Turkey - Country economic memorandum : recent economic development and medium-term prospects (Vol. 2 of 2) : Methodological and statistical annex

Report No. 4287-TU Turkey Country Economic Memorandum Recent Economic Development and Medium-Term Prospects (In Two Volumes) Volume II: Methodological and Statistical Annex June 3, 1983 Country Programs Department II Europe, Middle East and North Africa Region FOR OFFICIAL USE ONLY Document of the World Bank This document has a restncted distnbution and may be used by recipents o.ly in the performarce of their offictal duties Its contents may not otherwise be disclosed without World Bank authorization  TURKEY CURRENCY EQUIVALENTS (Annual and Quarterly Averages) Value of US$ 1959 TL 2.80 1970 TL 11.50 1971 TL 14.92 1972 TL 14.15 1973 TL 14.15 1974 TL 13.93 1975 TL 14.44 1976 TL 16.05 1977 TL 18.00 1978 TL 24.28 1979 TL 31.08 1980 First Quarter TL 61.60 Second Quarter TL 75.53 Third Quarter TL 80.10 Fourth Quarter TL 86.93 1981 First Quarter TL 94.59 Second Quarter TLI102.84 Third Quarter TL118.89 Fourth Quarter TL128.56 1982 First Quarter TL142.25 Second Quarter TL153.27 Third Quarter TLI71.86 Fourth Quarter TL182.85 1983 First Quarter TL194.15 May 2 TL208.00 FISCAL YEAR Republic of Turkey March 1 to February 28 - through 1981 March 1 to December 31, 1982 January 1 to December 31 - from 1983 SEEs and TCZB January 1 to December 31 ABBREVIATIONS CGE - Computable General Equilibrium Model EEC - European Economic Community ICOR - Incremental Capital Output Ratio IMF - International Monetary Fund LIBOR - London Inter-Bank Offer Rate M&LT - Medium and Long-Term NFS - Non-Factor Services OECD - Organization for Economic Cooperation Development RMSM - Revised Minimum Standard Model SEE - State Economic Enterprise SPO - State Planning Organization TCZB - Turkish Agricultural Bank TSKB - Turkish Industrial Development Bank  FOR OmCIAL E ONLY This report is based on the findings of a joint World Bank and IPC Economic Mission that visited Turkey in June - July 1982. The Mission consisted of the following; Jayanta Roy (Mission Chief) Joel Bergsman Geoffrey Gowen Seok Hyun Hong Jeffrey Lewis Malvina Pollock Sherman Robinson Joseph Solan Firouz Vakil Fan Pan Walker 1This 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 COUNTRY ECONOMIC MEMORANDUM RECENT ECONOMIC DEVELOPMENTS AND MEDIUM-TERM PROSPECTS Table of Contents Volume II: METHODOLOGICAL AND STATISTICAL ANNEX Page No. Annex I: PRIVATE MANUFACTURING 1 I. Introduction 1 II. The Situation as of June 1982 2 Investment 2 Exports 7 Finance and Capital Markets 19 Appendix I: Topics Covered in Interviews 22 Table A 1.1 Real Fixed Investment 3 A 1.2 Capacity Utilization Rates 4 A 1.3 Investment Certificates Issued, 1981 and 1982 5 A 1.4 Growth in Manufactured Exports 8 A 1.5 Exports of Manufactures from Turkey and Other Large Semi-Industrialized Countries 9 A 1.6 Exports Relative to Gross Value of Production in Manufacturing: 1981 10 A 1.7 Real Exchange Rates, 1967-1981 15 Annex II: EXTERNAL DEBT 24 Crisis and Debt Restructuring 24 Debt Outstanding 1981 25 Relations with the IMF 26 Short-Term Borrowing 26 Medium and Long-Term Borrowing 28 Debt Rescheduling Arrangements 31 OECD 1978 Agreement 33 OECD 1979 Agreement 34 OECD 1980 Agreement 34 Commercial Bank Refinancing Agreement 35 Non-Guaranteed Suppliers Credit Arrears (NGTAs) 35 Commercial Bank Refinancing Agreement II 36 Terms and Conditions of Borrowing 37 Borrowing Prospects 37 Debt Management 38 Table A 2.1 Level and Distribution of External Obligations 25 A 2.2 Total Debt Outstanding 1973-1981 26 A 2.3 IMF Transactions 1978-1981 26 A 2.4 Level of Short-Term Debt 1974-1981 28 A 2.5 Summary of Medium and Long-Term Commitments, 1975-1981 30 A 2.6 Net-Inflow of Medium and Long-Term Capital 31 A 2.7 Summary of Rescheduling Agreements, 1978-1982 33 A 2.8 Debt Service on Rescheduled Obligations, 1978-1981 36  - ii - Page No. Annex II: EXTERNAL DEBT (Continued) Appendix I 40 Table I.1 Medium and Long-Term Debt Outstanding 1973-1981 41 Table I.2 Short-Term Debt 1974-1981 42 Annex III: STRUCTURE OF THE REVISED MINIMUM STANDARD MODEL (RMSM) AND THE KEY ASSUMPTIONS 43 Structural of the Model 43 Consolidated Budget 43 SEE