Turkey - Agricultural Sector Adjustment Loan Project

ocxument of The World Bank. FOR OMCAuL USE ONLY > 2X-Fa-- TV Repowt No. P-4097-TU REPORT AND RECOMMENDATION OF TEE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED AGRICULTURAL SECTOR ADJUSTMENT LOAN IN AN AMOUNT EQUIVALENT TO USt300 MILLION TO THE REPUBLIC OF TURKEY May 24, 1985 Th*s docment s a nsokddd didibIdon and my be usd by rdpionts only B te perforute of thi o0icialdW ] csht& myS not ohenwise be disdosed QntboWt Wod Bk autizaono  TUR1iEY CURREUCY EQUIVALENTS Currency Unit Jan. 198011 Jan. 1981 Jan. 1982 Jan. 1983 Jan. 1984 May 1985 US Dollar TL 70.00 TL 91.00 TL 139.60 TL 191.15 TL 309.20 TL 520.00 TL I US$ 0.014 US$ 0.011 Us$ 0.007 us$ 0.005 Us$ 0.003 US$ 0.002 1/ Since January 1980, the rate is being adjusted for the differential inflation between Turkey and its major trading partners. ln this report it is assumed that this policy will continue. FISCAL YEAR Republic of Turkey January 1 to December 31 LIST OF ABBREVIATIONS APK - MAFRA'S Planning, Research and Coordination Bureau ASAL - Agricultural Sector Adjustment Loan CAYIUR - Tea Organization, an SEE DONATIM - Alternate name for TZDK (see below) DSI - State Hydraulic Works, Ministry of Energy & Natural Resources EBK - Meat and Fish Organization, an SEE GDRS - General Directorate of Rural Services, within MAFRA MAFRA - Ministry of Agriculture, Forestry and Rural Affairs 0 & M - Operation and Maintenance SEE - State Economic Enterprise SEKER - Turkish Sugar Factories, an SEE SPO - State Planning Organization, under the Prime Ministry TCZB - Argicultural Bank of Turkey TIGEM - Turkish Agricultural Enterprise, an SEE TL - Turkish Lira TMO - Soil Products Office, an SEE TSEK - Turkish Milk Industry, an SEE TZDK - Agricultural Supply Organization, an SEE YEMSAN - Turkish Feed Industry, an SEE  FOR OFFICIAL USE ONLY TURXEY AGRICULTURAL SECTOR ADJUSTMENT LOAN Loan Summary Borrower: Republic of Turkey. Beneficiaries; The Ministry of Agriculture, Forestry and Rural Affairs CMAFRA), the State Planning Organization (SPO), the State Hydraulic Works (DSI), the Turkish Agricultural Enterprise (TIGEN), the Agricultural Supply Organization (TZDK), and the Soil Products Office (TMO). Anount; US$300 million. Terms: Seventeen years including four years of grace, with standard variable interest rate. Description; The proposed loan would support the Government's agricultural sector adjustment program during the three-year period 1985-87. The principal objective of the program is the transition to a self-reliant, financially independent and responsive production and marketing system in o-der to stimulate exports and reattain historical growth. The main instruments would be reforms to (i) reduce producer subsidization while maintaining adequate incentives; (ii) improve the input distribution, marketing and credit systems; (iii) improve the public investment allocation system in the sector, particularly for the Core Irrigation and Drainage Investment Program; (iv) enhance the research, extension, protection and disease control services; and (v) strengthen management, planning, policy analysis and public expenditure programming for the sector. The loan would finance a portion of the imported inputs, capital goods, training and consulting services needed for the adjustment program. Benefits and Risks; The reforms agreed under the loan would foster a more efficient allocation of investment resources, a gradual withdrawal of Gov^rnment from direct intervention in input distribution, production and marketing activities, and more effective agricultural supporting services. The program is designed to revitalize agricultural production without reliance upon subsidies, stimulate agricultural exports and improve the pattern of public expenditures. The main risk arises from possible short-term disruptive effects on agriculture following the increases in retail Thbi document has a resticted distribution and may be used by recipients only ia the performance of tei offil duties Its contents may not otherwise be dislosed without World Bank authonzation.  -ii- fertilizer prices to border price levels. This risk is, however, considered slight, since the phase-out of the fertilizer subsidy would proceed at a slower pace than that which occurred in 1980-81 and again in 1984, when retail price increases had only minimal negative impact on fertilizer consumption and crop production. Maintenance of the fertilizer subsidy at current levels would, on the other hand, impose an unsustainable burden on Government's resources and jeopardize the stabilization program, thus representing a greater risk to the economy. Estimated Cost: The indicative cost of the agricultural program for 1985-87 is as follows: Allocation Categories Covered of Loan Z to be by loan Local Foreign Total Proceeds financed - - - - - - - US$ million /1 Seeds Importation 5.4 54.0 59.4 20.0 34 Fertilizers Importation 45.0 450.0 495.0 152.4 31 Irrigation 621.0 893.7 1,514.7 111.0 7 Supporting Services 184.7 90.9 275.6 8.1 3 Technical Assistance and Training - 8.5 8.5 8.5 100 Total 856.1 1,497.1 2,353.2 300.0 13 /1 At January 1, 1985 constant prices. Estimated Disbursements: US$ Million Bank FY 1986 1987 Annual 200.0 100.0 Cumulative 200.0 300.0 Economic Rate of Return: Not Applicable Appraisal Report: 5576-TU dated May 22, 1985  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECONMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED AGRICULTURAL SECTOR ADJUSTMENT LOAN TO THE REPUBLIC OF TURKEY 1. I submit the following report and recommendation on a proposed Agricultural Sector Adjustment Loan to the Republic of Turkey for the equivalent of US$300.0 million to support the Government's program of reforms in the agricultural sector designed to make the sector more efficient and better able to compete on the world market, while concentrating scarce Government resources on those expenditures best able to support sustainable growth at the sectoral level. The loan would have a term of 17 years including 4 years of grace, with interest at the standard variable rate. PART I - THE ECONOMY 1/ 2. An economic mission visited Turkey in June 1982, and its report entitled "Turkey: Country Economic Memorandum, Recent Economic Developments and Medium-Term Prospects" (No. 4287-TU) was distributed to the Executive Directors in June 1983. The report of a mission to review the financial sector, entitled: "Turkey: Special Economic Report - Policies for the Financial Sector" (No. 4459-TU), was distributed in September 1983. A Bank mission reviewed the Government's Fifth Five-Year Plan (1985-89) in August/September 1984 and its findings are reflected in this section. 3. Turkey is about as large as France and Germany combined, with a population of around 48 million and an estimated GNP per capita of $1230 in 1983. The density of population is low (78 per square kilometer of agricultural land), and about 47 percent live in urban centers. Population growth (2.2 percent per annum) is below the median for middle-income countries. Despite rapid economic growth in the mid-1970s as well as substantial emigration of workers (to Western Europe and more recently, to the Middle East), the employment situation has deteriorated steadily with an unemployment rate currently estimated at about 19 percent. There is, however, little or no absolute poverty, although income distribution is skewed. There are considerable regional differences in income and large rural-urban disparities. Recent data indicate a probable worsening in income distribution, especially of wage and salary earners, and a sharp real decline in average earnings. Educational enrollments have expanded greatly, but the level of adult literacy remains relatively low. Background 4. During the 1970s Turkey did not make the necessary adjustments to the shocks caused by the steep rise in oil prices, stagflation in the OECD economies, and the consequent deterioration of its terms of external trade. 1/ Parts I and V are substantially the same as Parts I and II of the President's Report on the Industrial Schools Project (P-3956-TU), dated April 18, 1985.  Until 1977 Turkey maintained high rates of economic growth by raising the share of public investment in GDP. This was financed initially by workers' remittances and, following the quadrupling of oil prices, increasingly by short-ternm borrowings. The rapid GNP growth came to an abrupt halt in 1977 as the massive external debt burden led to a sharp deterioration in creditworthiness, severe shortages of imports, and disruptions in industrial production with a rise in unemployment. By the end of 1979, doiwstic inflation had also become an issue of critical importance. 5. The Turkish authorities' response to the crisis of the late 1970s was a major shift in development strategy in 1980, moving towards outward orientation and giving an increased role to market forces. Policies were adopted to expand exports and increase workers' remittances which, together with liberalization of imports, encouragement of foreign investment and prudent external debt management, were aimed at alleviating the balance of payments constraint and import shortages. On the domestic front, the objectives were a reduction in the inflation rate, reform of the State Economic Enterprises (SEEs), a more efficient financial sector, improved resource mobilization and better selection of investments, especially in the public sector. 6. The adjustment program, which has been supported by the Bank through five structural adjustment loans, involves far-reaching changes in attitudes, institutions, and the legal and policy framework, all of which require time to put in place. Major structural changes have been made in the exchange rate system, the export and import regimes, the tax system, interest rate and selective credit policies and the public investment program. Implementation of the adjustment program was carried out under a military regime during *September 1980 - November 1983 and since then by an elected government. The Structural Adjustment Program - 1980-84 The Turkish economy has shown an impressive response to the structural adjustment program and actual performance met or exceeded the Government's own targets through 1982. By contrast, results in 1983 and 1984 proved to be mixed, due in part to adverse economic developments on the external front, slippages in the monetary program, a persistent shortfall in Government revenues and the renewal of inflationary pressures. 8. Real GNP expanded by 4.1 percent in 1981 and 4.6 percent in 1982. In 1983, GNP growth slowed down to 3.2 percent, due in large part to the effects of a bad harvest and a decline in the contribution of the foreign balance. The growth rate rebounded in 1984 to an estimated 5.7 percent, supported by favorable performance in the productive sectors with agricultural value added growing at 3.6 percent and industrial value added at 9.6 percent. Capacity utilization rates in private industry in 1984 are estimated to have risen by about 5 percent to an average rate of 72 percent. On the expenditure side, the average annual real rate of growth of public fixed investment has been contained to 3.1 percent over the 1980-84 period while the growth rate of private investment has improved systematically from -17.3 percent in 1980 to 4.8 percent in 1983 and an estimated 5.4 percent in 1984. Private consumption, which had actually fallen by 5 percent in 1980, grew at 4.9 percent in 1983 and an estimated 5.0 percent in 1984. On the other hand, helped by strict budgetary discipline, the rate of growth of public consumption declined from 8.4 percent in 1980 to 1.8 percent in 1983. Estimates for 1984 suggest a modest growth of 2.4 percent.  - 3 - 9. Through 1982, the Government met with considerable success in reducing the rate of inflation through a combination of fiscal, monetary and incomes policies. After peaking at 107 percent in 1980, the annual average rate of increase in the wholesale price index declined to 37 percent in 1981 and 27 percent in 1982. In 1983 the downward trend was reversed and the inflation rate rose to 30 percent. This rise was fueled by an expansion of Central Bank credits to firms and commercial banks in difficulty during the second half of 1983 as well as an unexpected increase in the budget deficit. The resulting liquidity expansion, in conjunction with a lowering of nominal deposit interest rates, encouraged consumption at the expense of savings. 10. Inflation accelerated further in the first half of 1984, although it moderated in the second half. The average inflation for 1984 is estimated at a little over 50 percent. The major factors that contributed to the worsening of the inflationary situation were the lagged impact of the expansionary monetary policy pursued during the second half of 1983, and a significant increase in agriculture product prices, especially of fresh fruits and vegetables, as a consequence of export liberalization and higher export market prices. Other important inflationary factors included substantial "catch up" increases of SEE prices and higher import prices resulting from the nominal depreciation of the Turkish lira. In addition, inflationary pressures stemmed from a larger than anticipated budget deficit in 1984 as a result of a slowdown in the growth of revenues. 