1973 Akdeniz Tourism 0.33 0.27 0.60 1974 Borusan Steel Pipes 3.60 0.43 4.03 1974 AKSA Textiles 10.00 - 10.00 1975 Kartaltepe Textiles 1.30 - 1.30 1975 Sasa Nylon Yarn 15.00 - 15.00 1975 Aslan Cement 10.60 - 10.60 1975 DOKTAS Steel 7.50 1.37 8.87 1975 TSKB DFC 25.00 1.23 26.23 1976 NASAS Aluminum 1.58 - 1.58 1976 TSKB DFC 25.00 - 25.00 1976 Asil Celik Steel 12.00 2.20 14.20 1977 Borusan Steel Pipes - 0.06 0.06 1978 DOKTAS Steel - 0.09 0.09 1979 Ege Mosan Engines for Mopeds 2.15 - 2.15 1979 ISAS Motor Vehicles & Accessories 8.85 0.45 9.30 1979 Asil Celik Steel - 1.80 1.80 1979 Trakya Cam Glass 33.15 2.25 35.42 1980 TSKB DFC - 1.09 1.09 1980/82 ISAS Motor Vehicles & Accessories - 1.26 1.26 1980 MENSA Textile and Fibers 4.00 - 4.00 1981 Kirklareli Cam Sanayii A.S. Glass Tableware 13.20 - 13.20 Total Gross Commitments 205.91 19.78 225.69 Less Cancellations, Terminations, Exchange Adjustments, Repayments and Sales 134.48 4.31 138.79 Total Commitments now held by IFC 71.43 15.47 86.90 Total Undisbursed 4.17 0.11 4.28  - 63 - ANNEX II Page 3 of 9 C. STATUS OF PROJECTS IN EXECUTION AS OF MARCH 31, 1982 I/ Ln. and Cr. Nos. 883/360, Ceyhan Aslantas Multipurpose Project: US$44 million loan and US$30 million credit of March 22, 1973. Effective Date: March 20, 1974. Closing Date: December 31,1983. Initial delays occurred due to difficult rock conditions and inappropriate tunnelling methods. Political problems in 1980 further delayed the project. In December 1981 the project was extended for a two-year period. The main dam construction is progressing satisfactorily, with 95 percent of the earth works completed and the spillway ready for evacuating the floods in the 1981/82 season. The installation of the power plant has been started. The construction of the irrigation systems is progressing satisfactorily. It will be completed and be operational for half of the total area in the 1982 season. On-farm works are progressing steadily, with about two-thirds completed. Tile drainage is expected to be completed in 1983. Staffing of the extension service is satisfactory. Its backing up by consultants is soon to materialize in a satisfactory manner. The project is expected to be completed by end-1983. Ln. No. 957 Antalya/Akdeniz Forest Utilization Project: US$40 million loan of January 28, 1974. Effective Date: May 26, 1976. Closing Date: June 30, 1982. Construction is substantially completed. The saw mill is ready for operation and the pulp and paper plant is expected to start operation in May/June 1982. Ln. No. 1023 Elbistan Lignite Mine and Power Project: US$148 million loan of June 28, 1974. Effective Date: June 1, 1976. Closing Date: July 30, 1982. Project implementation had been delayed by critical problems, including insufficient staff, inefficient management, inadequate coordination among various agencies and unsatisfactory performance of civil contractors. Following continuous Bank and co-lender reviews of the situation with the Turkish authorities from early 1977, the remedial measures initiated by the Government resulted in some improvement of project execution, until mid-1979. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  - 64 - ANNEX II Page 4 of 9 However, continuing and serious shortage of local funds then affected project progress, which has been aggravated by staff and management deficiencies. The Government's timely provision of adequate local funds for this high priority project from the Structural Adjustment Loan counterpart funds has helped resume momentum. The colenders and the Government agreed in November 1980 on a detailed program of action to overcome remaining implementation problems; this program is now being implemented. Further measures to strengthen project implementation by strengthening site management with expatriate assistance, increasing suppliers' involvement in equipment erection, and changing contracting arrangements for the major civil works, and to meet remaining foreign exchange needs are being considered by the colenders and the Government. Ln. No. 1130 Corum-Cankiri Rural Development: US$75 million loan of June 23, 1975. Effective Date: January 22, 1976. Closing Date: June 30, 1984. The project is in general progressing satisfactorily although because of disruptions of construction in 1980, the irrigation works will be completed only by end-1983. In November 1981 the closing date was extended 2-1/2 years. The Corum dam has been completed including the works to divert run-off from 5 nearby watersheds. The Kumbaba pumping station is operational, and irrigation has started in 1981. The Alaca dam, delayed because of extra excavation required due to bad rock, is expected to be completed by end-1982. Damage to the Alaca diversion tunnel, because of rock slides, has been repaired and the tunnel lining is completed. Construction