Accounts 44 Public Sector Borrowing Requirement 45 Base Case 45 GDP 45 Sectoral Growth Rates 45 Fixed Investment 46 Stock Changes 47 Exports 47 Imports 47 Remittances 47 Inflation 47 Exchange Rates 48 Export Prices 48 Import Prices 48 Interest Rate for Unidentified Capital 48 Transfers to SEEs 48 Government Current Expenditure 49 SEEs' Profit/Loss Account 49 SEE Taxes 49 Future Loan Commitments 49 Reserves Policy 49 Sensitivity Runs 49 Downside Risk Case 50 Glossary to Selected Projection Summary Tables 51 Base Case Summary Tables 56 Sensitivity 1 - Lower Oil Prices - Summary Tables 65 Sensitivity 2 - Export Lower Growth - Summary Tables 71 Sensitivity 3 - Downside Risk Case - Summary Tables 77 Table A 3.1 Oil Price Assumptions: Base and Sensitivity 1 50  - iii - Page No. Annex IV ANALYSIS OF TURKISH MEDIUM-TERM PROSPECTS 86 A. Introduction 86 B. An Overview of the CGE Model 86 C. Medium-Term Prospects for Turkey. 1981-90 88 1. The Base Run: Successful Export Expansion 90 2. Alternative Medium-Term Scenarios 92 3. Macroeconomic Projections 95 4. Sectoral Implications of Alternative Scenarios 100 D. Conclusion 109 Table A 4.1 Growth of Selected Exogenous Variables for Forward Runs 89 A 4.2 Base Run Balance of Payments Projections 90 A 4.3 Base Run Economic Indicators 91 A 4.4 Base Run Real GDP Projections 91 A 4.5 Balance of Payments Components for Forward Runs 93 A 4.6 Macroeconomic Aggregates: Real Growth Rates 96 A 4.7 Macroeconomic Ratios 97 A 4.8 Measures of Foreign Exchange Shortage, 1981-90 99 A 4.9 Export Growth by Sector in the Forward Base Run 101 A 4.10 Import Growth by Sector in the Forward Base Run 102 A 4.11 Investment Shares in Alternative Forward Runs: Base Run Public and Private Investment Shares/ Total Investment Shares 104-105 A 4.12 Export Performance Under Alternative Forward Scenarios: Annual Export Growth Rates, 1981-90/ Exports/Output Ratios 106 A 4.13 Import Performance Under Alternative Forward Scenarios; Annual Import Growth Rates, 1981-90/ Imports/Domestic Supply 107 A 4.14 Output Growth and Structure Under Alternative Forward Scenarios: Annual Output Growth Rates, 1981-90/ Structure of Production 108  - iv - Page. No. Annex IV ANALYSIS OF TURKISH MEDIUM-TERM PROSPECTS (Continued) Appendix I: The Revised Turkey CGE Model 110 A. The CGE Static Model Formulation 110 A.1 Product Markets and Factor Supplies 110 A.2 Foreign Trade 112 A.3 Income and Product Demand 113 A.4 Market Clearing Conditions 114 A.5 The Dynamic CGE Model 115 B. Modifications in the CGE Model 115 B.1 The Foreign Trade Regime 116 B.2 Investment Allocation 118 B.3 Production Technology 120 C. Mathematical Presentation of the CGE Model 121 C.1 Equations of the Flexible Exchange Rate Model 121 C.2 Fixed Exchange Rates and Import Rationing 127 Appendix II; The Data in the Turkey CGE Model 128 Table II.1 Sectoral Aggregation 129 II.2 10 Sector SPO vs 13 Sector CGE Classification 130 1I.3 1978 Input-Output Coefficients 132 I.4 1978 Capital Coefficients 133 1I.5 Structure of 1978 Base Data 134 II.6 1978 Trade and Production Parameters 134 II.7 1978 Social Accounting Matrix 135-136 Annex V STATISTICAL TABLES 137 Section 1: Population and Employment 1.1: Demographic Characteristics 1.2: Labor Force, Employment and Unemployment 1.3: Employment in Manufacturing Industry 1.4: Annual Emigration and Workers Employed Abroad 1.5: Employment by SEEs  Annex V STATISTICAL TABLES (Continued) Section 2: National Income Accounts 2.1: Gross Domestic Product at Current Prices by Sectoral Origin 2.2: Gross Domestic Product at 1968 Prices by Sectoral Origin 2.3: Expenditure on Gross National Product at Current Prices 2.4: Expenditure on Gross National Product at 1968 Prices 2.5: Sectoral Fixed Investment at Current Prices by Government and Private Sectors 2.6: Sectoral Fixed Investment at 1976 Prices by Government and Private Sector Section 3: Foreign Trade and Balance of Payments 3.1: Balance of Payments 3.2: Commodity Composition of Exports (In dollars) 3.3: Commodity Composition of Exports (In tons) 3.4: Commodity Composition of Imports (In dollars) 3.5; Commodity Composition of Imports (In tons) 3.6: Invisible Receipts and Payments 3.7: Imports by Destination 3.8: Exports