11. Commercial bank interest rates, which were deregulated in July 1980, have increased substantially and are now positive in real terms. As a result, total bank deposits increased by 72 percent in 1980 over 1979, and in 1981 this trend accelerated, with total deposits growing by 103 percent and time deposits by 274 percent. Growth in total deposits slowed after 1982, and in 1983 and 1984 they grew at 53 percent and 42 percent respectively. The bankruptcy in late June 1982 of a major non-bank financial institution shook depositor confidence and was followed by a shift of funds into the larger banks. The Government averted an immediate crisis in the banking sector and undertook actions to reform and strengthen the financial sector as a whole. A new banking law was enacted in June 1983 which covered many of the recommendations made in the Bank's report on the Financial Sector (No. 4459-TU). These included measures to reduce the undercapitalization of banks, place limits on the real assets and investments of banks, link the establisnment of branches to the level or a bank's equity, reduce the interlocking between banks and corporations, introduce a deposit insurance scheme, and increase the role of the Central Bank in the supervision of the banking sector. A new law is currently before Parliament which will further the banking reform process by introducing standardized accounting for banks and improved procedures for handling non-performing loans. The Government also took a major step towards reducing the cost of intermediation by reducing the financial transactions tax from 15 percent to 3 percent. Separately, the Government has reduced the level of withholding tax applicable to interest payments on deposits and bonds from 20 percent to 10 percent. Other important developments in the financial sector include measures undertaken to revitalize the capital markets, for which IFC has provided technical assistance, and the sale of revenue-sharing certificates linked to the income from selected public facilities (e.g. the Bosphorus bridge).  12. The Government is committed to maintaining an interest rate structure for deposits which is positive in real terms. Time deposits have been yielding more or less positive real returns since end-l983, with interest rates ranging from 45 to 53 percent depending upon the term of the deposit. While positive real interest rates have provided an incentive to save, they have also meant high borrowing costs. Nominal interest rates range from 60 to 80 percent on non-preferential credits, in part because of the high intermediation costs of the comercial banks and their widely prevalent practice of requiring compensating balances. The interest rate differentials between preferential and non-preferential credits and among preferential credits are large and need to be reduced. The Government has reaffirmed its determination to achieve positive real rates on all lending by a combination N of bringing down inflation and phasing out interest rate subsidies on preferential credits. In January 1985, it eliminated preferential interest rates on short-term export credits. High market interest rates, together with the limited availability of credit, have led to considerable liquidity problems for the private business sector, particularly for businesses supplying the domestic market. Measures are also needed to lower the operating costs of banks, which are well above prevailing levels in comparable countries. 13. In the fiscal area, progress was evident from 1980 to 1982 but there have been slippages in 1983 and 1984. The budget deficit to GNP ratio was reduced from 5.3 percent in 1980 to 2.1 percent in 1982, and the Public Sector Borrowing Requirement (PSBR) dropped sharply from 12.6 percent of GNP to 6.9 percent over the same period. However, the revenue to GNP ratio has been declining over the past three years. From a high of 20.3 percent in 1981, it has fallen sharply to an estimated 15.6 percent in 1984. Largely because of this significant shortfall in revenues, overall fiscal performance has worsened since 1983 even though government expenditures have been considerably curtailed (from 24.2 percent of GNP in 1980 to an estimated 20.8 percent in 1984) and budgetary transfers to SEEs as a percentage of GNP have fallen steadily (from 4.8 percent in 1980 to an estimated 1.6 percent in 1984). The budget deficit is estimated at 5.2 percent of GNP in 1984 and the PSBR at 8.8 percent. The downward trend in the Government revenue to GNP ratio highlights the urgency of mobilizing additional public resources. As a step in this direction, the Government introduced a Value Added Tax (VAT) in January 1985. 14. Improvements in the balance of payments were systematic through 1982 with the current account deficit decreasing from $3.3 billion (5.7 percent of GNP) in 1980 to $1.2 billion (2.2 percent of GNP) in 1982. However, in 1983 the current account deficit widened to about $2.1 billion (4.2 percent of GNP) as merchandise exports and workers' remittances fell short of targets. Exports rebounded strongly in 1984, growing by 25 percent in dollar terms to $7.1 billion. Remittances, too, registered a higher than expected increase, reaching $1.9 billion (up by 24 percent). Concurrently, there was a continued large inflow of deposits through the Dresdner scheme ($550 million in 1984). Under this scheme the Dresdner Bank collects deposits from Turkish workers in Germany and automatically places these funds at the disposition of the Central Bank of Turkey, which guarantees the deposits and pays an interest rate commeasurate with the Euro-market rate. However, these increases were offset by a sharp rise in merchandise imports to $10.8 billion (up by 16 percent in dollar terms). As a result, the current account deficit in 1984 was considerably higher than projected, reaching $2.1 billion (4.3 percent of GNP), or about the same level as in 1983.  15. On balance, merchandise export performance has been impressive over the 1980-84 period, growing at an average annual rate of about 26 percent in dollar terms. This growth has been led by the manufacturing sector and has involved a rise in the share of exports to the Middle Eastern countries. Industrial exports, comprised primarily of processed foods and textiles, have risen from 36 percent of total exports in 1980 to 72 percent in 1984. These results were achieved by a combination of indirect (flexible exchange rate policy and import liberalization) and direct (tax rebates, preferential credits) measures to enhance the relative profitability of exports and offset the traditional bias towards producing for the domestic market. The flexible exchange rate policy was one of the most important factors contributing to the growth of exports, together with the penetration of Turkish products in Middle East markets. 16. On the import side, the 1982-83 period was marked by a relative stability in the growth of merchandise imports, mostly due to exogenous factors. Imports fell by 1.0 percent in dollar terms in 1982 and rose by only 4.4 percent in 1983. This reflected price decreases in both oil and non-oil imports. Merchandise imports, however, increased substantially in value in 1984. The increase has been most significant in some of the groups (e.g. raw materials and consumer goods) that have been subjected to major liberalization in terms of both a lowering of tariff rates and a significant removal of quantitative restrictions. Medium-Term Prospects 17. The Government's Fifth Five Year Plan (1985-89) was approved by the Grand National Assembly in July 1984. The Plan reaffirms the Government's determination to pursue an outward-oriented development strategy and to liberalize the economy by relying increasingly on market forces for allocation decisions. The public sector is targeted to play a supportive role by concentrating its investments in infrastructure rather than manufacturing, while the private sector is to be encouraged to play a leading role in the growth of manufacturing and exports. Some of the key targets are: Si) an average annual GNP growth rate of 6.3 percent; (ii) an average annual real rate of growth of merchandise exports of 10.6 percent; (iii) an average annual real rate of growth of merchandise imports of 8.2 percent; (iv) an average annual real rate of growth of 10.9 percent in private investment and 6.8 percent in public investment; and (v) a declining external debt service ratio, from 26 percent in 1984 to around 18 percent in 1989.  6- 18. While the overall thrust of the Plan is in accord with the goals of the structural adjustment program, certain targets seem optimistic in view of both past performance and the immdiate prospects for the economy. The Bank's projections indicate the need for a continuation of the stabilization program well into 1987, implying a lower growth rate in GDP for the early years of the Plan and a return to a higher growth path only in 1988. Key economic variables in the Bank's latest projections for the period 1985-89 are presented in Table 1: Table 1: TURKEY - SELECTED ECONOMIC INDICATORS, 1983-89 1983 198E 1985 1S89 Reel Crowth Rate RI GCr_th Rate Wit. Actual Eat. Projected l198 1958 t985-S (:) Cl) 0mP TI. Be at 1913 Prices 11646 12122 27W 15855 3.7 5.7 5.6 Agriclture 2058 2132 2202 2481 -0.3 3.6 3.0 tad try 3096 3393 358 4732 7.6 9.6 7.0 Services 5631 5929 6175 77n X.0 5.3 5.7 Co_eai - 9586 1006 1539 12500 4.5 4.1 3.1 riced ie_eeue 2l81 2220 2400 3180 3.0 1.8 7.5 xports ,of good Curret S u 5728 7100 8541 17574 13.9 23.1 9.4 Imports of _d 9235 10756 12500 21307 12.0 15.8 7.2 Trade bemac -3507 -3656 -299 -3733 Curant account baln tur.r S * -2122 -2135 -1750 -2003 Ratios laVeafletltflP ; V.@ 1.3 18.9 20.0 SainsPGetl 2 16.5 17.1 17. 19.5 gxport, of Soo"/GOP 2 11.3 14.6 13.9 15.9 Curreet accost deficit/ -:4.2 4.3 -.81 -1.8 Debt e'rvice ratio /c ; 2M.0 25.0 23.7 19.8 Public fixd ivet/ : 60.3 58.9 57.6 52.6 total fied inoeeinnt KAm itc. CGros capital required /d Currnt - 3687 4290 3864 5905 /a At market prices; components are expressed at factor cost and will not add up due to exclusion of indirect taxes and subsidies. /b Based on constant TL. Ic Total Debt Service (excluding short-ternm) /Exports of Goods and NFS plus Workers' Remittances. /d Includes net IMF. Source; State Planning Organization for actuals and IBRD projections.  - 7 - 19. Bank projections indicate a GDP growth of 5.6 percent per annum on average for the Plan period, with a low of 4.9 percent in the initial year of the Plan (stabilization period) and a high of 6.3 percent for the final year (growth per od). Achievement of these growth rates will depend on the performance of the productive sectors, namely agriculture and manufacturing. This in turn will depend to a large extent on the Government's determination to constrain the growth ot the public sector in line with public resources and to create a more favorable investment climate for the private sector. This translates itself into a projected real growth per annum in public fixed investment of about 5.0 percent on average for the Plan period, starting with a modest increase in the early years. The comparable figure for private fixed investment is 10.6 percent or a little more than twice the growth rate: for public fixed investment. These figures are consistent with the need to meet the infrastructure requirements of the economy through the public investment program, while providing for the capacity expansion of the private sector necessary LC --t the export and growth targets. 20. Merchandise exports are projected to grow at an average 9.4 percent per annum in real terms. Merchandise imports, on the other hand, are projected to grow more slowly in real terms through 1986 and then pick up to an average 7.5 percent per annum in the terminal years of the Plan. On these assumptions, the current account deEicit is projected to decrease through 1986 as stabilization policies act to contain import growth while encouraging exports. As higher growth rates set in during Lne middle of the Plan period, the trend would reverse and the current account deficit would rise moderately through the end of the Plan. The terminal year 1989 would show a deficit of approximately $2.0 billion as compared to a 1985 figure of $1.7 billion. The projected capital account is seen to remain manageable throughout the period even in the face of some sharp increases in the amortization payments in 1985-87 arising from the debts rescheduled during the 1978-8'3 period and an imposed constraint on foreign exchange reserves equivalent to at least two months' imports. Consistent with the above is an average debt service ratio for medium and long-term credits for the Plan period of 21.7 percent. Tncluding short-term debt the average debt service ratio for the Plan period is 23.7 percent. Gross capital inflows required in 1989, on these assumptions, would be about $5.9 billion, or about 38 percent higher than the amount in 1984. Such an inflow is consistent with a decreasing debt service ratio from 1986 onwards. 21. The medium-term scenario presented above is, of ccurse, only one of many possibilities and is used specifically to illustrate Turkey's potential in the light of the Government's own development strategy. Given Turkey's progress in the structural adjustment program, the favorable response which this has evoked from the international financial community and the present view of future resources and export market possibilities, the Government's somewhat more ambitious Plan targets would be feasible provided they are supported by slightly higher export growth rates and greater success in the mobilization of public resources. This may be more difficult to achieve in the early (stabilization) phase of the Plan. 22. In view of the sensitivity of the projections to the assumptions of export and import growth rates, a downside risk case has also been developed. With Turkey's export performance heavily dependent on exogenous factors such  as the world economic outlook and movements in international prices, a slower growth of merchandise export. (an average of 6.9 percent over the Plan period) would lead to a more difficult but still manageable balance of payment. situation, more external borrowing, a lower GDP growth (averaging about 4.8 percent per annum) and a higher debt service ratio (22-24 percer.t per annum). In such a situation the Government would have little chance of absorbing the unemployed and improving tangibly the average standard oi living. However, given the Government's emphasis on export promotion and the determined efforts to counter the bias towards producing for the domestic market, there is good reason to support the perspective set out in the medium-term scenario presented in paragraphs 18 to 21. External Debt and Creditworthiness 23. At the end of 1978, Turkey had $7.2 billion in short-term debt and $7.C billion in medium and long-term debt. Between 1978 and 1980, Turkey rescheduled some $9.2 billion of outstanding obligations through a series of rescheduling arrangements concluded with official and commercial creditors. Approximately $6.0 billion of short-term debt, including $2.6 billion in convertible Turkish lira deposits and bankers' credits and $1.2 billion of non-guaranteed suppliers' credits, were consolidated into medium-term loans or partially converted into Turkish lira obligations. Following the resolution of the debt crisis, inflows were mostly from official sources - major creditors being the OECD countries, the World Bank and the IMF. Of the estimated total debt outstanding of $22.7 billion at end-1984, 81 percent constituted medium and long-term debt (including DMF). Short-term debt as a percentage of total debt outstanding fell from 51 percent in 1978 to about 11 percent in 1982, then increased to 14 percent in 1983 and to an estimated 18 percent in 1984. Much of this growth in the stock of short-term debt is due to the inflows associated with the Dresdner Bank scheme (para. 14). At end-1984 the outstanding liabilities associated with the Dresdner scheme are estimated to amount to $1.8 billion, which would represent about 45 percent of Turkey's short-term external obligations and 8 percent of its total outstanding debt. Based on the growth scenario outlined earlier, debt outstanding and disbursed as a percentage of CDP is projected to fall from an estimated 41 percent in 1984 to 32 percent in 1989. This translates into a total debt outstanding forecast for 1989 of $30.6 billion, with short-term debt constituting about 23 percent of that total. Dresdner scheme inflows are projected to be around $600 million per annum throughout this period and to account for a large part of the rise in the ratio of short-term debt to total debt outstanding. 