on the scheme's irrigation system has been started. Contracts for completion of the dam and for the irrigation system of the Guldercek scheme have been awarded and work is in progress. The project extension service is operating successfully and its impact on agriculture is promising. Village roads, small irrigation facilities and most of the water supply and electricity works will be completed by end-1982. The project is expected to be substantially completed by end-1983. Ln. No. 1194 Second TEK Power Transmission Project: US$56 million loan of June 14, 1976. Effective Date: April, 21, 1978. Closing Date: December 31, 1981. Procurement action is complete, somewhat behind schedule, but deliveries of some equipment are delayed. As of December 31, 1981, an amount of $5 million was held in the loan accounts pending settlement of final payments. Of this, about $4.3 million have since been disbursed. The loan is expected to be closed shortly. Ln. No. 1248 Agricultural Credit and Agroindustries: US$54.3 million loan of May 5, 1976. Effective Date: May 11, 1977. Closing Date: June 20, 1984. The ferryship component has been implemented, and the two roll-on and roll-off ships purchased under this project and the First Fruit and Vegetable Export project are now operating a regularly scheduled service between ports in Turkey and two ports in Italy. The implementation of the agro-industries component is delayed, mainly due to investors' reluctance to assume the foreign.exchange risk. The Government is reviewing possible measures to overcome this problem. The Agricultural Bank (TCZB) has introduced improved lending procedures for its ongoing supervised credit program, and this  - 65 - ANNEX II Page 5 of 9 component is being implemented satisfactorily. After considerable delay, tht consultants have completed the study of TCZB's structure and procedures. TC'i has begun implementation of some of the consultants' recommendations. At the Borrower's request, a cattle-fattening component of the Project, and $7.7 million of the original loan amount of $63 million allocated for this purpose, were cancelled on May 5, 1977. Also, as provided for in the Loan Agreement, $1.04 million for training was cancelled on December 22, 1977, following approval of UNDP funds for this purpose. Ln. No. 1258 Balikesir Newsprint: US$70 million loan of May 21, 1976. Effective Date: October 15, 1976. Closing Date: December 31, 1982. The project is nearing physical completion. The newsprint plant has begun operations and appears to be operating well. The sawmill is physically complete but is not operating due to marketing problems because of a depressed construction industry. Energy savings through using bark as fuel are not being achieved since the Forestry Department continues to deliver logs with bark removed. Remaining loan funds are being used for technical assistance and spare parts. Ln. No. 1265 Livestock III: US$21.5 million loan of May 26, 1976. Effective Date: February 25, 1977. Closing Date: July 31, 1982. After a slower than anticipated start-up, project implementation has improved. About 760 dairy farms are being developed, more than anticipated at appraisal, and a higher than expected proportion of sub-loans has been made to small farmers. The Government is taking action to recruit 3 technical specialists to help train the project staff and beneficiaries in forage production and in strengthening extension services. If this action is completed by end July 1982, the Bank plans to consider the Government's request for a further extension of the closing date to permit utilization of the remaining $8.5 million undisbursed loan funds. Ln. No. 1310 South Antalya Tourism Infrastructure: US$26 million loan of July 9, 1976. Effective Date: March 1, 1978. Closing Date: December 31, 1982. Though delayed, project implementation is now progressing satisfactorily. Highway connecting the project area to Antalya and water and electricity supply systems are completed, the construction of Kemer marina is in an advanced stage, and all other major construction works are contracted. The Government's request for a two-year extension of the closing date, and some modifications in the project scope, is under consideration. Ln. No. 1379 DYB (State Investment Bank of Turkey): US$70 million loan of March 23, 1977. Effective Date: July 21, 1977. Closing Date: December 31, 1982. The loan has been fully committed. Disbursements are expected to be completed by December 31, 1982, which is the extended closing date. A comprehensive study of DYB's institutional aspects and objectives is to be carried out by the Government under Loan No.1998.  - 66 - ANNEX II Page 6 of 9 Ln. No. 1585 Northern Forestry: US$86.0 million loan of June 5, 1978. Effective Date: October 30, 1978. Closing Date: March 31, 1986. Depressed timber sales have reduced complementary funding for the project but action has been taken to remedy the situation through stimulation of sawn timber exports and expansion of housing construction. Revision of forest management plans has been completed and proposals have been approved to prepare new plans for all productive forest areas. Action for recruitment of project consultants and fellowship training is underway. Procurement is making steady progress. Ln. No. 1586 Livestock IV: US$24.0 million loan of June 5, 1978. Effective Date: October 31, 1978. Closing Date: June 30, 1985. The supervised credit program is behind schedule as demand for sub-loans was affected by increased feed costs and low milk prices. Following the Government's actions to correct the situation, the project is picking up momentum. Recruitment of technical specialists is under way. Government is reviewing measures to attract qualified staff and train them to provide effective extension and animal health services to farmers. Ln. No. 1606 Erdemir Stage II Steel: US$95.0 million loan of June 30, 1978. Effective Date: July 30, 1979. Closing Date: June 30, 1983. Procurement for the phenol treatment plant, the raw material handling system and the hot rolled shear line has been completed. The depressed domestic market for steel is affecting sales and internal cash generation. As a result of lack of cash, raw materials and operating supplies have been inadequate from time to time, and shortfalls of local funds for the project are projected. The Government has agreed to reschedule some loans and increase its equity. The company is considering approaching its private sector shareholders for increased equity, selective price increases, and seeking export markets. Ln. No. 1741 Ports Rehabilitation: US$75 million of July 2, 1979. Effective Date: January 22, 1980. Closing Date: June 30, 1983. Project implementation is progressing satisfactorily. Procurement of equipment is well advanced, but a delay in project completion of about one year is anticipated due to delays in finalizing designs of some equipment. Technical assistance, training, costing and port sector studies, as well as procurement of civil works are in progress. Ln. No. 1742 Grain Storage: US$85 million of July 2, 1979. Effective Date: January 21, 1980. Closing Date: June 30, 1985. Project implementation has begun. Consultants have been appointed for engineering design and supervision of construction. Preliminary engineering designs for silos have been completed. A prototype of hopper wagons has been designed and is under evaluation.  -67 - ANNEX II Page 7 of 9 Ln. No. 1748 TSKB XIII (Industrial Development Bank of Turkey): US$60 million of July 12, 1979. Effective Date: October 25, 1979. Closing Date: December 31, 1982. After initial delays, the progress is now satisfactory with over 85 percent of the loan committed. Targets for SMI and least developed regions are not likely to be met, because of current policies' impact on small enterprises, the need to focus on rehabilitation of existing firms, and export promotion projects. However, approvals of export-oriented projects have almost reached targets despite depressed investment demand. The planned program for training and export development has been implemented. Lns. Nos. 1754 TSKB (US$65 million) and 1755 SYKB (US$15 million) Private Sector Textiles loans of September 17, 1979. Effective Date: February 29, 1980. Closing Date: December 31, 1984. The consultancy and extension service are now supplying useful assistance to private firms. Only about 40 percent of the loan has been committed, due to depressed conditions in the textile industry. Ln. No. S-15 Ankara Air Pollution Engineering; US$6 million loan of December 12, 1979. Effective Date: April 4, 1980. Closing Date: December 31, 1983. Equipment for modification of the Seyitomer plant has been installed, and is expected to be commissioned in April 1982. Pollution monitoring equipment is being procured. Consultants are being selected for project studies. Ln. No. 1844 Karakaya Hydropower: US$120 million loan of May 21, 1980. Effective Date: August 15, 1980. Closing Date: December 31, 1988. Project implementation is making satisfactory progress. Ln. No. 1847 Sumerbank Textiles Modernization and Rationalization: US$83 million loan of May 28, 1980. Effective Date: February 27, 1981. Closing Date: June 30, 1984. Project implementation is about one year behind schedule due to de4ays in loan effectiveness and staffing problems in the project implementation unit. Physical implementation is now progressing satisfactorily. The plan for reorganization of the Cotton Textile Division was approved by Sumerbank's Board in March 1982 and a contract for financial technical assistance was finalized in February 19R2. The main problem facing the project at present is difficulty in recruiting competent personnel for the project unit due to salary limitations on State Economic Enterprises.  - 68 - ANNEX II Page 8 of 9 Ln. No. 1862 Livestock V: US$51 million loan of June 6, 1980. Effective Date; October 22, 1980. Closing Date: June 30, 1987. Project implementation, though behind schedule, is picking up momentum, with the recruitment of consultants and progress in procurement of goods. Ln. No. 1916 Petroleum Exploration Project: US$25 million loan of November 24, 1980. Effective Date: June 30, 1981. Closing Date: December 31, 1984. Geophysical and geological studies are making progress and seismic surveys have begun. Recruitment of consultants for carrying out energy audits is underway. Ln. No. 1917 Bati Raman Enhanced Oil Recovery Field Demonstration Project: US$62 million loan of November 24, 1980. Effective Date: June 30, 1981. Closing Date: December 31, 1984. Project implementation is progressing satisfactorily. Detailed engineering designs for the Bati Raman Enhanced Oil Recovery sub-project have been completed, and all major equipment ordered. The stimulation of the Thrace gas field has been completed. Progress in separation of TPAO's import-related operations is behind schedule, pending Government's decision on overall SEE reform. Ln. No. 1952 Labor Intensive Industry Project: US$40 million loan of March 13, 1981. Effective Date: June 12, 1981. Closing Date: June 30, 1986. Sub-loan approvals (about $3 million) have been slower than expected because of the depressed investment climate. Ln. No. 1967 Second Fruit and Vegetable Project: US$40 million loan of April 6, 1981. Effective Date: August 4, 1981. Closing Date: June 30, 1986 Projection implementation has begun satisfactorily. Recruitment of consultants for horticultural production marketing and studies is underway. The articles of agreement for the Regional and the Central Marketing Corportions have been finalized, and the Government has initiated efforts to cstablish them as priva-- Ln. No. 1985 FertiLizer Ratiolat,zation and Energy Saving Project. US$110 million loan of May 15, 1981. Effective Date; August 28, 1981. Closing Date: December 31, 1986. This project is currently making good progress in its initial phase of implementation. Some consultants have been appointed, and negotiations are in progress with others. Procurement action also has begun.  -69 - ANNEX II Page 9 of 9 Ln. No. 1987 Second Structural Adjustment US$300 million loan of May 15, 1981. Effective Date: August 17, 1981. Closing Date: November 30, 1982. A mission in November 1981 reviewed progress in carrying out the SAL economic program, especially in the areas of trade policy, tax reform, SEE reform and energy prices and found progress satisfactory. The second tranche of $100 million was, therefore, released on December 29, 1981. Ln. No. 1998 State Industrial Enterprise Finance Project: US$70 million loan of June 3, 1981. Effective Date: August 27, 1981. Closing Date: December 31, 1986. Project implementation has commenced satisfactorily. Action has been initiated for recruitment of consultants by the beneficiary enterprises and is expected to be completed by June 1982 Ln. No. 2093 Export-Oriented Industries Project: US$100 million loan of March 5, 1982. Loan not yet effective. Closing Date: June 30, 1987. The loan is expected to become effective on schedule. Ln. No. 2094 Erzurum Rural Development Project: US$40 million loan of March 5, 1982. Effective Date: July 8, 1982. Closing Date: June 30, 1987. Loan not yet effective, but project implementation has begun.  - 70 - ANNEX III Page 1 of I TURKEY THIRD STRUCTURAL ADJUSTMENT LOAN Supplementary Loan Data Sheet Section I. Timetable of Key Events (a) Date of first presentation to Bank: September 1981 (b) Appraisal Mission: February 1982 (c) Completion of negotiations: May 1982 (d) Planned date of effectiveness: June 1982 Section II. Special Bank Implementation Actions None. Section III. Special Conditions 1. Disbursement of second tranche of $100 million after satisfactory review of progress (para. 120) in: (a) SEE Reform - Satisfactory progress in SEE reform including progress on SEE legal reforms and progress in maintaining the level of budget transfers to manufacturing SEEs below the budgeted level of TL47 billion for 1982 (paras. 71 and 77); (b) Public Investment - Satisfactory progress towards rationalizing the public investment program, and constraining the level of public investment to conform to available resources and stimulate the growth of private investment, in accordance witl the Government's objectives (paras. 64 and 66); * i 1sj~i .v1hia kOl -Satisfactory progress in developing -he Government's pr.-c.dttires and capabilities for preparation, tvaLuar<,.i.m D