by Destination 3.9: Workers' Remittances by Months Section 4; Public Finance 4.1: Consolidated Budget Summary 4.2: Consolidated Government Revenue 4.3: Profit and Loss Account of SEEs 4.4: Financing of Investment by SEEs 4.5: Fixed Investment by SEEs 4.6: 1980 Profit and Loss Account of SEEs 4.7: 1981 Profit and Loss Account of SEEs 4.8: 1982 Profit and Loss Account of SEEs 4.9: 1980 Financing of Investment by SEEs 4.10: 1981 Financing of Investment by SEEs 4.11: 1982 Financing of Investment by SEEs Section 5: Money and Banking 5.1: Money and Banking 5.2: Distribution of Central Bank Credits 5.3: Consolidated Commercial Bank Credits 5.4: Deposits with Deposit Money Banks 5.5: Central Bank Interest Rates on Rediscounts and on Advances 5.6: Commercial Bank Interest Rates (Selected) Section 6: Prices and Wages 6.1: Price Indices 6.2: Average Daily Wages of Workers by Economic Activity 6.3: Trends in Real and Nominal (Daily) Wages 6.4: Government Salaries by Grades 6.5: Public and Private Sector Wages 6.6; Collective Agreements and Coverage in Turkey  - vi - Annex V STATISTICAL TABLES (Continued) Section 7: Agriculture 7.1: Principal Land Use 7.2 Land Areas for Cereals, Pulses, and Industrial Crops 7.3: Output of Cereals, Pulses and Industrial Crops 7.4: Yields of Cereals, Pulses and Industrial Crops 7.5: Output of Nuts and Fruits 7.6: Use of Major Agricultural Inputs 7.7: Agricultural Support Prices 7.8: Official Prices of Agricultural Inputs Section 8: Industry 8.1; Output of Selected Industrial Goods 8.2: Value of Manufacturing Production 8.3: Fixed Investment in Manufacturing 8.4: Sectoral Distribution of Establishments, Employment, Output, Value Added and Investment in Public Manufacturing Industry - 1979 8.41: Sectoral Distribution of Establishment, Employment, Output, Value Added and Investment in Public Manufacturing Industry - 1980 8.42: Sectorsl Distribution of Establishment, Employment, Output, Value Added and Investment in Public Manufacturing Industry - 1981 8.5: Sectoral Distribution of Establishment, Employment, Output, Value Added and Investment in Private Manufacturing Industry - 1979 8.51: Sectoral Distribution of Establishment, Employment, Output, Value Added and Investment in Private Manufacturing Industry - 1980 8.52: Sectoral Distribution of Establishment, Employment, Output, Value Added and Investment in Private Manufacturing Industry - 1981 8.6 Production Figures for 1980, 1981, and 1982 8.7: Output of Petroleum, Coal and Major Minerals 8.8: Production of Electricity (Gross) 8.9: Capacity Utilization Rates for Some Commodities (SEEs) 8.10: Capacity Utilization in Private Industry Section 9: IBRD Standard Tables 9.1: National Accounts Summary (Billions of TL) 9.2; National Accounts Summary (Millions of USO) 9.3; Balance of Payments Symbols Used in Statistical Tables Not available Zero or negligible  ANNEX I - PRIVATE MANUFACTURING I. INTRODUCTION A 1.1 This report is part of the World Bank Group's continuing, regular analysis of the Turkish economy. As such, it relies and builds upon the recent study, Industrialization and Trade Strategy (3641-TU; February 18, 1982; referred to hereinafter as "ITS"). That study includes a comprehensive and detailed analysis of the important policy changes adopted since January 1980; the present report complements it by adding the view and assessing the experience of the private industrialist on whom the policies fall. A 1.2 There is no need here to repeat the description of policy changes; as of the mission's visit to Turkey in June 1982 the essentials were unchanged from those described in ITS. The main elements were (a) the anti-inflation program, which resulted in weak demand for most manufactured goods and, in combination with a freeing of interest rates, very high cost of credit to any borrower without access to special incentives; (b) a realistic exchange rate which, together with explicit incentives for exports, reduced (but did not remove) Turkey's historic bias against exporting (as contrasted to selling domestically). There had also been a general improvement in attitude and procedures, less subject to quantitative analysis but nevertheless of great importance, in Government regulation