Turkey - Country economic memorandum : sustaining the adjustment program (Vol. 2 of 2) : Annexes and statistical appendix

Report No. 6516-TU Turkey Country Economic Memorandum Sustaining the Adjustment Program (In Two Volumes) Volume II: Annexes and Statistical Appendix June 15,1987 EM2DA Europe, Middle East and North Africa Region FOR OFFICIAL USE ONLY H Document of the World Bank This report has a restricted distribution and may be used by recipiens only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. .  CURRENCY EQUIVALENT (Turkish Lira, TL) 1981 TL 111.22 1982 TL 162.55 1983 TL 225.46 1984 TL 366.68 1985 TL 521.98 1986 TL 674.51 1987 First Quarter TL 763.00 FISCAL YEAR March 1 to February 28 - through 1981 March 1 to December 31, 1982 January 1 to December 31 - from 1983 ABBREVIATIONS CBT - Central Bank of Turkey CPI - Consumer Price Index EBF - Extra-Budgetary Fund FEX - Foreign Exchange Deposit MHF - Mass Housing Fund QR - Quantitative Restriction RUSF - Resource Utilization Support Fund SEE - State Economic Enterprise SIS - State Institute of Statistics SPO - State Planning Organization VAT - Value-Added Tax WPI - Wholesale Price Index  FOR OMCIAL USE ONLY List of Annxes Annex 1: The Savings-Investment Equilibrium Annex 2: Money and Credit Policies Annex 3: Performance of and Prospects for Direct Foreign Investment Annex 4: External Debt Approval Process List of Statistical Tables Table Number Section 1: Population and Employment 1.1: Demographic Characteristics 1.2: Labor Force, Employment and Unemployment 1.3: Employment in Manufacturing Industry 1.4: Annual Emigration and Workers Employed Abroad 1.5: Employment by Operational SEEs Section 2: National Income Accounts 2.1: Gross National Product at Current Prices by Sectoral Origin 2.2: Gross National Products at 1968 Prices by Sectoral Origin 2.2a: Gross National Product at 1968 Prices (Annual Growth Rates) 2.3: Expenditure on Gross National Product At Current Prices 2.4: Expenditure on Gross National Product At 1985 Prices 2.5: Gross Fixed Investment by Government and Private Sectors Section 3: Foreign Trade, Balance of Payments, and External Debt 3.1: Balance of Payments (1980-1986) 3.2: Commodity Compeosition of Exports (in dollars) 3.2a: Commodity Composition of Exports (Annual Growth Rates in Dollar) 3.3: Commodity Composition of Exports (in tons) 3.4: Commodity Composition of Imports (in dollars) 3.4a: Commodity Composition of Imports (Annual Growth Rates in Dollar) 3.5: Commodity Composition of Imports (in tons) 3.6: Invisible Receipts and Payments (in dollars) (1973-1983) 3.6a: Invisible Receipts and Payments (in dvllars) (1984-1985) 3.7: Imports by Sources (in dollars) 3.7a: Imports by Sources (Annual Growth Rates) 3.7b: Imports by Sources (Share of total in Percentages) 3.8: Exports by Destination (in dollars) 3.8a: Exports by Destination (Annual Growth Rates) This document has a restricted distribution and may bo used by recipients only In the performance of their official duties. Its contents may not otherwise be dislosed without World Bank authorization.  3.8b: Exports by Destination (Share of total in Percentages) 3.9: Worker's Remittance by Months (in dollars) 3.10: Sectoral Distribution of Investment Incentive Certificates in 1985 3.11: Sectoral Distribution of Investment Incentive Certificates in 1986 3.12: Investment Incentive Certificates, 1980-86 3.13: External Debt Profile 3.14: Exchange Rate Movements Section 4: Public Finance 4.1: Consolidated Budget Summary 4.2: Consolidated Government Revenue 4.3: Operations of the SEEs 4.4: Public Sector Borrowing Requirements Section 5: Money and Banking 5.1: Money and Banking 5.2: Distribution of Central Bank Credits 5.3: Consolidated Commercial Bank Credits 5.4: Deposits with Deposit Money Banks 5.5: Central Bank Interest Rates on Rediscounts and on Advances 5.6: Commercial Bank Interest Rates (Selected) Section 6: Prices and Wages '6.1: Prict Indices (Treasury) 6.la: Price Indices (SI$) 6.2: Average Daily Wages 6.3: Trends in Real and Nominal (Daily) Wages 6.4: Government Salaries by Grades 6.5: Public and Private Sector Wages 6.6: Collective Agreements and.Coverage in Turkey Section 7: Agriculture 7.1: Principal Land Use 7.2: Land Areas for Cereals, Pulses, and Industrial Crops 7.3: Output of Cereals, Pulses and Industrial Crops 7.4: Output of Nuts and Fruits 7.5: Agricultural Support Prices Section 8: Industry 8.1: Selected Industrial Production 8.2: Capacity Utilization Rates for Some Commodities (SEEs) 8.3: Capacity Utilization in Some Private Industries  Section 9: Energy 9.1: Output of Petroleum, Coal and Major Minerals 9.2: Production of Electricity (Gross) 9.3: Primary Energy Consumption by Sources 9.4: Oil Balance 9.5: Selected Energy Indicators  -1- Annex 1 Page 1 of 3 THE SAVINGS-INVESTMENT EQUILIBRIUM 1. Analyzing Turkey's past performa.ice in investment and savings--both their levels and trends--is pertinent to the medium-term economic outlook. Table 1 shows Turkey's savings/GNP ratio over the period 1972-85. Gross national savings declined from 20 percent of GNP in 1972 to 16 percent in 1979, and then rose to 22.2 percent in 1986. The distribution of savings shows that private savings declined slightly during 1980-85, but increased significantly in 1986. Public savings remained steady during this period, around 9 percent of GNP. Table 1: NATIONAL SAVINGS--TRENDS, 1972-86 (As percent of GNP) Public Savings Private Savings Gross National Savings /a 1972 9.0 11.1 20.1 1973 8.8 11.6 20.3 1974 7.4 11.0 18.4 1975 9.0 8.5/b 17.4 1976 8.1 11.2 19.3 1977 6.4 11.7 18.0 1978 5.3 10.6 15.9 1979 2.7 13.5 16.2 1980 5.4 10.9 16.3 1981 8.8 9.6 18.4 1982 9.1 9.3 18.4 1983 8.3 7.7 16.0 1984 7.8 9.2 17.0 1985 9.4 9.8 19.2 1986 9.3 12.9 22.2 1985-89 Plan 6.2 12.9 19.1 (average) /a Gross national savings equals domestic savings plus net factor income from abroad. /b Data base was revised. Sources: Fifth Five Year Development Plan, SPO; 1986 Annual Program, SPO; Government estimates, macro-balance tables of June 1986. 2. The estimate for the national savings rate in the Fifth Five Year Plan is 19.1 percent of GNP on average, which was exceeded. Where the Plan estimates and the projections in Volume I differ is in the behavior of private versus public savings. The Plan's view is that private savings would form the bulk (12.9 percent of GNP) and that public savings would be half this level. Except for 1986, the actual behavior of public and private savings since 1981 shows closer to equal shares.  -2 Annex 1 Page 2 of 3 3. The fact that private savings as a proportion of GNP fell slightly between 1982 and 1984, grew between 1983 and 1984 (by 1.4 percent of GNP) and declined slightly agaiu in 1985 (by 0.4 percent of GNP) masks the fact that the growth rate of sarings (in real terms) has fluctuated even more widely (growth of 27.9 percent in 1984 to 0.7 percent growth in 1985). 1/ 4. Turkey's investment and savings ratios are shown in Table 2, along with the atios for some other countries. 2/ Table 2: COMPARISON OF SAVINGS AND INVESTMENT RATIOS IN SELECTED COUNTRIES (1) (2) (3) (4) (5) Investment/ National Private APS /a GNP per GNP Sav./GNP Sav./GNP Capita Korea, Rep. of (1984) 29.7 26.8 20.4 28.7 2,000 Malaysia (1984) 35.9 30.8 18.1 25.0 1,990 Philippines (1983) 27.5 21.0 17.0 19.0 660 Portugal (1984) 24.4 22.4 21.7 22.6 1,890 Tunisia (1982) 32.7 23.1 13.8 16.4 1,290 Turkey (1982) 20.2 17.6 9.2 11.1 1,300 (1983) 19.2 15.4 7.0 8.5 1,230 (1984) 19.1 16.4 8.4 10.1 1,200 (1985) 19.4 17.5 8.0 9.8 1,130 /I Average propensity to save out of disposable income. Source: World Bank estimates. I1 The private savings data need to be treated with caution. Besides the usual difficulties of being a residual item in the income-minus- consumption function, the Government's revision of the public investment data (such as to reflect exchange rate changes) meant that the public savings series also had to be revised. 2/ Comparisons with countries that have quite different resource bases and differenc structures vis-a-vis the public and private sectors are not fully reliable.  