24. The debt service ratio for medium and long-term credits (in relation to exports of goods and non-factor services and workers' remittances) increased from about 14.6 percent in 1981 to a peak of 28 percent in 1983 as a result of a large repayment of previously rescheduled debt under the earlier OECD agreements. Debt service obligations are likely to be high over the coming years and would average about $3.8 billion per year in 1985-89. However, the debt service ratio is seen to decrease from an estimated 25 percent in 1984 to 19.8 percent in 1989. The debt burden should remain manageable provided current policies are successfully implemented, the export drive is sustained, and Turkey continues to receive further support from international commercial and official sources. There have been encouraging  -9- signs of Turkey's ability to enter the market for commercial borrowings. From December 1983 to November 1984, Turkey had secured a little over $500 million from commercial credits, constituting about 23 percent of the total external credits received during this period. The Central Bank of Turkey recently completed the syndication of a $500 million multi-component medium-term (seven years) facility involving a large number of U.S., European, Japanese and Middle Eastern commercial banks as lead managers. 25. Turkey's economic program has been supported by the IMF through a series of standby arrangements. A three-year standby arrangement in an amount equivalent to SDR 1250 million was approved by the IMP's Board and became effective on June 18, 1980. The Government purchased the full amount authorized under the arrangement. The Government also purchased three-quarters of a SDR 225 million one-year standby arrangement which was approved by the IMP in April 1984 and replaced an earlier one-year arrangement terminated at the request of the Government. PART II - THE AGRICULTURAL SECTOR 26. While the relative importance of the acricultural sector in the economy is declining, it still represents about 18 percent of GDP, about a third of export earnings and about half of civilian employment. The growth rates of agricultural GDP and exports are projected to remain below those for the rest of the economy. Nevertheless, the agricultural sector will continue to play a significant role in meeting domestic food needs, sr,>plying industrial raw materials, and providing foreign exchange earnings and employment. 27. Turkish agriculture is diverse. Intensive crop cultivation is prevalent in the coastal regions which receive plentiful rainfall or are equipped with irrigation facilities. Mixed (crop and livestock) farming predominates in the eastern and central parts of the country where pastures and meadows form more than half of the agricultural land and crop production is dependent upon rainfall. In these areas much of the land is kept fallow in alternating years. While the livestock production system is largely traditional, dependent on grazing lands and low productivity systems of animal husbandry, it produces about one-third of agricultural CDP. Cereal crops cccupy about sixty-six percent of the cultivated area, fruits and vegetables about twenty percent, industrial crops about six percent, and oil seeds, pulses, and tubers the remaining seven percent. 28. Through the 1970s, Turkey's agricultural policies were inward-looking, stressing food self-sufficiency through subsidized inputs and producer prices. This led to relatively rapid growth of production through the first half of the 1970s, averaging 4.7 percent from 1972-75. However, with a deteriorating overall macroeconomic situation, these growth rates could not be maintained due in part to the strain placed upon the budget by the level of subsidization, and the competing demand for resources from the manufacturing sector. As a result of the overall economic crisis, growth in the sector slowed to'less than 1.5 percent per annum during the late 1970's. Ineffective public investment policies, weaknesses in technical services, and  - 10 - problems in marketing and credit also contributed to sluggish growth. During this period, sectoral exports remained a small fraction of total production (less than 1 percent of agricultural GDP in 1979) due to the overvalued exchange rate and other disincentives to export. 29. New Policies; As part of the structural adjustment program adopted by the Government in 1980, many of the incentives were abruptly dismantled, and more market-oriented policies were introduced. Input subsidies and production price supports were reduced and the overall restraint on monetary policy forced a curtailment of agricultural credit. Exports were encouraged through the introduction of a competitive exchange rate policy and other incentives. This shift in strategy initially resulted in considerable disarray in the sector: the growth of agricultural GDP in real terms fell to an average of only 0.9 percent in 1980 and 1981.11 In 1982 and 1983,11 however, real growth in agricultural GDP recovered to an average annual rate of 3.1 percent. During 1984 it reached 3.7 percent. Due to the adoption of a realistic exchange rate and relaxation of export licensing restrictions, agricultural exports increased by an annual average rate of 17.7 percent during 1980 and 1981. If agroindustries exports are included, the average annual rate of growth increases to 18.9 percent. In 1982 and 1983, while agricultural exports continued to grow in volume, the average annual rate of growth of the value of agricultural exports dropped sharply to only 1.2 percent, due to the decline in the prices of the main commodities. However, for agriculture and agroindustries combined, the average annual rate of export growth remained at a healthy 9.5 percent, indicating a significant switch from unprocessed to processed exports. 30. Prospects: The potential for Turkey's agricultural sector, over the -medium term, was examined in the recent agricultural sector study by the Bank_/ and updated with more recent data. The report stated that the possibilities for growth through expansion of the cropped area or of livestock numbers under a system of extensive grazing, were largely exhausted by the mid-1970s. Growth must now come primarily from increased productivity and changing the crop mixture to reflect better Turkey's comparative advantage. Increased productivity would require expansion in the irrigated area through improved efficiency of the implementing agencies (better planning, increased use of contractors), better extension and research programs, expanded imports of improved seeds and appropriate equipment, and increased availability of institutional credit (particularly for small and mediumr-scale farmers). 1/ In each case we are averaging one year each of above average and below average weather to produce an approximation of normal performance. Thus the difference between 80/81 and 82/83 is real, and not weather related. 21 Turkey - Report No.4204-TU, June 30, 1983, Agricultural Development Alternatives for Growth with Exports.  - 11 - 31. The demands of an export-oriented approach have led to a change of emphasis from food self-sufficiency to increased net agricultural contribution to the balance of trade. Thus imports of certain foods in which Turkey does not have a comparative advantage have been allowed. Increasing agricultural exports has involved appropriate pricing signals, maintenance of a competitive exchange rate, reduction of export regulations, and improved marketing. Other important issues in the sector include improved sectoral planning, continued progress in the reduction of subsidies, and reform of agricultural SEEs and marketing agencies. In parallel, general economic stabilization must continue to provide a foundation for uninterrupted sectoral growth. With continued progress on these issues and adherence to policies designed to encourage exports, agricultural GDP is expected to achieve a growth rate of about 3.0 percent annually during the remainder of the 1980s, and a growth of agricultural exports (excluding agroindustries) from 5-8 percent annually. 32. Recent Reforms: Under the structural adjustment program significant reforms have taken place affecting the agriculture sector. The share of agriculture in the public investment program has increased from 7 percent in 1980 to 10 percent in 1985, with greater emphasis on quickly gestating projects. Project completion rates have increased significantly. In the irrigation subsector, for example, as against only 18,000 ha of new irrigation put into operation by DSI in 1981, 86,000 ha were put into operation in 1984. Moreoever, several large projects, the economic viability of which had not been established, have been dropped, deferred, or substantially reduced in scope. The system of commodity support prices has been replaced by one of protective floor prices, and the number of affected commodities reduced from 25 to 13. These floor prices have been brought broadly in line with international prices. Livestock and grain exports have been liberalized. Plant protection subsidies have been eliminated and fertilizer subsidies reduced. The prices of seeds and agricultural machinery have been decontrolled, the restrictions on seed imports have been removed, and the time required for testing and registration of new seeds has been reduced. Irrigation water charges and agricultural interest rates have been increased. The Ministry of Agriculture, Forestry, and Rural Development (MAFRA) has been reorganized in order to substantially decentralize decision making, while merging the staff and facilities of overlapping field services. In addition, MAFRA's policy advisory and analysis unit (APK) has been given broader analysis and planning responsibilities, and serves as the "nerve center" for MAFRA. The proposed Agricultural Sector Adjustment Loan (ASAL) is designed to build on the progress already achieved and to assist in fostering continued progress in the structural reform of the agricultural sector. 33. Bank Experience with the Agricultural Sector: Bank group lending for the agricultural sector has totaled $1,034 million for 21 projects, of which 10 projects for about $727 million are still under implementation. About 25 percent of this lending has been for irrigation and drainage, 20 percent for agricultural credit, 10 percent for livestock and dairy projects and 10 percent for rural development, with the remainder going for grain storage, forestry, extension and research, and fruit and vegetable production. Completed projects have generally achieved their major objectives but have  - 12 - faced delays in implementation due in part to weaknesses in project nanagement and shortages of local funds. Recent PPAR's have focused on the problems of cost recovery under irrigation projects, inadequate extension and research support, periodic delays in the provision of local cost financing, and inadequate marketing arrangements. These issues are being addressed under projects currently under implementation. PART III - THE AGRICULTURAL SECTOR ADJUSTMENT PROGRAM 34. Background. The recently completed series of Structural Adjustment Loans from the Bank has helped to support a major economic restructuring program in Turkey. The principal aim of the program was to redirect the economy towards a development path placing greater reliance on market forces and outward orientation. Some impressive gains have been recorded in the last five years - export growth has been placed on a firmer basis, and a substantial measure of liberalization has been introduced in the management of the economy. But the.task of restructuring is by no means over, since the fundamental changes that are being attempted will take several years to complete. The objective of the Government in the next phase is to broaden and deepen the structural adjustment process, building on the progress already achieved, and carrying through to the sectoral and subsectoral level the approach that has been adopted in the area of macroeconomic policy. 