of private companies. Government officials were more willing to talk to businessmen than their predecessors had been, and a more liberal and cooperative environment was created. Thus both the substance of economic policy and the manner of its implementation were relying somewhat more on market forces, and on private actors, to achieve Turkey's development goals. A 1.3 In this context, the mission decided to focus most of its efforts on examination of the system as experienced by private business -- to analyze policy seen "from the bottom up," as a complement to the extensive analysis as seen "from the top" that already was available. Concentrating on manufacturing, over 45 interviews were held with private companies, industry associations, and banks in Istanbul, Izmir, Adana, and Bursa. Staff of the Turkish Industrial Development Bank (TSKB) were also very generous in sharing their data on and analysis of private manufacturing activity, as was the SPO. A list of the topics covered in most interviews is attached as an annex to this report; the information thus collected is the major basis for the report--along with other data and information from the Turkish Government.  -2- II. THE SITUATION AS OF JUNE 1982 Investment A 1.4 Economy-wide data provided by the SPO shows that private investment in manufacturing has been depressed since 1979. Its highest level in real termks was TL 23.2 billion in 1978 (at 1976 prices); in 1979, 80, and 81 it has hovered between TL 15.1 billion and TL 15.7 billion (see Table 1). It is thus about one-third below its peak, and about one-fourth below the plateau of 1974-77. The reasons for this depression are easy to find: the political and social turmoil of 1979, and the anti-inflation program that started in 1980. A 1.5 All the information the mission found suggests that 1982 is similar to 1981: private investment in manufacturing is still depressed. This information comes from the firms we interviewed, from TSKB, from capacity utilization rates, from imports of investment goods, and from analysis of incentive certificates. A 1.6 While some of the firms interviewed were expanding their capacity (especially in textiles), and others were engaged in some modernization and "bottleneck-breaking," they were unanimous in their evaluation that investment levels in their sectors were at or below those of 1981. TSKB and several commercial banks interviewed held the same view, as did representatives of Chambers of Industry in both Istanbul and Izmir. The basic reason is that very few firms are operating anywhere near capacity. In our interview sample, which was heavily biased towards successful exporters, we obtained meaningful capacity utilization rates on 30 different activities. Only 12 of these (i.e., 40 percent) were operating near full capacity. A 1.7 Table 2 shows overall estimates of capacity utilization, by sector, for the Istanbul and Izmir (Aegean) regions. These are the two most important manufacturing regions of Turkey, accounting for about 50 percent and 10 percent, respectively, of the national total. The data are based on periodic surveys taken by regional Chambers of Industry, which the mission collected in its interviews. These rates are commonly said to be understated by about 10 percentage points, because companies used to overstate their installed capacity in order to get larger import allocations. Even, taking this into account, the numbers in Table 2 do not paint a picture of strong pressures to invest. While Istanbul showed an improvement in 1981, utilization rates are still low--between 50 and 60 percent. This can be compared to rates above 80 percent, reported from the same sources, in the late 1970s. Information from the mission's own interviews and also from an ongoing TSKB survey shows rates in 1982 only slightly above those in 1981, in general.  - 3 - Table A.l.l: TURKEY: REAL FIXED INVESTMENT Economy-Wide Manufacturing Year Total Private Total Public Private ------------------(Billion 1976 TL)----------------- 1972 78.1 38.7 25.0 11.7 13.3 1973 91.7 47.7 27.3 10.5 16.9 1974 103.8 53.6 31.9 11.1 20.9 1975 126.3 61.3 39.0 18.1 20.8 1976 142.2 67.0 38.1 17.4 20.7 1977 152.3 67.1 40.4 19.6 20.8 1978 152.1 79.2 38.7 15.6 23.2 1979 147.5 70.9 36.4 20.7 15.7 1980 131.5 56.7 37.6 22.5 15.1 1981 137.1 57.1 36.1 20.7 15.4 Source: SPO A 1.8 The surveys that produced the data for Table 2 included queries about the reasons for less than full use of capacity. Among the most common reasons given, in Istanbul lack of demand was most often cited as number 1. "Financial difficulties" was in second place. In Izmir, lack of demand was second in 1980 but first in 1981, trading places with "working capital shortage"--another, more specific way to describe "financial difficulties". A 1.9 Imports of investment goods, another indicator of current investment levels, have been very depressed. According to data provided by TSKB, the 1981 total was 40 percent below 1980. 1/ In January-March 1982 the amount rose to 12 percent above the same period in 1981--still a low level. (These data refer to all importers; a public-private breakdown is not readily available.) A 1.10 Another view on future private investment was sought from the issuance of investment certificates ("certificates of encouragement") by the Turkish Government. However, the data are very difficult to interpret. Prior to 1982 these certificates show only preliminary intentions to invest. Starting in 1982 the applicant has had to submit a nonrefundable deposit of one-tenth of one percent of the proposed investment; this amount should be high enough to discourage completely conjectural applications in 1/ The recent State Institute of Statistics' (SIS) figures reveal that imports of investment goods in 1982 increased by $116 million over 1981. However, most of the demand for investment goods came from the transport sector or the SEEs. According to the same source, in 1981, Turkey's non-crude oil raw material imports, totalled $3.3 billion. In 1982, the corresponding figure declined to $2.8 billion. This fall is associated with decreased industrial demand for raw materials which may be seen as an indication that capacity utilization did not significantly exceed 60 percent during the year.  -4- the future. MoreDver, about half the value of certificates issued in 1981 were for transport equipment, which includes certificates for the purchases of trucks--a booming activity in 1981 which is not an investment in the manufacturing sector. Certificates issued in 1981 and early 1982 are shown in Table 3. There was a tremendous demand for certificates in 1981--over three times the amount of actual investment in 1981. This was almost surely an over-reaction to the great improvements, relative to 1980 and earlier: the restoratior, of law and order, much better prospects for political and social stability, a change in government attitude favoring private sector activity, and a simplification of procedures. Thus, the lower rate of demand in January-April 198:2 does not necessarily imply a decrease in investment plans; it may simply be a return towards a more realistic level, induced in part by the requirement to make the non-refundable deposit. The 1982 rate of issuance, annualized and adjusted for inflation, is still 1.5 to 2 times the actual investment rate in 1981 (which, it will be remembered, was quite depressed). About the only conclusion one can draw from the rate of issuance of certificates in early 1982 is that they do not show a resurgence of optimism. Table A.1.2: TURKEY: CAPACITY UTILIZATION RATES Izmir Istanbul 1980 1981 /a 1980 1981 ----------(percent)------ Food and Beverages 71 62 55 64 Textiles and Clothing 63 67 59 69 Wood and Products 62 58 26 52 Printing 71 74 n.a. n.a. Pulp and Paper n.a. n.a. 50 78 Rubber Products 51 45 )50 58 Chemicals 48 51 5 Nonmetallic Mineral Products 69 68 64 67 Metals 50 /b 58 /b 42 55 Metal Products 50 54 51 59 Machinery 47 47 n.a. n.a. Automotive 49 41 50 48 Others 41 54 47 59 Total Manufacturing 55 56 51 62 /a Average of first and last four months. /b One firm only - makes reinforcing rods. Source; Izmir and Istanbul Chambers of Industry.  -5- Table A.1.3: TURKEY: INVESTMENT CERTIFICATES ISSUED, 1981 AND 1982 Value of Certificates Issued Real Annualized Level 1981 1982 1982 January-April vs; 12 months Jan-April Jan-April 1981 12 mos. 1981 Jan-Apr. ----------(million TL)