Annex I Page 3 of 3 5. The current account deficit of the balance of payments can be seen as the mirror image of the domestic savings-investment imbalance. Table 3 presents these figures for the 1972-85 period, as well as the Fifth Five Year Plan's assumption (prepared in 1985) that both the investment and savings ratios would rise in the medium term by about 2 percentage points, which is being borne out by actual performance. Table 3: INVESTMENT, SAVINGS AND EXTERNAL BALANCE (As percent of GNP) Current Account Gross Gross National Deficit Investments /a Savings (Foreign Savings) /b 1972 20.1 20.1 0.0 1973 18.1 20.3 -2.2 1974 20.7 18.4 2.3 1975 22.4 17.4 5.0 1976 24.7 19.3 5.4 1977 24.9 18.0 6.9 1978 18.5 15.9 2.6 1979 18.3 16.2 2.1 1980 21.9 16.2 5.6 1981 22.0 18.4 3.6 1982 20.6 18.4 2.2 1983 19.6 16.0 3.6 1984 19.7 16.9 2.8 1985 21.1 19.0 1.9 1986 24.9 22.2 2.6 1985-89 Plan 21.0 19.1 1.9 (average) /a Gross investment comprises total fixed investment and stock changes. /b The current account deficit (foreign savings) equals the difference between gross national investment and gross national savings. Sources: Fifth Five Year Development Plan, 1986 Annual Program, SPO. (26291/18)  Annex 2 Page 1 of 11 MONEY AND CREDIT POLICIES A. Improvements in the Financial Sector Since 1Q80 1. The improvement in financial sector policies and the strengthening of the institutions in that sector have been two of the main components of the struetural adjustment program implemented by the Turkish authorities since 1980. The reforms in the financial sector included in particular: (a) more effective control of the growth of the money supply; (b) improvements in the mobilization of domestic financial resources by the banking system; (c) reduction of the distortions created by selective credit policies; (d) strengthening of the institutions in the banking system; and (e) development of the capital market. These improvements are described briefly in the following paragraphs. 2. The results achieved in the area of the policy of control over the money supply were not entirely satisfactory, despite the limitations introduced in Central Bank lending to the public sector and the drastic suts in Central Bank refinancing of commercial banks. The inadequacy of the instruments of control of the money supply available to the Central Bank is one of the main problems remaining in the financial sector. 3. The improvement in the mobilization of financial resources resulted mainly from more satisfactory interest rate policies. The level of interest rates on time deposits has been controlled during much of the time since 1980, but in general they have been high enough to provide depositors with significant positive yields in real terms. As a consequence of the improvements in interest rate policy, time deposits rose from 2.7 percent of GDP in 1980 to 14.5 percent in 1985. In part the increase resulted from shifts of funds from currency and sight deposits into time deposits. However, overall there was an expansion in the total demand for broad money (M2), from 15.8 percent of GDP in 1980 to 23.0 percent in 1985. 4. Substantial reductions in the charges for financial intermediation were achieved, essentially by reducing the withholding tax on income earned on deposits from 25 percent in 1980 to 10 percent in 1986, as well as the financial transactions tax, which fell from 25 percent (of the base interest rate) in 1980 to 3 percent in 1985. The reserve requirements were also reduced, from 30-35 percent in 1980 to 15 percent in 1986. Although the payment of interest on required reserves bas been eliminated, these reserves impose a lower cost on the resources collected by the banks than before because of the lowered reserve ratio. 5. The extremely complex system of selective credits that existed in 1980 was simplified considerably, and the distortions that it created were reduced significantly by the end of 1985. 1/ The differences in interest 1/ Staff Appraisal Report: Turkey Financial Sector Adjustment Loan (Report 6095-TU), dated May 15, 1986.  - 6- Annex 2 Page 2 of 11 rates for subsidized and non-subsidized credits are now much narrower than before, and the proportion of selective credits in total bank lending is at present below 20 percent. Many of the selective credit schemes were dismantled, including the differential reserve requirements, subsidies frou the Interest Rate Rebate Fund and the minimum ratio imposed on banks as regards the proportion of selective credits in their portfolios. Preferential rediscount facilities were cut drastically in recent years. 6. Quite a wide variety of measures have been introduced to strengthen the banking system. New banking legislation has tightened the equity requirements and other rules to ensure bank liquidity and viability. Competition in the banking sector was stimulated by the opening of 13 new banks, most of which are subsidiaries of international banking groups. Some banks with weak financial structures have been absorbed by more powerful ones. The average costs of operation of commercial banks declined from 9.5 percent of total assets in 1980 to about 5 percent in 1985. More effective requirements on external auditing were imposed, and the mechanisms of bank supervision were improved by introducing a system of standardized accounts and by creating a unit in the Central Bank with supervisory functions with respect to the banking system. in cooperation with the Board of Sworn Bank Auditors. 7. The development of the capital market was stimulated by the issue of substantial amounts of Government securities, by the improvement of the capacity of the Capital Market Board and by the opening of the new Istanbul Stock Exchange, based on more efficient arrangements than the old one. The improvements in the supervisory and regulatory activities of the Capital Market Board were an important factor in restoring confidence in the securities market after the crisis that hit it in 1982. B. Money Supply and Credit Expansion Since 1980 8. Tighter control of the money supply was one of the main components of the stabilization and structural adjustment measures implemented since 1980. Nevertheless, despite the efforts made, the stock of broad money (M2) rose very rapidly-at an average rate of 56 percent from the end of 1980 to the end of 1985. A substantial part of that expansion corresponded to the increase in the demand for money, which was reflected in a decline in the income velocity of M2 from 6.7 in 1980 to 4.3 in 1985. In spite of that trend, it is clear that the rapid growth of the money stock was an important factor in the persistence of the high rates of inflation. 9. In the monetary program for 1986, it was assumed, on the basis of the projections available for money demand, that the objective of reducing the rate of inflation to 25 percent (as measured by the increase in the wholesale price index from December 1985 to December 1986) would require that the stock of 12 not rise by more than 35 percent from the beginning to the end of the year. However, for reasons explained below, M2 rose by almost 15 percent in the first six months of the year, at an annualized rate of about 36 percent. The increase was even faster if foreign exchange deposits are added to the stock of M2: the aggregate including such deposits (M2X) rose at an annual rate of 53 percent during the first five months of 1986.  7 Annex 2 Page 3 of 11 10. The authorities based their policy of monetary control mainly on targets for reserve money and its main components and on forecasts of the reserve money multiplier. However, in general, they did not succeed in keeping the stock of reserve money within the ceilings fixed as targets. From the end of 1980 to the end of 1985, that stock increased at an average annual rate of 45 percent. The effects of this growth were amplified by the gradual increase in the money multiplier from 2.1 at the end of 1980 to 2.9 at the end of 1985. 11. The successive increases in the money multiplier were attributable to two factors: (a) the gradual decline in the proportion of currency to total deposits in Turkish lira froA 33 percent at the end of 19C0 to 12.4 percent at the end of 1985; and (b) the decline in the reserves kept by banks in currency or deposits at the Central Bank from 29 percent of total deposits In December 1980 to 23 percent at the end of 1985 and to around 20 percent in May 1986. The decline in the proportion of currency to total deposits reflects the growing preference of the population for payments through banking accounts and, in particular, the influence of the high interest rates on the converbion of cash balances into time deposits. The decline in the proportion between commercial bank reserves and deposits rpsulted essentially from successive reductions in the rate of required reserves, which fell from 30-35 percent in 1980 to 15 percent by March 1986. 