35. The agricultural sector in Turkey has significant potential to contribute to the ongoing adjustment program. However, the sector is marked by structural and instituLional constraints and it requires greater priority and selectivity in resource allocation. The Government has recognized this and a program of reforms was launched in 1980 to reattain historical growth rates in the agricultural sector, under conditions of markedly reduced subsidization and greater exposure to market forces. The objectives of these reforms are to alter the commodity composition of output in favor of increased value-added (e.g. by allowing market forces to stimulate production of coummDdities for which Turkey has comparative advantage), intensify crop and animal production, expand exports, and induce efficient patterns of import substitution. Many reforms have already been introduced (para 32). The immediate priorities are to strengthen the input distribution systems (particularly for fertilizers) while reducing subsidization, improve the priority and selectivity of the investment program (particularly for irrigation which represents about two-thirds of agricultural public investment), increase the effectiveness of the technical services (agricultural extension and research), and improve sectoral planning. The Government's intentions in this regard are set forth in a Statement of Agricultural Sector Policies (Annex IV) embodied in the request for this loan. The Government's program, being supported under the proposed loan, is expected to result in a return to historical agricultural growth levels, but without the burden of subsidies previously required, combined with an incL..,ased contribution by the sector to exports in line with Turkey's comparative advantage.  - 13 - 36. The Government's ability to carry out the sectoral adjustment program has been strengthened substantially by the June 1984 decision to create the policy advisory and analysis unit (APK) within NAFRA with formal authority to (i) review the performance of government policies affecting agriculture; (ii) advise the core agencies (e.g. SPO) on agricultural price, subsidy and trade policies; and (iii) evaluate sector performance under Five-Year Plans and annual programs. APK's staff has been increased from about 5U technical and sectoral specialists to nearly 200. A program of technical assistance and material support bas been organized by FA0 to improve part of the agricultural data base and train APK's staff to use microcomputers for their analytical work. The proposed loan includes financing for further technical assistance and training to help APK install and use a computer model of Turkey's agricultural sector in its analytical work. A. Agricultural Inputs Distribution and Pricing (i) Fertilizer 37. Since the 1960's, the Government's policy has been to set uniform retail prices throughout the country in order to encourage the use of fertilizer. Since the early 1970's all fertilizer imports and wholesale distribution have been monopolized by two SEE's, with the Agricultural Supply Organization (TZDK) handling about 93 percent of distribution and with Turkish Sugar Factories (SEKER) supplying the remaining 7 percent (to meet the needs of sugar beet farmers). These two SEE's also handle 43 percent of retail distribution, with agricultural credit cooperatives (38 percent) and agricultural sales cooperatives (12 percent) handling most of the remainder. The domestic fertilizer industry has been protected through a system of administered ex-factory prices set above border equivalents to encourage production. With the support of two Bank-assisted Fertilizer Industry Rationalization and Energy Saving Projects, and improved availability of imported raw materials, domestic fertilizer production has increased to 60-70 percent of plant capacity. By the time of the completion of the Bank-financed rehabilitation program, capacity utilization and production will increase further. 38. These arrangements have been fairly effective to the extent that inorganic nutrients are nov widely used by Turkish farmers and are generally available throughout the country. However there is a need to improve the quality of the service provided to the farmers with regard to the range of products available and the provision of advisory services on fertilizer use. TZDK sees its role as being essentially logistical and tends therefore to limit distribution activities to a relatively small number of basic fertilizers already well known to farmers. It has no incentive to improve customers' satisfaction through the provision of a wider range of products or appropriate advice on soil or crop specific requirements for particular fertilizers. TZDK also lacks incentive to expand the number of retail outlets. Similarly, domestic manufacturers have up to the present been shielded from market forces since TZDK is their sole customer, automatically guaranteeing to purchase all production. Therefore, the farming community does not benefit fully from technological and scientific developments, nor  - 14 - from the kinds of soil/crop/nutrient advisory services which would be available under a more competitive distribution system. Finally, these arrangements have been expensive both in terms of the burden of subsidies on the budget and the inefficiency in the distribution system. 39. Fertilizer Pricing: Both the ex-factory prices of fertilizers and the retail prices paid by the farmers are determined by Government through semi-annual decrees. Until 1979, er-factory prices were determined by a negotiated cost-plus method for each fertilizer type. Beginning in 1980, and in line with the outward oriented policies of the Government, ex-factory pricing formulae were adopted which link domestic prices with reference c.i.f. import prices. Under these formulae, the gap between domestic prices and their border price equivalents has been effectively narrowed, and is targeted to close by 1988 when the factory rehabilitation program will be fully effective. Important refinements to the ex-factory pricing system were adopted in August 1984 when the ex-factory formula was expressed in US dollar terms for each fertilizer type, and the TL price received by manufacturers began to be adjusted monthly based on the prevailing exchange rate. Domestic manufacturers now operate with more certainty and are assured of adequate compensation for increases in costs of imported materials resulting from exchange rate fluctuations. The result is that today ex-factory prices are at about par with their border equivalents, with ratios ranging from 1.15 to 0.96. The industry has become reasonably competitive and moderate amounts of exports have recently been made. 40. Subsidies: The subsidization of fertilizer retail prices is the largest remaining source of subsidies to the agricultural sector. Retail prices are set by the Government on an ad hoc basis without any fixed formula. In 1980, and again in 1981, retail prices were dramatically increased (by a cumulative 500 percent in nominal terms), which abruptly reversed the previous pattern of growing subsidization. Further real increases in retail prices have taken place since 1981, and during 1984 retail prices were increased by 50 percent in real terms. After a further 20 percent increase (in TL terms) was made in February 1985, the current average retail subsidy was reduced to 45 percent of the c.i.f. spot price of the comparable product,11 compared with about 60 percent in 1983. An additional price increase, reducing the subsidy further, is expected in mid 1985. 41. Reforms Under the ASAL; To rationalize the fertilizer pricing and distribution system further, an action program is being initiated aimed at: (i) reestablishing competitive wholesale distribution networks (through the introduction of wholesaling by public and private sector fertilizer manufacturers and private traders) and expanding the retail distribution system through the introduction of private retailers; (ii) allowing private sector fertilizer imports; (iii) carrying out a comprehensive management improvement study for TZDK and an action plan to strengthen its capabilities; (iv) adjusting regulations governing credit eligibility to improve credit availability and avoid discrimination against private sector distributors; and (v) phasing out retail subsidies. I/ If comparisons were made against trend c.i.f. prices, the subsidy level would be somewhat lower, as c.i.f. prices are currently in a cyclical upswing. The above subsidy levels do not take account of the 10 percent value-added tax introduced in January 1985, which has further increased the prices paid by farmers for fertilizer.  - 15 - 42. The Government has indicated its intention to phase out the subsidy at the retail level by end-1988, in pursuance of the policy of reducing subsidies in a phased manner to avoid disruptions in agricultural production. Some elements of subsidy may be maintained, however, to cover: ti) transport to remote and sensitive low income ares, such as eastern Turkey; (ii) slightly higher ex-factoiry prices as compared to c.i.f. trend prices until the factory rehabilitation program is fully effective; and (iii) higher than normal distribution costs by TZDK until its operations are rationalized. 43. The Government intends to re-establish a competitive distribution system to promote efficiency and improve the service to farmers. This will be done through (i) encouraging participation in fertilizer distribution by fertilizer manufacturers and private traders at the wholesale level and improving the coverage of the retail network through the introduction of private sector retailers; (ii) improving TZDK's management structure and financial and operating capabilities in order to reduce the financial burden of its current stocking and distribution practices; (iii) further liberalizing imports to bring domestic fertilizer availability in line with cost-saving opportunities offered by the use of higher analysis fertilizers; and (iv) ensuring farmers have adequate access to credit for fertilizer under revised pricing and liberalized distribution arrangements. These reforms will be introduced in two phases. The first will last until December 31, 1988, while the retail subsidy is being phased out. The Government has indicated its intention to take action, beginning with the January 1986 semi-annual fertilizer pricing decree, to remove progressively the obstacles to fertilizer manufacturers and private sector companies engaging in fertilizer wholesaling and to private sector retailing. The Government also intends to adjust distribution financing arrangements to avoid discrimination against private sector retailers. During the second phase, following the phase out of the retail subsidy, imports by private traders and fertilizer manufacturers will be permitted, and a further reduction of Government regulation is intended, managed carefully to prevent inadvertent disruption of fertilizer supplies. 44. To support the implementation of this policy framework, a Fertilizer Monitoring Unit has been installed in APK. The unit will coordinate the introduction of fertilizer manufacturers and private traders into fertilizer distribution and the delineation of the marketing areas to be taken up by each distributor during the transition to competitive marketing. 45. Because TZDK will continue to have a role in the fertilizer subsector as a direct distributor to many remote areas, holder of buffer stocks, and distributor through agricultural cooperatives, action is needed to piimote cost-efficiency in its operations and to reduce the burden on the Government's budget. During 1985 and 1986, TZDK, assisted by internationally recruited consultants, would carry out a comprehensive management improvement study to redefine its role and prepare an action plan to improve efficiency on whatever tasks it will retain (Loan Agreement, Section 3.06 and Schedule 3, Section II). The proposed loan would include financing for these consultants and for overseas training of TZDK staff.  - 16 - 46. Financing/Credit Arrangements: The Government intends to take measures to make adequate amounts of credit available through the Agricultural Bank (TCZB) and the Credit Cooperatives to meet farmers' increasing credit requirements as the fertilizer subsidy is phased out, and to avoid discrimination in access to such credit or in credit terms between farmers purchasing fertilizer through TZDK and the Credit Cooperatives and those using alternative (new) channels. The fertilizer manufacturers, private distributors and, ultimately, TZDK and the cooperatives will be expected to fitiance distribution at commercial interest rates. (ii) Seeds 47. Current Status: The limited availability of high quality seeds has been a major constraint to increasing yields. Until last year the production, distribution and pricing of seeds were strictly regulated by Government. The private sector was confined to producing and marketing vegetable and alfalfa seeds at set government prices. Furthermore, seed imports were entirely at the discretion of the Minister of Agriculture_ The rationale for this public sector domination of the seed system was based on a perceived need to protect farmers. However the system failed to provide seeds in adequate quantity and quality, inhibited private sector involvement in seed production and distribution, and denied Turkish farmers access to the broad range of seed varieties available from international seed companies. 48. This situation changed dramatically in 1984, following a series of Government decrees which deregulated seed pricing, liberalized seed imports, and provided credit and other incentives for seed industry investments. Within a relatively short time new joint ventures with major international seed companies increased the number of private seed companies from only 3 to 12, and other firms are actively considering establishing operations in Turkey. However, the production of seeds for self-pollinated cereals, such as wheat and barley, is expected to remain largely within the public sector, since the private sector is expected to concentrate on the more profitable seed types (vegetables, hybrids, etc.).II To improve efficiency in the production of wheat and barley seeds, the Government in 1984 formed a new SEE, the Turkish Agricultural Enterprise (TIGEM), from budgeted line departments (including the former General Directorate of State Farms) which had cereal seed production responsibilities. This new SEE will be expected to operate on commercial principles and quickly become a self-sustaining entity. 