Statement by Luc Hubloue at the Board meeting of September 4, 1997

International Bank for Reconstruction and Development International Development Association 87161 International Finance Corportation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS97-346 September 3, 1997 Board Meeting of September 4, 1997 Statement by Luc Hubloue Turkey: Country Assistance Strategy The collaboration between the World Bank and Turkey has a rich and diverse history. The country has for long been among the Bank's largest borrowers: financial assistance obtained from the Bank reaches the total amount of US $12.5 billion and the active portfolio includes 27 projects covering virtually all sectors of the economy. IFC and MIGA are playing similar prominent roles in Turkey's development process. Even in recent years when domestic developments did not permit to maintain World Bank assistance at normal levels, the dialogue on the conditions to be fulfilled for returning to a higher profile of cooperation remained very intense and constructive. This is why my authorities strongly welcome the new Assistance Strategy for their country, since it provides a clear roadmap for this desirable intensification of cooperation in the period ahead. Moreover, the presentation of this CAS is especially timely, since it unites new teams on both the Government and the Bank side in a common understanding of what their ambitions should be for the coming years. Taking into account the size of negative net transfers which is building up, my authorities' ambition is clearly to aim for the higher levels of assistance envisaged under the CAS. However, they are also aware that success along these lines will not be easily achieved. It will require continued progress towards macro-economic stabilization, strong commitment to sustained development policies and the Bank Group's timely response to emerging opportunities for assistance. The new Government in Ankara has immediately taken steps to start work on the fulfillment of the first two conditions, while the key elements of the new CAS are reassuring on the third one. Progress towards macro-economic stabilization This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otheJWise be disclosed without World Bank authorization. ----~--~--·--------- ------- -  2 While Turkey's private sector confirmed its resilience in response to the 1994 financial crisis, showing around 8 percent economic growth and continuous reductions in the unemployment rate in each of the two subsequent years, political conditions for a decisive attack on the country's public sector imbalances have not been favorable. The new Government is in full agreement with the conclusion of the Bank's analysis that the restoration of a stable macro-economic environment should be the country's top priority. As a first step, it took the decision to release data on the consolidated budget for the first half of 1997 and to revise this year's macro-economic targets, in order to restore the transparency and reliability of the public accounts. For those following the developments in the Turkish economy on a daily basis, it is not a minor comfort to know that the measures to be taken will now be discussed on the basis of data giving a reliable picture of the size of the problems to be addressed. The business and financial market circles have already reacted positively to this refreshing perspective. The seriousness of the Government's commitment to initiate a process of sizable and systematic public deficit reductions as of 1998 is underscored by a variety of measures taken during the first few months: tariffs on a number of public services have been increased, privatization efforts are accelerated, measures to broaden the tax basis are under preparation, an outstanding World Bank project to improve public financial management will be re- activated at the request of the Finance Minister and a protocol has been signed to restrict the Treasury's access to Central Bank financing. Meanwhile, the Authorities are staying in close contact with the IMF on the breadth and depth of their unfolding stabilization program and have asked to consult the Fund staff before finalizing the 1998 budget. Commitment to sustained development policies The importance of budgetary discipline for the reduction of persistently high inflation in Turkey cannot be overstated. However, my Authorities are also aware that, in a longer term perspective, the eradication of inflationary expectations will to a large extent depend on the nature of the structural measures taken to put the country back on a sustained development path. The policy declaration of the new Government assures full consistency between the financial stabilization objective and the structural reform agenda. Priority will be given to the acceleration of privatization, to financial sector reform and to the rehabilitation of the social security system. The financial burden of these sectors on the budget has been sizable; failure to reform them would continue to crowd out more productive investments. Special mention should be made, in connection with the CAS's poverty reduction priorities, of the Government's pluri-annual plan to eliminate excessive income disparities and poverty pockets at their roots, rather than continue their indefinite and ultimately, unsustainable subsidization. Income disparities have deepened dramatically in Turkey, as a  3 result of rapid but uneven economic expansion, and have become a source of social tension eroding the consensus on needed reforms. Their correction will require action on regional development, on agricultural reform and modernization and, most fundamentally of all, on the valorization of the country's vast human capital. In that connection, the Government has committed itself to give the utmost importance to the full participation of women in all aspects of society. Programs in all these areas have been started up, most notably with the extension of compulsory education, and they have been appropriately prioritized in the CAS. World Bank responsiveness to emerging opportunities This is a CAS for which the Bank has definitely taken into account the rather disappointing lessons learned from its predecessor. The expeditiousness with which the outstanding portfolio has been trimmed may have raised concerns at the outset, but it has resulted in a core of operations which can be more easily managed under the Portfolio Improvement Program and for which there is a genuine government commitment to bring them to fruition. Future investment programs will focus on priority sectors in which the value added from World Bank assistance is especially appreciated by my authorities, implying, at the present juncture, a shift to the pursuit of social development objectives. Prospects for successful cooperation on social development have greatly improved, because it is high on the Government's agenda and because the Bank's far-reaching decentralization in this area should better adapt its assistance to local conditions. For assistance in other investment sectors, my authorities have high expectations about the unfolding World Bank Group strategy in Turkey, especially the support it can provide to their policy for promoting private sector participation in infrastructure. They welcome IFC' s close association to the preparation of the present CAS. Attachment 2 of the document includes an extensive list of possible adjustment operations for which the Bank could provide assistance and which is illustrative for the structural reform challenges to be met in the coming years. Time has now come to start the dialogue on the preparation of these reforms quietly and efficiently, using the exchange of informal policy notes rather than the publication of comprehensive reports. The Resident Mission in Ankara is already providing valuable services in this respect and my authorities would like to see the Bank extend and deepen its advisory work along these lines, especially in sensitive sectors where confidentiality is warranted. This approach is also likely to provide the best assurances on the availability of timely financial support, once the conditions for it are fulfilled.