12. Reserve money rose more than had been planned in practically every year since 1981, because of the difficulties the Central Bank had in adhering to the targets fixed for that aggregate. In 1982 and 1984, the target was overshot because of foreign exchange inflows that contributed to an accumulation of net foreign assets considerably in excess of what had been anticipated. Some offsetting measures were taken in. those years, but they were not sufficient, mainly because it proved very difficult to restrict further the amounts of Central Bank credit going to the public and private sectors. In 1982-83, reserve money also rose more than had been projected as a result of the substantial credits that the Central Bank, as lender of last resort, had to grant to some commercial banks with liquidity difficulties. 13. In spite of all these problems, it can be said that, overall, more effective discipline has been imposed since 1981 on Central Bank credit to both the public and private sectors. 14. Central Bank credits to the public sector, including advances to the Treasury and credits to the state economic enterprises (SEEs), rose at an average annual rate of only 14 percent during the period from the end of 1981 to the end of 1985, a level that corresponds to a negative annual rate of -17 percent in real terms. The restrictive policy in Central Bank lending to the public sector was made possible by three factors: (a) the improvement in the financial accounts of the Government after 1980, in the context of the implementation of the stabilization programs, with the consolidated budget deficit declining from 5 percent of GDP in 1982 to 2 percent in 1983, at which time it rose again in 1984 to 5 percent of GDP because of poor tax performance, only to return to 2.3 percent in 1985;  -8- Annex 2 Page 4 of 11 (b) the reduction in the SEE's need for borrowing, which declined gradually from 5.2 percent of GDP in 1980 to 1.2 percent in 1985, a reflection of both the improved profitablity of the enterprises and the stricter control over their investments; (c) the financing of large proportions of the budget deficit by issues of securities, although they were placed primarily in commercial banks, a practice that contributed to an average rate of growth of commercial bank lending to the Treasury of almost 9C percent per annum during the period 1981-85. 15. Recently there was a significant deterioration in the control over Central Bank credits to the public sector. From December 1984 to December 1985, the public sector's stock rose by 25 percent, as against an average annual rate of growth of 11 percent over the three preceding years. By the middle of 1986, the rate of increase in Central Bank lending to the public sector was up almost 50 percent over the preceding 12 months. 16. The restrictions on the growth of reserve money also affectfsd Central Bank rediscounts of commercial bank credit. After 1981, the redisco;nt window remained practically closed for prolonged periods. The ratio between Central Bank credits to commercial banks and total credits granted by these banks to the private sector fell from 32.5 percent at the end of 1981 to 6.8 percent in December 1985. In particular, the rediscount facilities for preferential credits were almost entirely eliminated. Thus, for instance, the amount of rediscounted export credits outstanding fell from TL 113 billion in December 1981 to TL 7 billion at the end of 1985. 17. The consequences of the severe cuts in Central Bank refinancing to commercial banks were offset to a large extent by the reduction in their required reserves. These reductions and the growing preference of the public for deposits as compared with currency increased the money multiplier and made it possible for the commercial banks to expand their total lending at a average annual rate of 50 percent or more from the end of 1981 to December 1985. However, commercial bank credit to the private sector rose at an average annual rate of only 43 percent. In view of the inflation and the high nominal interest rates, that expansion was not sufficient to prevent the acute liquidity difficulties that have affected a large proportion of Turkish enterprises. The scarcity of credit to the private sector partly explains the previlence of very high real interest rates in commercial bank lendirq. Further, the roll-over of some credits to enterprises in arrears, particularly by banks to companies in which they had financial interests, meant that even less credit was available for new loans. 18. In 1986, the expansion of cGrmercial bank credit becpme much more rapid, increasing 35 percent during the first five months of that year and at the beginning of June showing a rise of 80 percent over the preceding 12 month period. This very rapid expansion was explained by a combination of several factors: the reduction in the rate of reserve requirements from 19 percent to 15 percent; the continued increase in foreign currency deposits (which rose by more than one-third in the first half of 1986); heavy short-term foreign borrowing by commercial banks; and an increase of about 40 percent in Central Bank rediscounts.  9 Annex 2 Page 5 of 11 19. If the accelerated rate of expansion of bank credits recorded in the first half of 1986 persists for many more months, the economic reform program could be put at serious risk. That expansion has already contributed to increases in the money supply that, if maintained, would undermine the objective of reducing inflation. At the same time, the credit expansion has involved a significant increase in the net foreign liabilities of the banking system. A tightening of credit policy should therefore become one of the main priorities of the Turkish authorities during the second half of 1986 and in 1987. C. The Need for Effective Instruments to Control the Supply of Money 20. The analysis of the preceding section shows that the main priority of financial sector policies in Tvxkey is to achieve more effective control of the money supply. The instruments available to the Central Bank to reach that objective are clearly insufficient. They fall into two groups - those that influence the money multiplier, and those that ensure control of base money. 21. The money multiplier will certainly continue to rise unless the authorities increase the rate of required reserves. In fact, it is very probable that the downward trend in the ratio of currency to deposits will persist, a trend that will allow banks the possibility of increasing their credit at a faster rate than that of reserve money. The authorities can in principle offset the effects on total money supply of the growing preference for deposits as opposed to currency by raising the reserve requirements. Such a move would, however, reverse their recent decision to reduce those requirements, based on the objectives of lowering the costs imposed in bank intermediation and lessening the dependence of commercial banks on Central Bank refinancing. 22. Nevertheless, the policy of reducing the reserve requirements is certainly justified in the medium and long run as a way to make the commercial banking system more competitive and less subject to the influence of the Central Bank in the allocation of credits. 