49. The Government has indicated that its policy for the seed industry is that private seed companies should be preeminent in all seed multiplication, production and distribution, as well as for the research and breeding of cross-pollinated varieties. Government's role, through its parastatals and control directorates, would be limited to: (i) research and breeding of self-pollinated varieties; (ii) protecting quality control through 1/ Since farmers can easily reproduce self-pollinated seeds themselves, production of such seeds is unlikely to be of interest to the private sector firms.  - 17 - phytosanitary and certification regulation; (iii) protection of breeders' rights; and (iv) promoting coordination and cooperation between the private and public sector segments of the seeds industry. To complete the restructuring of the industry, the Government intends duriig 1985 to: (i) submit a revised seeds law for legislative approval, consolidating the reforms of the existing law contained in subsequent decrees and regulations and embracing the revised policy and regulatory framework; (ii) develop a National Seed Industry Development Plan; and (iii) encourage formation of an industry level seed industry association to advise on seed policy and coordinate development of t.ie industry. Since TIGEM will remain an important seed producer and distributor within the new system, consultants would be employed to assist the Government in establishing an appropriate management improvement action program for it (Loan Agreement, Section 3.06 and Schedule 3, Section II). The consultants would also assist in clarifying the roles of TIGEM and TZDK in seed distribution. In parallel, the Government intends during 1985 for TIGEM to improve the existing system of contract seed growers, and to turn over multiplication of self-pollinated varieties to fully commercialized certified seed growers. 0. The Agricultural Sector Investment Program 50. The Government has increased the share of agriculture in its public investment program to 10 percent, and intends to maintain it at a minimum of about 10 percent over the next 5 years, with the concentration on completing essential irrigation works, improving technical services (extension and research) and providing rural infrastructure for the least developed provinces. The government also intends to improve the overall planning and programming of agricultural public expenditure and to strengthen the project selection, monitoring and evaluation capacity of MAFRA's APK. For this purpose APK has been given general authority to review agricultural programs and plans. This is expected to involve the establishment of systematic criteria for determining program and regional priorities, detailed screening of all large on-going projects as well as new projects, and the monitoring of performance in program implementation in order to provide recommendations to Government concerning the programming of agricultural sector investment. (i) Irrigation 51. Irrigation investment represents about 65 percent of the public sector agricultural investment program and has been a major factor in increasing and stabilizing agricultural production. While less than 15 percent of arable land is irrigated, roughly 40 percent of all plant output and about 25 percent of agricultural exports are grown under irrigation. In many respects, however, irrigated agriculture has performed considerably below its capacity. Newly developed irrigation projects have often failed to meet expected yield increases, double cropping and the adoption of higher-valued crops due to the (i) lack of adequate drainage works leading to water logging and salinity; (ii) reluctance of farmers to take the risk of more costly inputs associated with changing cropping patterns under irrigation; (iii) lack of adequate extension and cropping systems research; (iv) lag in on-farm development works; and (v) inadequate maintenance of some completed works.  - 18 - The increase in irrigated crop areas has, therefore, lagged significantly behind the expansion of irrigation infrastructure. The underutilization of this infrastructure, built at comparatively high costs results in a large lose to the economy. 52. The irrigated area varies considerably from year to year, since wheat is not usually irrigated in years of adequate rainfall. The maxinm= area under irrigation in recent years is estimated at about 4.3 million hectares (out of 28 million ha of arable land) and much of this ares is inadequately operated with low water efficiency and less than optimal yields. The Government has estimated, based on technical criteria only, that an additional 4.4 million ha could be irrigated. However, this estimate Was not based on economic criteria, and it is likely that only a smaller area could be developed economically. The highest potential for increasing irrigated production in the near future lies in (i) concentrating resources o0 completing projects near to completion; (ii) providing drainage and on-farm works in areas where major irrigation facilities have been completed; (iii) improving the maintenance of completed works; and (iv) developing effective extension services able to introduce appropriate irrigation techniques to first time users (and to farmers currently using inappropriate methods and cropping patterns). 53. Two public agencies are responsible for the construction of irrigation facilities. The General Directorate of State Hydraulic Works (DSI) of the Ministry of Power and Natural Resources is responsible for the construction of the basic irrigation infrastructure for large-scale projects. The General Directorate of Rural Services (GDRS) of MAFRA is responsible for the construction of on-farm development works on large-scale irrigation projects and the development of small-scale projects. These agencies have not been able to contribute fully to agricultural productivity increases because of budget constraints, attempts to work on too mmy projects, excessive reliance upon force account work, inadequate coordination between the two agencies in project design and implementation, and poor supporting services, resulting in slow project completion and limited agricultural benefits. 54. Irrigation investment levels have remained about constant in real terms, except for 1985 for which progranmed investment was increased significantly. The DSI investment program has averaged about twice that of GDRS. Since 1980, when DSI resources were spread thinly over 142 projects, considerable progress has been made in concentrating resources on a smaller number of projects. As a result, the new irrigation area put-into operation each year by DSI has increased from 18,000 ha in 1981 to 86,000 ha in 1984. However, GDRS has recently been able to complete only 10-12,000 ha per year of on-farm development, bringing the backlog of work for on-farm development on completed DSI schemes to over 300,000 ha. This ever-increasing backlog between irrigation infrastructure development by DSI and GDRS' on-farm development works represents a major misallocation of public resources for irrigation investment. 55. The problems referred to in paras 51 - 54 above are recognized by the Goverunent, which has agreed to carry out an Irrigation Development Study and formulate a 10-year Irrigation Development Master Plan (1986-1995) using funds  - 19 - made available under the IAEE Irrigation Project (Loan 2433-TU). The Master Plan would be based on a detailed project-by-project inventory and an assessment of existing and projected irrigation and on-farm development investments and financial and implementation constraints. It would detail the issues and targets to be reached including additional works required, cost and timing, arrangements for sustainability of irrigation works and cost recovery improvement. In parallel, and with financing from the Bank-assisted Agricultural Extension and Applied Research Project (Loan 2405-TU), the Government is also implementing a program to improve agricultural extension, with priority for irrigated areas. 56. During the next few years when Turkey will continue to face severe limitations on domestic and foreign financial resources, it is essential to concentrate available resources on projects which can be brought into production most quickly and for which the incremental investment in completion would result in high economic returns. Therefore, the Government intends to reorient its irrigation investment program to concentrate resources on expenditures aiming to achieve further utilization of completed or ongoing major projects. With the exception of a few new project starts having quick gestation and high ERRs (say 15% or higher), only essential headworks on ongoing schemes will be financed, while the bulk of annual expenditures will be reoriented towards (i) overcoming the backlog of drainage and on-farm works on 63 ongoing or coi.pleted DSI projects; and (ii) improving the level of maintenance on all completed projects; and (iii) providing reclamation of saline land. 57. While irrigation cost recovery has been a problem, significant progress is being made on this issue. Under the TAEE Irrigation Project (Loan 2433-TU), the Government agreed to (i) adjust DSI capital recovery charges under existing legislation to include interest, (ii) progressively increase DSI O&M charges to achieve 100 percent recovery of the preceeding year's costs by 1986, and (iii) increase penalties for delinquent payment. It was further agreed that action would be taken to permit GDRS to recover its capital costs for on-farm works. Considerable progress has been made to implement these agreements. DSI's O&M assessments were increased by 275 percent in real terms in 1984 over 1978 levels. As a result the percentage of O&H costs recovered was 54.4 percent, compared with a mere 14.7 percent in 1980. Beginning in 1983, the Government also adopted a much stiffer schedule of penalties for late payment. Under the new rules, if payment is late by one year, a total penalty is levied equal to 46 percent of the initial assessment. Before 1983. the penalty was a flat 10 percent. The Government has also recently enacted legislation in accordance with the IAEE agreement permitting QbRS for the first time to collect water charges to recover costs on its irrigation investments. 58. A Core Program for Irrigation and Drainage Investments would be carried out (Loan Agreement, Section 3.01) to bring about adequate drainage in the command area of DSI's ongoing and completed projects, the completion of highest priority on-farm works, and the provision of adequate O&M to insure the optimum utilization of the command area. Allocations for Core Program investments will average about 35 percent of the irrigation/drainage investment program, as compared to less than 10 percent at present. Specific  - 20 - works to be completed under this program would be selected in accordance with criteria agreed with the Bank. The estimated cost of the program (in 1985 prices) is about $932 million. Sufficient funds are available in the 1985 investment program to increase GDRS' program to cover 50,000 ha/year of on-farm development works. The Government intends to increase funding levels beginning in 1986 to permit GDRS to complete 100,000 ha/year of such works. This would also be facilitated by increased reliance on contract construction work. For this purpose arrangements would be made to permit DSI and GDRS to provide equipment to contractors on a reimbursable basis. In order to supplement current staff capacity for implementing this program, the proposed loan would finance internationally recruited engineering consultants to assist in operational programming, scheduling and design of approved works in the Core Program, and in monitoring their implementation. In view of the complexity of the task, the proposed loan would also finance consultants to review the economic, agricultural, and engineering work of the consulting engineering firms. To assist DSI in implementing its portion of the Core Program (excavation of surface drains over an area of about 125,000 ha, rehabilitation of surface drains over an area of about 250,000 ha, and subsequent maintenance through improved OW), the proposed loan would also finance a portion of the machinery and equipment imports needed for the rehabilitation and maintenance of surface drains. 59. DSI Funding Priorities: Although increased emphasis should be placed upon completing on-farm works, the construction of headworks for selected priority investments should continue. Under the indicative investment program reviewed by the Bank, it is expected that DSI would be able to complete irrigation infrastructure for about 475,000 ha of new lands during the next five to six years. The Government intends, during 1986, to review all ongoing DSI projects in accordance with the current criteria for screening new projects, based upon economic and technical viability. The engineering and reviewing consultants (para 58) would also assist DSI in this task. The findings of this review would be furnished to the Bank by June 1986, to be followed by an exchange of views on the proposed 1987 irrigation investment and recurrent expenditure program (Loan Agreement, Section 3.02). 60. The proposed loan would also finance the services of consultants to prepare and assist in the implementation of in-service and formal training progrsms for DSI/GDRS engineering, design and evaluation staff, including an overseas training program. C - Technical Support Services (Extension and Research) 61. A major share of Turkey's future agricultural growth potential can only be achieved through improvements in the generation of technological packages adapted to meet the specific needs of the various regions of Turkey and in the flow of information on improved technology to Turkey's farmers. The results of Bank-supported projects, particularly dhe Corum-Cankiri Rural Development Project (Loan 1130-TU) have demonstrated the potential of improved extension methods to bring about increased yields through intensified cultivation practices and improved crop rotation patterns. Based upon these successes, the Government has decided to adopt in a phased manner the Training and Visit (T & V) extension system as its nationwide extension system.  - 21 - 62. Agricultural research in Turkey is fragmented among some 90 research institutes and stations in various departments and agencies. Professional staff are inadequately trained in research methodology with some 85 percent of those in the crops research institutes having only the equivalent of a Bachelors degree. The difficulties in research planning and coordination which arise from this fragmentation are compounded by a lack of clearly formulated priorities at the national level and limited capacity in the State Planning Office or MAFRA for sectoral planning. This has led to duplication of the research effort and dilution of scarce research manpower and financial resources. The Government has attempted to correct this situation through the creation of multi-agency research teams focussed on specific research projects. This approach has been successful in some cases and represents a clear step forward, but problems of coordination and duplication still persist. In order to address these problems HAFRA, in March 1984, established a ministerial working group to develop medium-term plans for reorganizing and consolidating agricultural research activities and for setting research priorities. Consultants assistance for this review, under agreed terms of reference, would be financed under the proposed loan. The Government would review with the Bank by May 31, 1986 these plans together with an action plan for adopting reforms in research programming and organization (Loan Agreement, Section 3.09). 63. The effectiveness of the extension services has been constrained by a number of ractors. Weaknesses in the general extension service have led to the proliferation of services covering irrigation, plant protection, livestock, and various crop specific programs. The centralized control of budgets and work programming has discouraged inter-agency coordination in the field, and has resulted in excessive bureaucracy. Administrative matters occupy a disproportionately large share of the time of the extension agents, while work programs for actual extension work have not been sufficiently specific. Their activities have concentrated on a few commodity-specific actions while the more general aspects of extension, including advice on farm management and answers to particular problems faced by farmers outside these commodity-specific projects, have not benefited from an organized structure of technical support. The links between extension and research services have been weak. Finally, the location of most technicians in county offices and the limited availability of transportation has resulted in an over-concentration of activities in the more accessible villages and the neglect of the remainder. 64. The Government has become increasingly aware of the present shortcomings in the provision of agricultural extension and research services. The Agricultural Extension and Applied Research Project (Loan 2405-TU) supports the first phase of the Government's efforts to reform these systems in sixteen provin=es through the introduction of the T & V extension system and improved links between extension and research. The Government intends to review the performance of these systems by the end of 1986, make modifications as necessary, and then formulate programs for phasing them in ou a nation-wide basis.  - 22 - 65. MAKRA Reorganization. A major initiative was announced by Government on June 8, 1984, to reorganize and consolidate the main service departments of MAFRA, broade. the Ministry's responsibilities for the planning and management of agricultural sector policies, and to decentralize and regionalize program formulation and execution, including the pooling of facilities, staff, equipment and budgeting for MAFRA's diverse field services. MAFRA was given a year to implement the reorganization, and issue the related by-laws and ministerial instructions. Staff reassignments are underway and the new operational and budgeting procedures are being put into effect. The Government intends to complete its consolidation of MAFRA's research and extension activities at the provincial level during 1985 and to begin joint programming and budgeting in 1986. MAFRA also intends during 1985 to issue directives clarifying arrangements for the provision of central technical leadership and coordination for extension and research activities under the new decentralized management arrangements, and to appoint national level coordinators for its research and extension programs. 66. In the context of this program, MAFRA would establish on a pilot basis, in the 16 provinces covered under the Agricultural Extension and Applied Research Project (Loan 2405-TU), improved communications and management information systems required to manage decentralized technical services and to monitor program performance (Loan Agreement, Section 3.05). The proposed loan would finance consultants' services and software requirements for the creation of the automated management information system, accounting and record keeping, and the establishment of computerized data banks at regional and central levels, and for the training of staff to operate the new systems (Loan Agreement, Schedule 3, Section II}. D - Other Agricultural Policies (i) Pricing and Trade 67. A near total liberalization of agricultural commodity exports and commodity and input imports has occurred since 1980. For a few specialized export commodities (tobacco, tea, hazelnuts) which are Turkey's traditional export crops, the supply response to price incentives has been inelastic due to agroclimatic and technical constraints preventing further expansion. For these crops price supports are established only to provide remunerative incomes so that production targets are fulfilled. The resulting difference between export receipts and farm-gate prices is captured through export levies, earmarked for agricultural development expenditure. The Government intends to continue to review the efficacy of this levy system. The Government has also eliminated quantitative restrictions and reduced tariffs on imports of agricultural machinery. Prices of agricultural machinery were decontrolled in 1984 and are currently below European prices for equivalent models of tractors and equipment. Measures to be undertaken for removing the main remaining import restrictions, affecting fertilizer and seeds, were described in paras 43, 44, 48 and 49 above. 68. Since 1980, the number of agricultural commodities for which the Government establishes purchase pricea for its agencies has been reduced from 25 products to 13. In 1984 the Government formally shiftetd from support  - 23 - prices to floor prices (although substantial progress in this direction had already been made in the previous three years). Prices for almost all of Turkey's crops are now roughly in line with international price parities. What remains to be done is to develop a methodology for continuous analysis of domestic pricing policy in the context of domestic and international prices. APK is expecting to complete the preparation of such a methodology and to begin implementation by early 1986. An exception is sugar which continues to be supported at prices above international levels in view of the supplemental cash income sugar beets provide to a wide range of producers and in view of the concerns of policy makers regarding excessive dependence on the volatile world sugar market. The Government intends to continue to review the efficacy of current floor pricing policies and import restrictions for sugar. (ii) Agricultural Credit 69. The agricultural credit system in Turkey is divided between an organized sector, which provides both production and term credit on concessional terms, and an unorganized sector, the activities of which largely consist of short-term liquidity advances at high rates of interest. The latter take the form of loans from money lenders al' merchants and advances for the purchase of farm products. Little is known about the informal sector except that it is pervasive and diverse, funds are disbursed quickly, interest rates are high, and arrears are few. 70. Over 95 percent of institutioaal agricultural credit is provided by or through the Government-owned Agricultural Bank of Turkey (TCZB). TCZB (which dates from Ottoman times) has the largest volume of deposits of any Bank in Turkey. It provides credit for farm production and investment, farm input distribution, the export of agricultural commodities and for agro-industries. It also provides a full range of banking services to various commercial and manufacturing entities both in Turkey and abroad, and handles all governmental transactions in nearly half of the country's administrative districts. TCZB's recovery rates on loans to farmers varied from 64-83 percent over the years 1981-83. 71. The agricultural credit cooperatives receive about 10 percent of TCZB's agricultural loans. The system currently includes close to 2,500 cooperatives with 1.5 million members and serves about 40 percent of the farm households in Turkey. The cooperative system is one of the few financial insticutions operating at the grass roots level and taking an active role in small farmer financing. The credit cooperatives finance their lending operacions almost entirely from funds borrowed from TCZB while using their membership dues to cover operating expenses. The cooperatives' rate of repayment on their loans from TCZB has been 100 percent. The credit cooperatives need strengthening through the training of staff, augnentation of their financial resources, deployment of professional managers, and installation of sound financial management practices. The Gover,ment has agreed under Loan 2318-TU (Second Agricultural Credit) to commission a study to develop measures to increase the effectiveness of the credit cooperative  - 24 - system, including in particular an examination of the feasibility of deposit collection by the credit cooperatives in rural areas. Consultants have been invited to submit proposals for this study. 72. Turkey has followed a policy of providing agricultural credit at preferential rates, which until recently have been significantly below the rate of inflation. This policy has led to a drain on Government resources and may have contributed to unduly high interest rates for non-preferential lending. Under the system of credit rationing necessitated by subsidized interest rates, larger farmers have obtained most of the available credit, while smaller farmers have had to make do with the remainder, plus informal credit at much higher interest rates. While about 3/4 of Turkey's farmers participate in the formal credit system, average production credit averages only about 14 percent of the material costs of production. Additional credit is provided indirectly through the financing of inventory costs and other services of sales cooperatives and agriculural SEE's. The system has also caused financial problems for TCZB which has had to balance a negative spread between its time deposit rates and its agricultural interest rates, with its earnings on commercial lending and the funds deposited by Government. The Government stated its intention under the Fourth Structural Adjustment Loan (Loan 2321-TU) to raise all preferential interest rates to positive real levels by the end of 1984. While significant progress has been made toward this goal, the difficulties in reducing inflation have turned out to be greater than anticipated. The basic agricultural interest rate, wbich was 20 percent in December 1983, has been increased progressively to reach 30 percent in early 1984 (34 percent for fertilizer loans). Taxes and fees add an additional amount of about 4 percent to the effective cost of credit. During the discussions with Government on the release of the second tranche of SAL V (Loan 2441-TU), a revised target has been agreed for reaching positive real interest rates, namely by the end of 1986. Satisfactory progress in achieving this goal would be one of the conditions of the release of the second tranche of the proposed loan (Loan Agreement, Schedule 5). 73. Progress is underway under an Action Plan agreed under Loan 2318-TU to institute reforms in TCZB's organization and operations. These reforms include increased delegation of decision-making authority from Ankara to the regions and branches, improved supervision of the branches, reduction in paper-work and streamlining of procedures, improvements in accounting, auditing and management information systems, and development of a staff training program. While TCZB's agricultural credit guidelines are generally satisfactory in theory, the Action Plan includes training in their implementation so that branch managers may apply improved eligibility criteria designed to improve access to credit by small and medium scale farmers. While some aspects of the Action Plan have fallen somewhat behind schedule, overall progress is generally satisfactory. 74. The most important remaining issue in the agricultural credit field is the need to increase resources available for lending from the formal credit system. The credit funds currently available cover only a small portion of the costs of material production inputs and this would be further decreased with the expected reduction in the subsidization of fertilizer retail prices. Increased credit is also desirable to support the planned increase in  - 25 - agricultural production and to increase the share of institutional credit to total credit requirements. As noted in para 46, the Government has indicated its intention, as the burden of the fertilizer subsidy on the budget is reduced, to increase resources available for agricultural credit to compensate for the increase in fertilizer prices. (iii) Reforms of State Economic Enterprises and Sales Cooperatives 75. There are currently eight agricultural SEEs formed to promote the production and internal marketing of agricultural inputs and products as well as to provide essential commodities (e.g. wheat) to urban consumers. The agricultural SEEs cover a wide range of commodities and enjoy varying degrees of market power. SEKER operates all Turkey's sugar factories-], distributes fertilizer and seeds to sugar farmers, and purchases beet sugar from farmers on a contractual basis. CAYKUR had until 1984 a virtual monopoly in tea processing for the domestic and export markets, but this field has now been opened up to private sector competition. EBK slaughters cattle and sheep, supplying about 25 percent of domestic meat demand (mostly for Government agencies) and some exports. TSEK purchases milk from farmers and sells it, mainly in the form of cheese and yoghurt, mostly to Government agencies. It handles less than 20 percent of the market. YEMSAN produces about 40 percent of Turkey's commercial livestock feed. TMO purchases and provides storage for 10 - 15 percent of Turkey's marketed grain. TIGEM provides certified seeds and breeding animals (see paras 48 and 49) while TZDK distributes 90 percent of Turkey's fertilizer and considerably smaller proportions of machinery and other agricultural inputs. 