Turkey - Country assistance strategy public information notice (CPIN)

Report No. PIN71 Turkey CAS: Public Information Notice World Bank Board Discusses Turkey Country Assistance Strategy Progress Report The Board of Executive Directors of the World Bank Group discussed the Turkey Country Assistance Strategy Progress Report (CAS PR) on July 12, 2001. In December 2000, the Board had discussed the CAS for FY01-FY03 with a High Case lending envelope of US$5 billion. Turkey is in a deep economic crisis and facing growing social hardships. The country's challenge going forward is to try to recover quickly from the sharp recession - but at the same time to address some of its root causes. Turkey has established a new economic team and outlined a new economic program. The new program is formulated to bring about a rapid turnaround in the economy. Up front restructuring of the banking sector is a key factor in restoring confidence and ensuring early recovery. Experience gained from other countries suggests that quick and decisive progress on macroeconomic stabilization and financial restructuring is critical for quick recovery. Broader structural reform will strengthen the environment for private-sector led growth. The new program goes much deeper than previous attempts in addressing the structural roots of the crisis - weak public finances and a fragile banking system - while strengthening social programs. It will also bring Turkey closer to its goal of EU accession. The key structural and social elements of this new economic program are a strong focus on public sector reform, building a sound banking sector and liberalization of markets for private sector led growth, as well as special emphasis on strengthening social assistance. The main features are: * Large fiscal adjustment in the context of a macro-economic framework designed to bring down inflation and interest rates, and ensure sustainability of the public debt. * Rapid restructuring of the banking sector - especially restructuring and privatization of state banks and resolution of intervened private banks - and measures to reduce connected lending. * Strengthened public sector management and governance - including improvements in public expenditure management, public procurement, accounting and auditing, and anti-corruption measures. * Market liberalization in energy and telecommunications, together with establishment of independent regulatory bodies. * Privatization of state-owned enterprises - including Turk Telekom, the national airline, petroleum refineries, and iron and steel companies. * Continuation of agriculture sector reform to liberalize the sector and raise rural incomes, shifting from price subsidies to direct income payments to farmers. * Strengthening social assistance to help people adversely affected by the crisis. The coalition Government has renewed its commitment to cohesive support for the program. The macro-economic picture and the debt dynamics are important risk factors. Following the latest crisis, Turkey faces much higher public debt ratios than before. The viability of the macro-economic framework is being enhanced by additional external financing of some US$10 billion from the IMF and IBRD. The program's combination of immediate upfront measures and a blueprint for the medium term aims to strengthen investor confidence which is crucial to economic recovery. To support implementation of the program, the Bank proposes to accelerate and refocus its support for Turkey with a graduated response to structural and social reforms. In 2001, IBRD will contribute US$3.2 billion towards Turkey's financing needs, which is US$2 billion more than the original CAS. Of this latter amount, US$0.8 billion will be  provided by accelerating disbursements from the existing CAS High Case envelope of US$5 billion and US$1.2 billion will be provided through new financing under Special Structural Adjustment Loan (SSAL) terms. The Bank Group's revised CAS program increases the focus on banking and public sector reforms and enhances assistance to Turkey for strengthening its social protection. In the area of banking and public sector reform, the Bank provided a first Programmatic Financial and Public Sector Adjustment Loan (PFPSAL) of $1.1 billion in July 2001, and proposes to provide a second PFPSAL II in late 2001, for up to US$1.35 billion, followed in 2002 by separate programmatic adjustment loans in the financial sector and the public sector. The second tranche of the ongoing Economic Reform Loan (US$375 million) would be continue to support reforms that will remove obstacles to private sector growth. IFC's financing and other assistance will also focus on the financial sector and privatization, as well as firms with good export prospects which can contribute to rapid economic recovery. The Bank is preparing a loan to support the Social Risk Mitigation Project expected in early Fall 2001. The Agriculture Reform Implementation Project, presented to the Board with this CAS Progress Report, supports structural reform in agriculture and implementation of a direct income support system for farmers. The triggers for the High Case program have been strengthened in view of Turkey's accelerated structural reforms in banking and public sector reform as well as to ensure that social expenditures are adequately protected during a period of fiscal stringency. The Bank's long-term support to programs in education, health, community-based watershed management, and community development and heritage will continue alongside support for economic reforms. IFC's short-term strategy is changing in response to the crisis in close collaboration with the Bank. The focus is on highly visible interventions with strong demonstration effects and positive impact on market sentiment. IFC will protect its portfolio through restructuring and, where appropriate, recapitalizing its client companies. Providing swift support to existing export-oriented clients will help these firms with debt service and contribute to the vibrancy of exports, which is vital to recovery. In the current situation of credit scarcity, IFC's ability to provide long-term project financing, credit lines for banks, working capital finance, and operational and financial strengthening is a positive contribution to the private sector. During 2001-02, IFC will give priority to: (i) the financial sector; (ii) restructuring industrial companies; and (iii) assisting the authorities with privatization. The complementary focus of the Bank and IFC in these areas will enhance the Bank Group's contribution to Turkey's reform program. James Parks Q:\My Documents\E-drive\document\CAS CPIN.doc July 26, 2001 1:48 PM 1 -2-