23. One possible approach is to maintain present rates of required reserves and to impose marginal rates of required reserves on the growth of deposits above the level recorded at a certain date. The marginal rates should be added to the average rates in force at present. If, for instance, the marginal rate was fixed at 10 percent, the banks would have to put 25 percent of their new deposits in required reserves (15 percent average rate plus 'o percent marginal rate). To avoid increases in the costs of funds intermediated through the banking system, the marginal reserves on new deposits should earn an interest rate close to market rates. The marginal reserves could be dispensed with when easing the monetary policy becomes possible or when alternative instruments (for instance, open market operations) can be used. 24. Even if the required reserves are increased, it will still be necessary to achieve more effective discipline over the growth of reserve money. That discipline will depend on the possibility of controlling the three main factors that determine the stock of reserve mnoney--net foreign assets, Central Bank credits to other financial institutions and credits to the public sector.  - 10 - Annex 2 -10 - Page 6 of 11 25. As in other countries, in Turkey it has been extremely difficult to predict the behavior of net foreign assets with reasonable accuracy. When deviations in net foreign assets from the predicted path have become too large, the Central Bank has tried to offset them by compensatory measures. However, with a crawling peg exchange regime, these measures are difficult to implement, and success has therefore been limited. A decrease in the net foreign assets of the banking system would help to moderate the growth of the money supply, should it persist in the medium term. However, it is generally impossible to maintain such decreases for long. The net foreign indebtedness of Turkish banks rose rapidly in the first half of 1986, and its present level is already reason for concern. 26. The contribution that a more restrictive monetary policy in the form of reductions of Central Bank credit to the private sector would have also be-n very limited. As mentioned in the preceding section, the amount of Central Bank refinancing of other credit institutions has already declined sbarply to very low levels. Further significant reductions will be almost impossible to achieve. The maximum that should be expected is that Central Bank credits to the private sector do not increase. However, this situation did not occur in the first half of 1986, when those credits rose 30 percent, or at an annual rate of about 75 percent, as measured May 1986 over May 1985. That rise was the main contributor to the excessive growth of the money supply during this period. To achieve better adherence to the targets for reserve money, the Turkish authorities should control Central Bank credit to other institutions much more strictly than they have in recent months. 27. Central Bank credits to the public sector have been the most important factor in the creation of reserve money. In spite of the progress achieved in limiting the borrowing of the public sector from the Central Bank, at the end of 1985 that borrowing corresponded to 92 percent of the stock of money supply. 28. Two basic policies should be considered to reduce further the impact of credit to the public sector on reserve money--further reductions in the borrowing needs of the public sector and transfer of part of the credits of the Central Bank to the Treasury and to commercial banks. 29. Regarding a reduction in the borrowing needs of the public sector, it can be argued that they have already been reduced substantially since 1980 and are now much lower as a proportion of GDP than in many industrialized countries. It should be borne in mind, however, that the Turkish financial sector is not well-developed. The total stock of financial debt instruments, consisting of M2 and of bonds held by non-bank institutions and households, corresponds to only about 25 percent of GDP. With such a shallow financial system, borrowing by the public sector (including the state economic enterprises) on the order of 5.5 percent of GnP creates far more crowding out of the private sector and involves more inflationary risks than it would in countries with a similar public sector deficit and borrowing needs but a more developed financial sector (a ratio of M2 and bonds in excess of 30 percent of GDP). For this reason, a tighter budgetary policy and further improvement in the financial situation of the SEEs continue to be essential conditions  Annex 2 Page 7 of 11 for slowing inflation and reducing the very high real interest rates that have been creating severe difficulties for the private sector. 30. The consolidation of debt that took place in December 1984, whereby the Treasury took over obligations extended by the Central Bank to the SEEs, should in the future be handled by means of open market operations. The Turkish authorities are planning to introduce these operations as a new instrument of monetary policy. Given the inadequacy of the other instruments available, open market operations should improve the possibility of controlling the money supply substantially by providing a more regular form of expansion/contraction, as the situation warrants, through market purchases/sales. 31. The introduction of open market operations should be complemented by better coordination between the Treasury's borrowing program and the monetary policy. At present, the timing of Treasury issues is determined almost exclusively by the Government's borrowing needs and does not take into account the liquidity of the banks or the targets of monetary policy. Coordination between the issue of Treasury bills and monetary policy could be achieved by selling all these bills through the Central Bank. The Treasury would place the bills in the Central Bank in accordance with its borrowing needs, and the Central Bank would then sell them to the commercial banks in accordance with monetary policy objectives. A certain proportion of the bills would be kept temporarily in the Central Bank until their sale to commercial banks was compatible with monetary policy objectives. D. Foreign Exchange Deposits 32. Foreign currency deposits have grown very rapidly in the last five years: from US$83 million at the end of 1983 to US$2.0 billion in December 1985 and almost $3.2 billion by end-1986. Part of the increase is explained by the fact that a large portion of the foreign currency deposits (about two-thirds) is expressed in DM, against which the US dollar has depreciated substantially. The proportion of foreign currency deposits in relation to the supply of domestic money in the broad sense nonetheless rose from about 10 percent at the beginning of 1985 to almost 18 percent by the end of 1986. 33. Foreign currency deposits have been encouraged by the Turkish authorities as a first step toward convertibility of the Turkish lira. However, their main effect until now has been to provide a substantial contribution in financing the balance of payments deficit, although that contribution is significantly lower than it appears from their total amounts. In fact. it is clear that a significant portion of the remittances of emigrants and of the revenues from tourism have been diverted directly into foreign currency deposits and thus have increased the current account deficits above the levels that would otherwise have been recorded. 34. The rapid growth of foreign currency deposits cannot be maintained for a prolonged period without jeopardizing the Turkish financial system. To begin with, it will be more difficult to control inflation. Foreign currency deposits are a form of keeping liquidity: the liquidity indicator  - 12 - Annex 2 Page 8 of 11 that results from adding them to domestic money (which is isually denominated as M2X) rose by 59 percent during 1985 and continued to increase at about the same annual rate in the first half of 1986. It can be safely assumed that, because of portfolio diversification, the demand for M2X will be higher than it would be for M2 alone. Nevertheless, it is very likely that foreign currency deposits will increase the income velocity of the domestic money stock. In fact, they substit'ite to some extent for domestic currency deposits. In such a situation, the conduct of monetary policy becomes much more complicated, particularly because the growth of these deposits cannot be predicted. To avoid inflationary dangers, it is necessary to impose tighter restrictions on the growth of domestic money. It is more difficult to predict the incAme velocity of M2 and consequently to fix targets. 