76. Taken as a group, the eight agricultural SEEs control about 25 percent of agricultural value-added. While the situation varies from enterprise to enterprise, the SEEs have been operating at less than optimal efficiency. Most are not in sound financial condition. Reforms to agricultural SEE organization, pricing and financing are being implemented in the context of Government's overall SEE reform policies, based on a June 1984 decree. Half of the Boards of Directors now consist of officers of the enterprises rather than ministerial appointees. Furthermore, SEEs have (with certain limitations) been allowed to set prices (which previously had been set by Government decree). Finally, SEEs are now free to pay employee bonuses in order to encourage greater efficiency. Laws of January 1984 (2974) and April 1984 (2983) provided for the consolidation of inter-SEE debt and established a legal framework permitting the privatization of SEEs without parliamentary action. A new basic statute for each SEE was issued in the fall of 1984, incorporating the provisions of the new legislation. 77. The Government has indicated its intention, in public policy statements, to privatize state-owned enterprises wherever appropriate. Privatization embraces different forms of private sector participation, including joint ventures, mergers, leasing, and management contracts, as well as the outright sale of assets to the private sector. The High Level Council of Restructuring and Development is coordinating this effort, under the aegis 1/ Including operating a few factories which are privately owned.  - 26 - of the Office of the Public Participation Fund (OPPF) with technical support from the Bank. The Government also intends to take measures to strengthen and improve the efficiency of those SEE's which remain in the public sector. To this end, under the proposed loan, management improvement action plans for TZDK and TIGE would be developed with the assistance of internationally recruited consultants (paras 45 and 49). Technical assistance is also being provided to SEKER and THO under ongoing Bank loans_/ to strengthen their planning and management, and engineering capabilities. 78. The sales cooperatives, while ostensibly independent, have acted in effect as SEE's. These cooperatives were intended to act as intermediaries for the price stabilization program, using funds borrowed from Government sources to purchase crops from farmers at the floor price and then selling the crops domestically and abroad. The sales cooperatives also provide credit to farmers as an inducement to sell their crops to the cooperatives. These cooperatives have operated in an inefficient fashion and have frequently diverted funds from the profits on sales and the non-payment of loans to support the investment and operating costs of diverse manufacturing activities. As a result, the Central Bank has regularly had to write off substantial amounts for arrears of the sales cooperatives. The Government has already taken some actions to reform the sales cooperatives, including increasing the cost of their borrowing to an interest rate of about 50 percent. The proposed loan includes financing for a study by internationally recruited consultants to prepare a program for improving the efficiency of the sales cooperatives and enabling them to operate in a financially autonomous manner (Loan Agreement, Schedule 3, Section II). PART IV - THE PROPOSED LOAN 79. The proposed loan is intended to be the first of several of sectoral adjustment loans designed to support the Government's efforts to broaden and Ceepen the structural adjustment process through reform programs in key sectors. The main elements of Turkey's agricultural sector reform program have been described in Part III of this report. A letter from the Deputy Prime Minister dated May 21, 1985 attaching a Statement of Agricultural Sector Policies sets out the main elements in the program. (See Annex IV). Preliminary discussions on the possible content of the agricultural reform program were held with the Government in April 1984 and the proposed loan was appraised in December 1984 and February 1985. Negotiations were held in Ankara in May 1985. The Government delegation was headed by Mr. Yener Dincmen, Deputy Undersecretary ef the Undersecretariat for Treasury and Foreign trade. 80. The proposed US$300 million loan would be disbursed over a two-year period (mid-1985 to mid-1987) in two tranches to finance part of a three-year slice (1985-1987) of the Government's imported inputs and public investment and technical assistance programs for the agricultural sector. After completion of disbursements of the first tranche amounting to US$200 million, 1/ Loan 1998-TU (State Industrial Enterprises) and Loan 1742-TU (Grain Storage.  - 27 - further withdrawals (other than for ongoing technical assistance and training programs) would be subject to a progress review (Loan Agreement, Schedule 1, pcra 4 and Schedule 5) expected about May 1986. The agricultural inputs, equipment, technical assistance and training programs to be financed under the proposed loan have been selected because of their relevance to the Government's sectoral production and reform objectives. 81. The components of the proposed loan would be as follows: Agricultural Inputs Pricing and Distribution (a) Fertilizer. Implementation of an action program to phase out the remaining retail subsidy, establish a competitive wholesale distribution network, expand the retail distribution system through increased use of private retailers, and revise distribution credit regulations (paras 41-46); (b) Seeds. Implementation of actions to revise and implement the relevant seed laws and decrees with a view to improving seed selection, handling and pricing, and to encourage commercial seeds production (paras 48 and 49); Irrigation/Drainage Investment Program Application of agreed investment criteria to all new and ongoing irrigation subsector projects, improved programming and coordination, and implementation of an agreed Core Program to focus irrigation subsector investment on the completion of drainage works, on-farm development and improved O&M for completed schemes (paras 56-60); Technical Support Services Implementation of arrangements to decentralize and consolidate the budgeting and operation of research and extension, and appointment of national level research and extension coordinators (paras 61-66); and Sector Planning and Monitoring Strengthening APK to improve sectoral policy formation, performance monitoring, and planning and monitoring of agricultural recurrent and investment expenditure (paras 36 and 50). 82. The proposed loan would finance a portion of the imported inputs, capital goods, training and consulting services needed to support the above comwonents of the sectoral adjustment program. Financing would be provided for: (i) Fertilizer: $152.4 million of fertilizer imports during 1985-1987, and overseas training and technical assistance for YAFRA's Fertilizer Distribution Monitoring Unit (FMU) and TZIK;  - 28 - (ii) Seeds: $20.0 million of imported seeds (to be distributed by TIGEM, TZDK, and TMO), $5.4 million of seed production equipment, and technical assistance and training for TIGEM; (iii) Irrigation/Drainage: $111.0 million of O&M equipment, and training and consultants services;l/ (iv) Technical Support Services: Technical assistance to improve the _ identification and prioritization of agricultural resear-h programs, and $2.7 million of equipment for an automated management information system for MAFRA, plus technical assistance and staff training for setting up the system; and (v) Sector Planning and Monitoring: Overseas training and technical assistance for APK. In total the proposed loan would include $6.2 million to finance the technical assistance services listed above and $2.3 million for the training programs. Procurement, Disbursement and Administration 83. Except for about $2.7 million of computer hardware and software and peripheral equipment (to be procured through limited international tendering on the basis of quotations from at least three eligible suppliers), all goods and equipment would be procured through international competitive bidding (ICB) (about $289 million equivalent). All bidding packages exceeding $5 million equivalent would be subject to the Bank's prior review. Consultants would be selected in accordance with the Bank's guidelines, and training programs would require the Bank's prior approval. 84. Disbursements would be made on the basis of 100 percent of the CIF cost of imported goods or, in the case of locally-manufactured equipment procured through ICB, 100 percent of the ex-factory cost; 100 percent of expenditures f or overseas training; and 100 percent of foreign expenditures for foreign consultants and 90 percent of total expenditures for local consultants. In order to avoid discrimination with respect to consultants contracts awarded through international selection procedures, the disbursement percentage for local consultants has been calculated to be approximately equivalent to the percentage resulting from covering the foreign exchange costs of foreign consultancy contracts. Disbvrrsements would normally be made 1/ The irrigation/drainage equipment financed under this loan would be for OEM. The consultants services would assist with programs for drainage, improved maintenance of existing works, and land reclamation (increasing water use efficiency and reducing soil erosion) in areas where major works have already been completed or are close to completion, and overall irrigation sector planning and programing. These activities would not have appreciable adverse effects on the quantity or quality of water received by dowwstream riparians.  - 29 - against full documentation. In order to ensure that Turkey would have ready access to foreign exchange, a Special Account would be estaL'lished in the Central Bank of Turkey to which the IBRD would make an initial deposit of $50 million. The Special Account would be replenished against withdrawals at monthly intervals or as appropriate when the undisbursed balance of the account falls below $25 million. Imports would be made directly by the beneficiary agencies. The loan is expected to be fully disbursed by June 30, 1987, and the Closing Date has been set at December 31, 1987. Monitoring and Reporting 85. The Government has agreed to assign qualified staff to be responsible for programming, coordination, monitoring, and evaluation of activities under the sectoral adjustment program, in accordance with work programs acceptable to the Bank (Loan Agreement, Section 3.08). APK is expected to be responsible for monitoring and progress reporting under the proposed loan, including in particular preparation of a report prior to the tranche review and preparation of the completion report. It would be assisted inter alia by the Fertilizer Monitoring Unit with regard to the fertilizer aspects. 86. Aside from ongoing contracts for technical assistance and training, disbursements beyond US$200 mil'ion equivalent (Loan Agreement, Schedule 1, para 4 and Schedule 5) would be based upon satisfactory progress in implementation of the sectoral adjustment program, with special emphasis on progress on the following issues: (a) phasing out the retail fertilizer subsidy; (b) opening up fertilizer distribution to fertilizer manufacturers and private sector wholesalers and retailers; (c) formulation of an action program for TZDK management improvement; (d) implementation of the Core Program for irrigation/drainage investment; and (e) achieving positive real interest rates in the agricultural sector. The tranche review is expected to take place about June 1986. Prior to the tranche review, the Government is expected to have procured about half of the provision under the loan for fertilizer and seeds, plus the full allocation for irrigation O&M equipment needed for the 1986 construction season for urgent work in unclogging drainage canals. 87. The Treasury would supervise the maintenance of separate accounts for the loan and would prepare detailed statements of expenditures during each half-year period. In addition, an annual audit would be carried out and submitted to the Bank within nine months of the end of each fiscal year (Loan Agreement, Section 3.10). Benefits and Risks 88. The appropriateness of agricultural sector adjustment lending for Turkey at this juncture is grounded in the combination of (i) the excellent performance potential for Turkish agriculture; (ii) Government's resolve to strengthen at the sectoral level the policy and institutional reforms needed  - 30 - for the export led growth strategy and economic stabilization and liberalization policies; (iii) Government's past actions and current initiatives to revise agricultural policies at the macro and sectoral levels to conform with the requisites of the structural adjustment program; (iv) the package of ASAL reforms, which would enhance current efforts to revitalize public institutions serving agriculture; (v) the gradual withdrawal of direct intervention in production, marketing and input supply activities which could be more effectively carried out by private initiative; and (vi) the continued need for supplemental foreign exchange resources in 1985-87 to finance imports critical for sustaining primary production and sectoral investment. The reforms agreed under the proposed loan would also foster a more efficient allocation of scarce public investment resources and improvements in sectoral economic and financing policies. These measures are expected to lead to more rapid agricultural sector growth and an increased contribution of the sector to exports in line with Turkey's comparative advantage, while reducing the burden of subsidies on the Government budget. 