35. The risk of illiquidity created by foreign exchange deposits is also cause for coticern. The experience of other countries shows that those deposits are very vulnerable to changes in confidence (particularly as regards the balance of payments and external debt). Sudden unexpected withdrawals may occur on occasions when banks do not have enough liquid reserves in foreign currency to meet the demand. In such a case, the potential of the Central Bank, as lender of last resort, to help will be much less than is the case with withdrawals of deposits in domestic currency. A Central Bank is able to create domestic money, but may suffer from a shortage of foreign exchange. This danger is more manageable with longer term deposits. However, it appears that in Turkey, more than one-third are sight deposits, while almost all the others have maturities of less than six months. The risks described above will, however, be significantly reduced by the decision taken by the Central Bank at the beginning of 1986 to impose a reserve requirement of 15 percent on foreign currency deposits. Nevertheless, it is not certain that this requirement will be enough, particularly in light of the substantial deterioration of the net foreign assets position of the Turkish banking system during the first half of 1986. 36. Another negative aspect of the growth of foreign currency deposits is the risk of disintermediation as regards deposits taken in foreign currency bnd thereafter lent in credits denominated in Turkish lira. Local currency deposits are subject to a withholding tax of 10 percent, while local currency credits are subject to a financial transactions tax of 1 percent. Local currency deposits are also subject to reserve requirements that pay no interest. Foreign currency deposits, in contrast, are exempt from taxes, and the reserves imposed on them do not involve any cost because they earn market interest rates. Because of this discrimination, the charges borne by commercial banks amount to about 10 percentage points with TL deposits and practically zero with foreign currency deposits. Under such conditions, it is likely that, after a certain time, depositors will get better yields by shifting from Turkish lira into foreign currency deposits, at the same time that debtors will face lower costs by borrowing in foreign currencies instead of Turkish lira. Some signs of disintermediation of bank operations in Turkish lira are already apparent, as indicated by the fact that some banks are offering interest rates for foreign currency deposits significantly higher than those available in the international markets.  - 13 - Annex 2 Page 9 of 11 37. In view of the risks mentioned above, the authorities should take steps to: (a) eliminate the discrimination between foreign currency and TL deposits, in terms of taxation and required reserves; (b) impose tighter reserve requirements on foreign currency deposits; and (c) increase the average maturity of foreign currency deposits. 38. The following measures are therefore recommended: (a) The discrimination between foreign currency and TL deposits should be eliminated by: (i) subjecting foreign currency deposits to the same withholding tax that applies to TL deposits; (ii) subjecting loans in foreign currency to the financial transaction tax, as is the case for TL loans; and (iii) paying interest at market rates only on that part of the reserves required for foreign currency deposits that exceed the level required for TL deposits. This latter measure would mean, in the present circumstances, that the required reserves from foreign currency deposits would earn interest only on the amounts above 15 percent of the deposits. (b) The average rate of reserves required for foreign currency deposits, 15 percent at present, should be raised significantly. To stimulate an increase in the maturities of these deposits, the rates of required reserves should be higher for deposits with shorter maturities and be very high for sight deposits (for instance, from 50-80 or even 100 percent). They should not be lower than 15 percent even for deposits TAth comparatively long maturities (for instance, two years or more). (c) Since it will be necessary -to implement the above two measures gradually, they should be applied during a first phase of six months only to new deposits or time deposits that result from the renewal of existing ones. At the end of six months, however, all sight deposits, including those existing at the beginning, should be subject to the new conditions. (d) The Central Bank should keep a high portion (not less than 60 percent and preferably up to 100 percent) of the reserves required from foreign currency deposits in secure and reasonably liquid assets (for instance, easily marketable Government securities expressed in the main foreign currencies). In this way, the Central Bank would be better able to meet the pressure caused by withdrawals of foreign currency deposits from commercial banks and thus avoid the risk of financial instability.  14 - Annex 2 Page 10 of 13 Table 1: MONETAY AGGREGATES, 1980-86 (TL oillions and annual percentage change) .~~~~~~~~~~~~~~~~l *934 19 1^1 1*117 NC U a o nc U 4 w NC Ja Csrry in cirtulu 7.3 30.0 9.0 120S 23.4 2.0 1469.3 1i.1 *449.8 47.3 Si9ht _ ts *curciall 00.0 7.9 11s.3 4.5 10423 1241 *2.4 13 141.3 73.0 Rot _bpoits lsiqs* 34 333. 421.3 3.2 411 U4.7 ? 407.3 723.1 85.2 913.4 31 1943.7 ISM M2 331. 24.7 ML.0 $ 325 VI*0 4*7.3 4M.7 Tin hkpts _ ib a 2L5 2W.1 361. 313 390. 4340 4101 1 30.9 $101.. 5211.2 Cvrtifiutn of W.it 230. 314.2 300 S1 4V7.1 747.5 703.9 741.4 74. 745.0 CuuciaI Ti paidt 112.5 143 2m. 23L. 34.3 33.2 414.0 441.0 L35 4S.I l 14064 SI3.2 4312.2 te7.0 011.7 0371.3 9 0 99. 10704 *1S0$0 Fe hp.ts 119. 591 0.9 IU 14.1 2IS5.S -92 21.0 in 3325.3 40.3 730.1 M4.? #. 99S ISM9 1360LO b_w M" 1923 323L0 244 231l 114.1 2907.9 313. 3 .1 33.7T 3199.4 vrucy )"W 917.9 9%L0 1144 1L3 1U 1394.1 164.3 *98W *9195 20.1 kW NbtIpaiUr lith ut 2 to 2.1 2.4 2.S L 2.7 2t 2.9 L0 L0 3.0 m 10 V II t7.3 2.9 37.6 31 D.1 6.4 40. *40 W 44.4 12 L.2 I 3 43.0 7.2 4.9 44LS 3. 42.0 43. 1mw basy 44.2 45.3 0. 17.2 43 29.0 S.4 24. 241 7.9 1It bUSY swap of Noy 4w m. V Swim.tewt4umuatbaywrow Iwt tbstrald b of Tvl.w.  - 15 - Annex 2 -age Ii of 11 Table 2: RESERVE MONEY &ND COMPONENTS, 1980-86 (TL billions) End of Period a/ 1980 1981 1982 b/ 1983 1984 1985 1986 c7 (SeptT7 Reserve Money 428.9 641.0 943.2 1281.7 1942.9 2754.1 3377.3 Net Foreign Assets b/ -164.4 -163.1 -39.2 -43.2 479.1 279.3 822.5 Net Domestic Assets 593.4 804.1 982.4 1324.9 1463.8 2474.8 2554.0 Credit to Public Sector, net 411.4 537.6 585.0 633.6 731.9 2556.0 2594.4 Treasury, short-term 178.4 236.4 240.7 314.3 467.2 781.5 975.0 Monopolies 32.5 53.2 46.0 34.6 34.6 - - SEEs 187.1 222.8 249.5 245.7 247.0 228.0 217.5 Other Public Entities 13.5 25.2 48.8 39.0 (16.9) -82.1 -226.0 Consolidation Act No.297 - - - - - 1628.6 1628.6 Credit to the Private sector 272.1 379.8 395.1 603.9 543.6 -226.6 -475.0 Agric. sector 109.6 122.9 13.5 7.3 36.7 4.7 40.1 Commercial bills 116.3 198.7 228.6 367.4 290.8 247.0 326.7 Oth,: 46.2 58.2 153.0 229.2 206.1 -478.3 -842.0 Other items, net -90.2 -113.3 2.3 87.4 204.5 145.4 435.9 Deposits against letters of cr. -47.9 -42.6 -34.3 -42.1 -72.2 -87.8 159.0 Other -42.3 -70.7 36.6 129.5 276.7 233.2 276.9 a/ Last Friday of the period, except for 1982-84, when the data relate to the penultimate Friday. b/ Data on net foreign assets are not comparable between 1981 and 1982 because of revaluation of foreign assets and liabilities. c/ Data on several reserve money components are not comparable to those for previous years because of: (a) revaluation of foreign assets (including gold holdings) and liabilities, and (b) assuation of certain SEE and private sector liabilities by the Central Government on December 31, 1984. Source: Central Bank of Turkey, Quarterly and Monthly Evaluation Bulletins. (2629Ip.ll)  - 17 - Annex 3 Page 1 of 6 PERFORMANCE OF AND PROSPECTS FOR DIRECT FOREIGN INVESTMENT A. SummrY 1. The reorientation of Turkey's economy has led to a marked increase in investor interest in Turkey. Assuming that the steady economic progress continues and that the political situation remains stable, it is likely that flows of direct foreign investment will average around US$100 million annually over the next five years, up from the $50-60 million of foreign investment recorded during the past five years. However, such an amoumt is still less than 2.5 percent of annual private investment. As such, Turkey's entrepreneurs-not foreign firms-hold the key to the expansion of private industry in Turkey in the medium term. Nevertheless, the benefits that foreign investment can bring to Turkey by way of up-to-date technology, quality consciousness and modern business methods can be immense. In fact, the ability of Turkey to continue its export expansion drive and to compete effectively with imported goods rests to some extent on whether it can attract foreign investors (in joint ventures with Turkish firms) that might bring the contacts and know-how that local industry sorely needs. 2. Several factors should stimulate the interest of foreign investors in Turkey. Government policies are favorable to foreign investment; for example, recently the Government permitted 100 percent foreign ownership of local firms. The country has a large domestic market and a reasonably trained labor force (skilled and unskilled), and wages are relatively low as compared to EEC countries. Turkey's geographic location provides convenient access to the Middle Eastern markets and to the EEC. Turkey has many under-exploited natural resources such as deposits of minerals (boron, copper and soda ash) and a good agro-industrial base. In all, it offers an attractive environment for most potential investors, and with the passage of sufficient time and a consistent policy framework, expansion of foreign investment is likely. 1/ B. Background 3. After World War II, and following many years of economic isolationism, Turkey began to open its economy to foreign trade and investment. A few joint ventures between local and foreign firms took place in the late forties and early fifties; for example, Is Bank financed the construction of a light bulb manufacturing plant in conjunction with General Electric and a margarine plant with Unilever. In the sixties, joint ventures for the production of trucks, buses, pharmaceuticals and beverages were launched involving US, German, Swiss and British companies. The basic law governing foreign investment-Law No. 6224-entitled "The Law Concerning the Encouragement of Foreign Capital"-- was enacted in 1954 and is still in effect today. It allows approval of foreign investment in any sector open to domestic firms and provides for the repatriation of profits and capital. A separate Decree was enacted at the same time to regulate private activities in the exploration, production and refining of oil. 1/ In the Republic of Korea, for example, it took many years for foreign investment to become an important feature.  - 18 - Anex 3 Page 2 of 6 4. Neverthelese, during the sixties, foreign Investment flow amounted to ooly $10-45 million per anurs, although they gradually increased to a book value of direct foreign invenstmnt of $200 million in 1969, mostly concentrated in import-substituting industries such as phareaceuticals, applianees, motor vehicles, tires and agricultural equipment. Oil exploration Involving a dozen multinational fiaw also comeenced during this period, with the Royal Dutch Shell and Mobil Corporations being the most active. The main problem foreign companies had to fce during this period were the bureaucratic obstacles characteristic of the econoy in general. Still, Investors continued to show interest in Turkey, mainly because of the high level of protection accorded domeatic producers. 5. The situation changed following the 1973 oil shock, when the deteriorating political and economic situation caused foreign investment to fall, which it did throughout;the rminder of the seventies. C. Ixierience Since 980 t 6. The economic reform program of 1980 and subsequent measures included various changes that affected direct foreign investment specifically, in addition to those measures that affected the environmet for investment as a whole. The most important changes were improvements in the taxation framework, ownership provisions, and negotiation of earnings. Also important was the creation of the Foreign Investment Department (FID) in the State Planning Organisation (SP0). The FID was given the authority to approve investment projects involving less than US$50 million in foreign capital and less than a 50 percent foreign equity share. Larger projects, or those with more than 50 percent foreign equity, required the Council of Ministers' approval, acting on the reecoaendation of the FID. The FID was given responsibility for authorizing profit and capital transfers and for maintaining records on foreign investors in Turkey. 7. Petroleum investment was also liberalised in 1980. A series of decrees opened up new acreage, promised free transfers of earnings, and accorded producers the right to adopt world market prices for newly discovered oil. Most importantly, foreign investors were accorded the right to export up to 35 percent of any oil produced from new discoveries (45 percent of any oil produced offshore). Fully foreign-owned ventures were allowed, although the State Oil Company preferred to develop joint ventures with foreign firms, for which it could offer exploration licenses in excbange for technical assistance. 8. The tax regime applicable to investors is of paramount importance. Turkey has Double Taxation Agreements in effect with Austria, Norway, the Republic of Korea and Italy (the latter is limited to air and maritime transportation). In addition, Turkey has signed agreements with several other countries that are pending confirmation by one of the sides, namely, the US, 1/ Finland, the Federal Republic of Germany, Jordan, Rolland, United Kingdom, Rommnia, Pakistan and Tunisia. The Government is also interested in finalizing agreements as soon as possible with several other nations, and negotiations are expected to begin in late 1986 with Malaysia and Canada and in early 1987 with Japan and Switxerland. l/ A Bilateral Investment Treaty with the US was negotiated in mid-1985 and is awaiting parliamentary ratification on both sides. Its most important features are an agreement on the arbitration of disputes and on the elimination of double taxation.  Annex 3 - 19 - Page 3 of 6 9. These policy changes, together with the change in the political and economic environment, have had a dramatic effect. Between 1980 and 1985, approvals were granted for an additional US$1.2 billion of investment, and the number of companies with foreign participation rose to around 420, as shown in Table 1. 1/ However, actual inflows were substantially lower, since some projects were implemented over a long period of time, while others were cancelled. Still, the figures on approvals 2/ indicate the possible amount of foreign capital investment that will accrue in the immediate future. 10. Table 2 shows the distribution of foreign investment by sector as of December 31, 1985. Foreign investment in agriculture and mining has been rather small, whereas it has been substantial in the food and beverage, iron and steel, and machinery sectors. In the services sector, tourism and banking have been the main recipients of foreign investment. In the past, high and widely different levels of protection created incentives for investing in sectors in which Turkey might not have had a comparative advantage, true for both domestic and foreign investors. The continuous liberalization of the trade system should lead to a nv)re efficient allocation of investment in the future. This condition is especially important in the case of foreign investment. The areas to which foreign capital can be expected to flow in the future include tourism, agro-industries, mining and petroleum. In banking, foreign capital is already playing an important role. With the opening of free trade zones, entrepot trading may become important as well. 11. Turkey requires that many of the foreign firms selling goods to the Government manufacture at least part of them locally. In the case of defense contracts, this requirement has led to substantial commitments for the next couple of years that include the local production of selected equipment for aircraft and artillery. ITT, one of the earliest foreign companies to invest in Turkey, will manufacture digital switches for PTT, Turkey's telecommunications agency. 