89. The performance prospects for Turkish agriculture are excellent. Through growth and increased specialization. agriculture can contribute substantially both to the export drive and to a more productive absorption of Turkey's rural labor force. These possibilities were examined in the recent agricultural sector study.11 A quantitative model was constructed to assess the impact of public investment, technology, price and trade policies under the sectoral reform program. The results suggest medium term value-added growth prospects for Turkish agriculture of about 3 percent per annum. This would be accompanied by an increase in net farm income of 2.8 percent per annum and a 1.5 percent increase in agricultural employment. Total fertilizer demand over the period would increase by about 40 percent (N and P nutrient equivalents) assuming no consumer subsidy. However, these prospects are sensitive to the pace of three major variables: (i) trade policy - needed to keep agricultural exports profitable; (ii) irrigation development - to expand the scope for agricultural intensification, especially in areas where infrastructure has been completed but where on-farm development lags; and Ciii) applied agricultural research and extension - to augment the availability of improved technical packages and to accellerate the introduction of export crops and adoption of intensive cropping patterns. 90. The model confirms the minimal effect on value added growth from phasing out the fertilizer subsidy. While the economically optimum level of fertilizer application on a given crop will decrease, the value-cost ratios would still provide sufficient incentives to sustain high levels of fertilizer consumption. While the fertilizer subsidy is currently equivalent in value to 7 percent of gross crop production, the elimination of the subsidy would reduce production by less than 2 percent, since the overall levels of fertilizer application are already high and in many cases excessive. In addition, charging economic prices for fertilizer is expected to shift 1/ Turkey - Agricultural Development Alternatives for Growth with Exports (Report No. 4204-TU, June 30, 1983), updated by the Appraisal Mission.  - 31 - cropping patterns, yielding increased intensification, somewhat higher export growth, and a significant increase in the growth of agricultural employment (1.5 percent per year compared with 0.7 percent with current pri:es). Futhermore, if even a portion of the savings from reduced subsidization can be devoted to increased agricultural investment (particularly in irrigation and technical services) the effects of the reduction in fertilizer use would be more than overcome. 91. The main risks in this reform program arise from possible disruptive effects on agricultural production when these reforms are first introduced, in particular the shock effect of reducing subsidization by increasing retail fertilizer prices to border price levels. The possibility of a major shock effect is, however, considered slight, since the phase-out of the fertilizer subsidy would proceed at a slower pace than occurred in 1980-81 and again in 1984, when retail price increases had only minimal negative impact on fertilizer consumption and crop production. Increasing financial requirements to maintain the fertilizer subsidy at its current level would, on the other hand, impose a growing and unsustainable burden on Government's resources and jeopardize the entire stabilization and agricultural sector adjustment program, thus representing a far greater risk than the possible shock effect of raising fertilizer prices. PART V - BANK GROUP OPERATIONS IN TURKEY 92. Through Harch 31, 1985 the Bank and IDA have lent $5383.5 million2l to Turkey, through 81 projects. Agriculture accounts for 19 percent of funds lent, industry and DFCs for 24 percent, power for 13 percent, structural adjustment and program loans for 32 percent, and urban development, transportation, education, tourism and technical assistance for the remaining 12 percent. Disbursements for all sectors combined average 49 percent of appraisal estimates (excluding structural adjustment loans) as compared to 50 percent for Tunisia and 49 percent for Morocco. As of March 31, 1985, IFC commitments to Turkey totalled about $239 million, of which about $64 million were still held by IFC. Annex II provides a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1985. 93. Bank lending is aimed at supporting Turkey's medium-term objectives of restructuring the Turkish economy by placing more reliance on market forces and adopting a more outward-oriented strategy. The main vehicle for the Bank's operational discussions with the Government has been the structural adjustment lending (SAL) program. SAL V, which was approved in June 1984, completed the series of five loans which the Bank had indicated would be the maximum to a country. Significant progress has been achieved in the past five years, but the task of restructuring is by no means over. The next phase should involve the broadening and deepening of the adjustment process at the sectoral level. Recent economic developments have underlined the need for a continuation of the stabilization program without giving up the goals of sectoral adjustment. Hence the emphasis of Bank lending in the post-SAL 1/ Net of cancellations.  - 32 - period would be on striking an appropriate balance between sectoral adjustment lending designed to be quick disbursing and supportive of policy reforms in the major sectors, and carefully formulated project lending focussing on high priority projects principally in the agriculture, energy and transport sectors. 94. Efforts have already been initiated to develop a series of sectoral adjustment loans for the major sectors over the next few years, of which this would be the first. Sectoral adjustment lending would also support measures to address the structural problems of the financial sector and enhance the utilization of industrial capacity in the public and private sectors keeping in view the scope for the "privatization" of publicly-held assests in the manufacturin,' jubsectors. Other sectors where sectoral adjustment loans could be develor include energy and transport. 95. Project lending, which would continue to make up the majority of the lending operations, would be designed to support and strengthen the adjustment process. A portion of project lending would be earmarked for the completion or rehabilitation of key projects in the energy sector. Other projects would be guided by the major policy objectives of the Government, which include the generation of foreign exchange (including improving productivity in export industries and providing essential infrastructure for exports), improvement of institutional efficiency, non-inflationary output growth and amelioration of the social costs of adjustment (including provision of social infrastructure and employment generation, with some emphasis on the least developed provinces in eastern Turkey). 96. The close macroeconomic and sector dialogue established with the Government in recent years is expected to be pursued. The economic and sector work currently being undertaken includes a review of the five-year development plan and studies of housing finance, telecommunications and electronics. Topics to be covered in the future include a review of the public investment program, a study focussing on the impact of structural adjustment, a review of transport investments and studies of the engineering and agro-industries. 97. This is the fifth loan to Turkey to be presented to the Executive Directors in this fiscal year. In addition, a fourth power transmission project is being processed for presentation in June 1985. 98. Turkey's debt burden is projected to remain manageable throughout 1985-89 (paras. 23 and 24). The Bank Group's share of Turkey's total external debt was 12.4 percent in 1983, is estimated at 13 percent in 1984, and is expected to grow to about 17 percent by 1989. Official debt outstanding is projecced to increase from $11.4 billion in 1984 to $14.4 billion in 1989 and private medium and long-term debt outstanding is projected to increase from $5.7 billion in 1984 to $8.8 billion in 1989. The Bank group's share of total debt service payments is projected to increase from about 12 percent in 1983 to an estimated 13 percent in 1984, and to about 17 percent in 1989. 99. IFC has invested in synthe:ic yarns, textiles, pulp and paper, glass, aluminum, cement, iron and steel products, heavy diesel engines, motor bicycle engines, piston rings, food processing and tourism. It has also invested in  - 33 - the Industrial Development Bank of Turkey (TSKB) and provided guarantees for overseas contracting firms. In addition, IFC is currently providing technical assistance to the Government with respect to the development of the capital market and a regulatory framework for leasing. PART VI - LEGAL INSTRUMENTS AND AUTHORITY 100. 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 listed in Section III of Annex III of this Report. 101. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 102. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments May 24, 1985 Washington, D. C.  - 34 - T A I t 3ANEX 1 Y? - OCIAL INDICATfRSI ITA, ST Page 1 of 5 TUftER! REVE~RENZCE GROUP (UEZCHD AYZAUES) NM (HOST Er KTINXATE) 1k RECENT *NZDULE ZNZ IIs ID T UTRIAL AuRA (iinm ua. 31) OT.AL 780.6 780.6 780.6 AtERICLTJLRL 3"6.7 381.8 380.9 er CAITe (m 240.0 440.0 1370.0 k345.3 11071.0 (KLOG Of 07.OIL QUIVALENT) 170.0 362.0 569.0 1122.8 4996.9 POUAZI AM VITL sTATISTICS POPUuImo.,UnAR (KHuSANs) 27509.0 35321.0 46459.0 URAN POPULTLON (Z or lorAL) 29.7 32.9 43.9 16.6 78.3 FOPULATION PROJECTIONS POPULATION EN VWAR 2000 (HILL) 65.4 SUTAIONAY POPLDIU CKELL) 110.8 POPULATION IEnU r 1.8 POPUlATO DESETY PFM Sq. M4. 35.2 45.2 56.2 8Z.9 139.3 KER SQ. KM. ACRI. LAND 7'.6 92.5 1IS.3 136.9 519.2 POPUATION AGE STRUCTURE (Z) 0-14 SRS 41.2 41.0 36.2 31.6 22.1 15-64 YRS 55.2 54.3 57.3 61.1 66.1 65 ZaD ADrM 3.5 4.7 4.4 7.1 L1.7 POPULATION CRONEH RATE (I) TOTAL 2.8 2.5 2.3 1.6 0.8 IULRN 6.1 3.6 4.8 3.7 1.3 CRUDE BIRTH RATE (PER THOUS) 43.1 37.9 30.9 23.4 13.8 CRUDE DEATH RATE (PR TROUS) 15.8 12.2 8.8 8.8 9.2 GROSS RHPROWUCTIOo RATE 2.9 2.6 2.2 1.6 0.9 FAMELY PLANNIIIG ACC*ORS ANAL (TROUS) .. 65.6 USRS (CZ OF HAlE vaN) 5.3 I. 32.0 /d, 38.0 I f, FOOD A- Vfma.K INDEX 0r FROW NOD. PER CAPITA (1969-71-L10) 96.0 100.0 1l5.0 114.5 114.1 PER CAPITA SUPPLY OF CALORIES CE OF REquIzm4ENs) 115.0 111.0 122.0 128.6 132.3 NOTEINS (eMS PFEIR DAT) 85.0 80.0 86.0 89.7 98.5 OF WHICH ANIMAL AND PULSE 25.0 23.0 25.0 . 34.5 61.3 CUIL (AGES 1-4) DEATH RATE 47.0 23.0 9.0 5.2 0.4 LXFE EXPECT. AT BIRT (TFARS) 50.5 55.9 62.7 67.4 74.9 IWAST MDR1T. RATE (PtR TBO0S) 184.0 127.0 83.0 54.2 10.3 ACCESS TO SAFE WA2ER (ZPOP) TOTAL .. 52.0 75.0 hf URAN .. 51.0 70.0 7 RURAL . 53.0 80.0 .. ACCESS TO ERETA DISPOSAL (1 oF POPULrITON) TOTAL '' URBAN .. .. 20.0 /h XURAL .. .. POPULATION PER PRISICIAN 2800.0 2230.0 1630.0 1065.8 553.7 POP. PER NURSING lESO 16300.0 IL 188D.0 1130.0 764.4 166.9 POP. PER 6OSPITAL RED TOTAL 600.0 490.0 490.0 If 326.3 120.8 UltAN 340.0 IL 270.0 /k 270.0 T 201.5 143.1 RQAL 5100.0 7I 5060.0 Wr 5650.0 a ARtlSSIONS PER HOSPITAL ED .. 20.2 22.3 L& 20.0 17.8 AVERAGE SIE OF BHOUSOLD TOTAL 5.7 /1 5.9 RURAL .. .. . .. AVERAGE NO. OF PJSONSIOK TOTAL 2.4 /J 2.2 URIRA 2.0 T 1.9 RDRAL 2. 7i .. ACTESS tO ELECT. 1S or WELBlNCS) TOTAL 29.0 41.1 57.0 In IRSAS ., 78.2 RURAL 2.0 18.0  -35 - ANNEX 1 TA*L* 38 Pa Te2 of 5 TuIR - SC INDICATORS DATA SZ tUIUM SKElNC GROUPS (WEZGNTND AVERAGE) =- mS (COST RECENT ESTDIATE) lb us*ia& maiL xA!zuu.z Xs zNsusNIN ADJUSBTD EIIOLEZUT RATIOS PRIMARTs TOTAL 73.0 110.0 102.0 101.1 LO1.3 HALZ 90.0 124.0 110.0 105.5 103.0 FZUSLE 56.0 95.0 95.0 96.7 102.7 SECONDARY: TOTAL 14.0 27.0 42.0 59.L 90.3 KALE zo.0 3s.0 57.0 68.9 84.6 FEMALE 8.0 15.0 28.0 50.6 N7.1 VOCATIOIL tS or SECONART) 17.7 13.7 22.3 21.6 17.9 PUPI.-Tacz RInO PRtIM 46.0 38.0 28.0 25.1 20.2 SECONDART 19.0 28.0 20.0 20.3 13.0 AOULT LITERACT RATE CZ) 38.1 51.3 6.3. A 75.6 99.1 CO-n PASSENGE CARS/TOUSAND POP 1.7 3.9 11.5 54.7 367.2 R3*3O RzcEIVzRS/THOSAND POP 49.1 07.7 96.4 164.9 1090.7 TV RECEMZ ISHUoAND POP 0.0 1.8 75.3 123.6 451.0 NEDSPAPER DAILT GENERAL INnnzSr) CnUnATt1 PER THOSND POPUATION 51.3 40.6 89.1|J 96.3 331.2 Cum ANNUAL ATTEUDANCECAIPIT 1.1 7.0 1.9 2.9 3.6 TOTAL LABOR FORCE (TOM) 13782.0 15629.0 20137.0 FEIALE (FEC!) 40.2 37.0 36.4 34.5 36.2 AGRXICULTURZ (PERCENT) 76.5 67.7 53.5 40.7 6.2 lIDlltY (PISPERCEN) 10.5 12.1 12.6 23.3 37.7 PARtICIPATXIO RAIl (PERCENr) TOTAL 50.1 44.3 43.3 42.9 45.7 MLE 58.7 55.7 54.3 54.7 59.3 FDEALE 4L.2 33.6 32.0 31.0 32.7 ECONOMC DEPENDENCY RIO 0.9 1.0 1.0 0.9 0.7 -X- PERCENT OF PRIVATE INCOME RECEIVEID BU HcIH EST Or 0 1_ 33.0 Ic 32.6.. HIGCHST 20S OF HOUSESOLDS 61.0 7 60.6 4 .' 43.1 LOWEST 2Ot OF HOUSEHLD 4.2 7 2.9 7. .. 5.4 LOESr 402 o0 SOUSEHOLDS 10.6 7; 9.477 .. .. 16.4 sum YC - CSTIlOD AISOLUTE POWERTS INCUS LEVEL (USS PER CAPT) BA N .. 342.0 /. RURAL .. .. 270.0.. eSTIMATED RELATIVE POVERTY IICOME LEEL (U$ M CAPITA) mun .. .. RURAL .. .. 220.0 /f ESTIMATED POP. BlOW ABSOLDU POVERTY INCOE LEEL (2) U .. ..R URAL .. .. NOT AVAILABLE NOT APPLCALE NOTES /s The group mrra for each ndicator are populatlo-waiat-d ardtetsic amenA. Coverage Of countrles among thc indicatora dapends on avalLability of data ad Is not alfcm. lb Unlear otherwse noted. 'Data for 1960' refer to any yer betumn 1959 and 1961; 'Deta for 1970 bateau 1969 and 1971; and data for Htost Recent Zscist " betwasn 1980 and 2382. /c 1963; /d 2968; Is 4Aus 23-4;' lt 1976; k 1977; /b 1