12. Several foreign commercial banks and investment banks are active in promoting foreign investment in Turkey and in identifying specific opportunities. They estimate that its total value could average around US$100 million annually over the period 1986-90. This estimate does not include any inflows deriving from the privatization program or from the Build, Operate, and Transfer (BOAT) program. 1/ Part of the increase in capital inflows can be ascribed to the possibility of using Non-Guaranteed Trade Arrears (NGTAs) and Convertible Turkish Lira Deposits (CTLDs) for investment. These instruments, which guaranteed a high return, are no longer available, having been phased out. 2/ Approvals have on average been two to three times higher than the level of realizations, a pattern that indicates that at least half the projects do not get implemented, at least not in the periods immediately following approval.  - 20 - Annex 3 Page 4 of 6 13. The BOAT initiative has been proposed in recent years first for energy plants and now for several other projects, such as highway construction. Under this scheme, a private consortium would build the project (with its own financing) and would operate it for 15 or 20 years. After this period, it would have the option of continuing to run the entity or of turning it over to the Government at a price to be determined later. Three coal-fired thermal power plants are under study and could be built under this arrangement in the next five years. The cost of each of these projects is estimated to be about US$1 billion, although less than 10 percent of it would involve foreign equity participation. These projects, and similar arrangements for other projects in other sectors, would contribute substantially to building up Turkey's physical capital stock. However, their contribution to the availability of foreign currency to support balance of payments needs would be minimal, since nearly all the equipment and some of the raw materials (e.g., coal for the thermal plants) would be imported. Nevertheless, the proposals represent an important new element in the foreign investment scenario. 14. The Government is committed to the privatization of a large number of enterprises that today are totally or partially in the public sector. These enterprises, which operate in almost all sectors of the economy, include manufacturing and tourism entities, public utilities, banks, telecommunications, the national airline, railways and maritime entities. The process will involve a large amount of private capital and will most probably require foreign participation. This step may also increase substantially the inflow of foreign capital; while it would improve the balance of payments, it would have only a minor effect on new capital formation. The prospects for the privatization program remain uncertain, both as to the type of divestiture to be pursued and the time horizon required. In the first phase, the companies to be sold are likely to be suitable for local capital. 1/ 1/ Probably the only exception is Turkish Airlines (THY), in which several foreign airlines have shown an interest. It seems that a foreign airline could be given a management contract in return for which it could acquire 20 percent of THY's equity. There are substantial problems (such as inadequate accounting practices) that would have to be solved before THY could be sold.  - 21 - Annex 3 Page 5 of 6 Table 1: FOREIGN INVESTMENT APPROVALS AND REALIZATIONS (In millions of dollars) Years Approvals a/ Actuals b/ 1954-79 228 n.a 1980 97 18.0 1981 338 95.0 1982 167 55.0 1983 103 46.0 1984 271 113.0 19e5 235 99.0 1986 177k' 150.01' aI According to the permits granted by the SPO. b/ As reflected in the balance of payments figures. ci Approval for the first six months of the year. d/ Projection. Sources: State Planning Organization, various publications; Central Bank of Turkey, Annual Reports, various issues.  Annex 3 - 22 - Page 6 of 6 Table 2: SECTORAL BREARDOWN OF COMPANIES WITH FOREIGN CAPITAL PARTICIPATION AS 0F DECEMBER 31, 1985 (In TL millions) Number Total Foreign As Percent of Capital Capital of Companies (TL million) (TL million) Total Agriculture 7 13,952 6,101 2.9 Mining 4 1,070 813 0.4 Manwfacturing 202 323,098 118,169 56.7 Baked Clay and Cement Materials 6 4,024 1,237 0.6 Cement 1 5,400 765 0.4 Chemicals 31 20*159 15,185 7.3 Electrical Equipment and Electronics 21 21,286 11,052 5.3 Fertilizer 1 2,065 976 0.5 Food and Beverages 27 46,049 24,687 11.8 Forestry Products 7 3,943 1,158 0.6 Glass 3 18,450 1,783 0.8 Iron and Steel 8 67,175 12,102 5.8 Machinery 15 22,202 7,941 3.8 Metallic Goods 14 9,587 2,472 1.2 Nonferrous Metals 3 8,160 1,262 0.6 Plastics 4 2,885 719 0.3 Pulp and Paper 5 3,640 1,750 0.8 Textiles 21 16,643 7,840 3.8 Tires 4 6,636 3,702 1.8 Transportation Equipment and Related Industry 18 60,239 21,405 10.3 Airplane 2 500 245 0.1 Other 11 4,055 1,888 1.0 Services 208 126,863 83,327 40.0 Tourism 20 19,960 9,943 4.8 Trade 123 13,762 10,457 5.0 Banking 19 59,225 43,839 21.0 Land Transportation 4 2,363 1,534 0.7 Sea Txransportation 3 23,930 11,956 5.7 Other 39 7,623 5,598 2.7 Total 421 464,983 208,410 100.0 Source: Central Bank of Turkey - Annual Report, 1985.  - 23 - Annex 4 Page 1 of 4 EXTERNAL DEBT APPROVAL PROCESS A. Short-term External Borrowins by the Private Sector 1. The private sector faces relatively few controls in seeking short-term funds abroad. All short-term borrowing is subject to a 3 percent tax levied on the face value of the loan. The receipts from this tax accrue to the Price Stabilization Fund. Exporters that borrow abroad on a short-term basis to finance the production of export goods ("pre-export finance") may receive a full rebate of the tax if they present proof of export, In the form of customs documents, to their local bank within three months after paying the tax. 2. The major of private sector short-term borrowing are import finar"ing and pre-export financing. The latter is something of a misnomer, inasmuca as it covers all bank-reported short-term borrowing by the Turkish non-bank private sector, except for loans recorded under acceptance credits. The other major component of the private sector's external liabilities is the non-resident portion of foreign currency deposit accounts at Turkish banks. Any non-resident individual or firm is free to open a foreign-currency deposit account, as long as the funds are deposited in the form of foreign currency. The interest receipts are not taxed by the Turkish Government. B. 1ong-Term External Borrowing by the Private Sector 3. Private sector external borrowing with a maturity of over one y-ar but less than two years does not require prior approval, as long as the borrower has an investment incentive certificate from the SPO. Nowever, these loans must be registered with the External Debt Office of the Turkish Treasury. The borrower is required to have a Treasury log number in order to receive disbursements and purchase foreign exchange to meet the debt service payments. Private sector external borrowing with a maturity greater than two years must be approved by the Foreign Exchange Cuntrol Office of the Banking and Foreign Exchange General Directorate of the Turkish Treasury, if the source of the funds is also private. Approval is made on the basis of the draft terms and the purpose of the borrowing. The terms must be within guidelines set by the Treasury. Currently, these guidelines call for a spread of less than 1.25 percentage points over LIBOR and no fees or comuissions. The borrowing must finance an investment that fits within the SPO's five-year plan for Turkey. Normally, the borrower must possess an investment incentive certificate. Private sector external borrowing from a bilateral or multilateral official agency must be approved by the Treasury's General Directorate for External Economic Relations. Again, the purpose of the loan must fit within guidelines established by the SPO, and the terms within guidelines set by the Treasury.  - 24 - Annex 4 Page 2 of 4 C. External Borrowing by the Public Sector 4. All public sector external borrowing requires the approval of the Treasury's General Directorate for External Economic Relations. (Treasury approval is also necessary for the acquisition of external assets by the public sector.) World Bank loans require the approval of Turkey's IBRD Projects Department. Public sector borrowing from other multilateral organizations and all borrowing by universities and municipalities, except loans from the IBRD, require the approval of the Multilateral Development Funds Department in the Treasury. Public sector external borrowing from official bilateral agencies and international markets requires the approval of the Bilateral Financing Department. Loans of more than $10 million, all loans from the World Bank, and all Central Government borrowing must be approved by the Office of the Prime Minister, the Council of Ministers and the Treasury at its highest level. These loans must be published in the official Gazette before they go into effect. All other loans come into force with the approval of the Office of the Prime Minister. 2629I:25  - 25 - Volume II, Annex 4 Table 1 - MAJOR STATE ECONOMIC ENTERPRISES-- OUTSTANDING EXTERNAL DEBT AS OF JUNE 30, 1986 a/ (In thousands of US dollars) Disbursed & Outstanding Undisbursed Borrower Debt RANK Debt Rank Turkiye Demir Ve Celik Isletmeleri Kurumu 20,789 2b,065 Devlet Yatirim Bankasi (DYB) 90,507 28,741 Etibank 23,055 2,070 Mke Kurumu 473 0 Sumerbank Genel Mudurlugu 2,505 0 Toprak Mahsulleri Ofisi 150,962 5 169,900 4 TCDD 7b,792 62,035 PTT Genel Mudurlugu 48,239 234,508 3 T.C. Ziraat Bankasi 50,725 121,544 5 Turkiye Elekrtik (TEK) 567,478 1 808,404 1 T.K.I. Turkiye Komur Isletmeleri Kurumu 139,452 79,40! Seka Turkiye Seluloz Ve Kagit Fab. Isletmeleri Kuru 45,208 0 T. Gubre Sanayi (Azot T.A.S) 2,272 0 Turkiye Cimento Sanay II 8,286 0 TC. Turizm Bankasi A.S. 37,352 0 Turkiye Radyo Ve Televizyon Kuriumu (TRT) 2,983 1 T.C Karayollari Genel Mudurlugu 1,489 0 Anadolu Bankasi T.A.S 2,250 0 Seka Kastamonu Muessesesi Mudurlugu 2,951 0 Turkiye Denizciklik Isletmeleri 15,055 0 Tekel Isletmeleri Genel Nudurlugu 24,207 U Asil Celik Sanayi Ve Ticaret A.S 20,653 0 Botas 0 257,000 2 Deniscilik Bankasi T.A.S 2,975 5,647 Turkiye Seker Fabrikalari A.S 3,708 1,325 Petkim Petroki.ya A.S 208,820 3 3,693 Turkiye Petrolleri A.C. (TPAO) 70,995 63,469 Turk Hava Yollari (THY) 296,351 2 32,301 Cinkur-Cinko Kursun Metal Sanayi A.S 1,154 0 Petlas Lastik Sanayi Ve Ticaret A.S 66,079 38,236 Tumosan 31,946 659 Taksan Takim Tesgahlari Sanayi Ve Ticaret A.S 25,235 26,837 Testas 1,235 11,504 Tupras 163,281 4 4,989 Kumas 3,688 5,918 Igsas 9,620 0 Turkiye Gemi Sanayi 2,120 2,50b Sub Total 2,220,062 1,951,661 Other SEEs (Derived from Total frr' the end of 1985, and sub-total for end-June 1986) 34,940 181,411 Total (End of 1985) 2,255,002 2,138,072 e/ Not all loans that were contracted into the first half of 1986 were entered into the Turkish external debt monitoring system of July 1, the date that these data were compiled. Source: Turkish Treasury, External Debt Management Division (26821)  Application Process for External Borrowing - Turket A. PUBLIC SECTOt All Maturities IBN) Loans Directorate for External Economic Relati3na IBRD Projects Dept.l/ Loans from other official Loan from bilateral uultilateral agencies or official agencies or borrovingp by anicipalities the private markets and universities (except IBiD Bilateral Financing loans): Multilateral Dev. Departmet. 1/ Funds Department. 1/ External borroving from an official source:s -~~~~~~~~~~~~~~~~~~~~~~~~ .__________________ *Bilateral Maltilateral B. PR1VATE SECtOR Foreisn Capital { __Dmsi at8Copans _ _ _ Companies r -i D _ Foreign Capital No official Only requirement: External External Dept of the PO. approval an investment borrowing from borrowing from required. incentive certificate a private sector an official from the SPO. source: Capital source: Markets Dept. Bilateral : Maltilateral of General Financing ' Development Directorate for Department! Funds Departuen Banking and Foreign Exchange. 1/ Approval process for public sector borrowing includes approval by the Council of Ministers and the Prime Minister. 2542,p.18 [I.  Tbl1.e t I.urC '' * (h bim) 19?2 1973 1976 1975 17 19 1978 19 198 1961 196 no 1n MY mtiaata.) 11 37132 31D72 3M6 MD78 1.0915 41768 42640 43530 44 438 45446 46459 476n 4 0 348 a1bm dtit Iual 24393 2 2R813 29 256 2410 25U6 25726 25863 259 296 2 261 26765 /ba15 1273 130 14223 I59 179 1 1766 178 I55 19696 206 2U409 22398 23500 AV smwe dis8Iat *4p 0-14 yw L56 15518 15774 M055 6273 190 16715 MS 162 1436 17634 1781 w 9 19500 _s f 64 L g 2o18 W 0 65M 219 22211 22781 23369 23968 26 25214 25935 26764 27611 29661 29500 4> 65 ad1 1m62 1lM 1753 1812 1861 1909 1957 ZN0 2362 2075 2C61 2a 20l5 2000 1990-0 19S-70 1970-75 1975-1D 198-8 19s 990 Oue bifrth brt/2 4LS 40.8 35.0 32.2 3D.6 29.1 Ceds /2d r**1! 15.3 13.5 10.8 10.0 9.0 79 fat mctaLity 1iM 3 AI.0 133.0 12D.0 130.0 83.2 66.3 Lil ascty at birtE: 1b 0.3 52.8 58.3 58.3 60.6 62.8 F_ 53.2 .S6.1 59.4 62*8 65.5 67.8 a zqpVdw s r_ 2.9 2.7 2.5 2.2 1.9 L8 / w ni km &ao de of 1 1, 1M, 197 s 10 (*A of July 1). If1 dvAuI of ppilIaA l3 f aew of inkm * * die be&we I ye lfap , p diswuud 14w buds in a Sia y. / cawdirs t die latt cam (OA* w 20, 1985). do poplatii odd y tie S t am 50 dills. 5Plam a 2D,100 pwple a accesi iaolm. B mst Stac lmtite of Sa r,tiet WO (0642. p. 1)  - 28 - Tib1i 1.2s LADE R, LODI A DIS@M0I 1977 3978 1979 19 1961 16 1983 1M9 196y lb mmtd c 1 d ih5 * At}413 .622 lt,056 18,W 18.618 18IAW 19,099 19.347195 (Outic ai ) 0011tic dviliai IAx 1 ea 16579 6 17 ,297 17,533 ^17773 18,016 18,26 18,512 uwciviiz 15,123 1 151,3 1,21D6 lS67 l,Z57?6 15 , 5 , 621i4 4riso1 r V9,546 9,537 9,529 9,520 9,369 9,481 9,451 9,420 9,390 9,364 S ~~~~~~~~1A, 1,427 I,79 1,M 1,822 1,8SS 1,911 1,964 2,052 2,110 *of%zand qri$a 117 120 123 124 126 114 109 132 1U3 - Nmouc&AIrq 1,57 1,610 1,572 1,548 1,5% 1,62M 1,65 1,748 1,80% - 61uitziciey, raut Pe 93 97 300 99 108 13 116 124 L35 - Co wte 547 5s2. 576 S81 56 584 586 606 623 652 Itmwap tim, Oa, ad 495 501 492 48D 491 498 507 523 541 566 Muoluals 41id vati U 637 646 638 628 656 675 696 73D 763 813 -ak, im-o mu teal eatat 198 208 20S 211 214 216 .217 224 229 - atmmrl~ 1,642 1,70 1,72 1,767 1,68 1,680 1,935 2,016 2,083 2,719 y 256 273 273 273 273 273 273 273 273 - Ikbu all$ ur4 wupoyn I*ar ..gplais 5 1,31.6 j., 8 j j;U 12 929 2 066 2 9 2 2 2,224 hwiasl1 'q St'x2"| Pak sm 4 740 720 70 7 700 665 665 665 665 652 amctic 1*w usobwp 1,905 2,066 2,288 2,532 2,69 2,731 2,861 2,905 2,979 2,88D DMtic 1*bu agpws tuo (C) 12.1 12.4 13.6 14.8 13.2 15.6 16.1 16.1 16.3 15.5 t1wr stxd A ' 706 51J 795 893 951 1,085 1,073 1,063 1,076 1,074 itail ldc, Azpiau 2,691 2,817 3,083 3,425 3,580 3,816 3,934 3,988 4,057 3,954 Wtal Iw wzxp nctio (C) 15.6 16.2 17.5 19.1 19.6 20.5 20.9 2D.9 21.0 20.1 V~~~ .....~I 4...u .u.mpqia ,n _i w. Y wad d"ismMSVA111.fa wt4" e. tIFfais 1 etaw ad wirmai1i.d a r. 17n. M.  - 29 - Table 1.3s ESPLCDHE IZ4 XtUMI:DARIwG IDUSK I/ 1977 1978 1979 198D l981 198 1983 19( S Z/ Food and bw pera 122.0 129.6 125.0 134.5 134.6 135.7 122.2 132.2 Ibbacc puuoessig 50.0 47.0 51.7 52.8 50.4 44.5 47.5 47.7 Tbtiles ad appwrels 172.8 183.3 183.5 182.5 189.9 198.1 198.3 202.6 Wbod poducts 15.8 17.2 M..5 17.8 18.5 17.7 16.0 15.8 Paper ad psper oducts 16.4 17.6 15.3 18.2 18.5 18.9 18.7 19.8 ftintiby 9.7 10.5 10.6 10.9 11.6 11.4 9.8 10.9 lesl and fur 4.1 4.4 4.1 4.4 5.3 5.7 4.2 4.3 -Rbb products 13.6 11.6 11.5 10.5 9.8 12.8 10.3 9.9 imdeicals 42.4 43.4 43.5 43.4 43.8 46.5 46.6 48.5 Pbtrolemu 10.4 10.0 9.7 10.1 10.1 10.7 10.7 7.5 biwrtallic mhuwals 55.1 59.6 58.4 61.0 64.1 60.5 58.7 62.1 Bhsic atals 76.5 82.2 81.1 76.8 76.9 77.1 74.1 75.7 )btal piocdcts 32.1 37.8 38.3 40.4 39.9 41.7 37.0 37.7 )ddnimqy 41.0 47.2 47.3 48.1 54.1 53.0 47.6 47.9 McaChInsuderY 28.1 34.3 31.5 29.9 31.4 33A4 32.7 35.1 ffl3sport eq!cpmaalt 53.8 57.6 53.3 49.9 51.4 49.7 50.2 52.0 lAtic, prodbcts 5.6 6.6 5.6 5.3 6.9 6.2 6.0 9.7 Other ----jfbwivgzl U11.2 13.0 12.4 12.2 14.5 13.6 9.3 6.4 ibtal 760.4 812.9 799.8 808.6 829.8 837.7 800.0 825.8 of t*ticb- Public sector 287.3 288.7 293.2 289.1 277.6 266.1 280.4 279.1 Pziats soectwo 473.1 524.2 506.6 519.5 552.2 571.1 519.6 546.7 -(RM SIS ybic (all estbliu ( nit) + Privat sector (tab1isImic %ibe 10 w - pwam are aeppd). y tabliastmi t 2w5e 25 mic pwns. 2Wn7! p.2  T?bl. 1.4t ANNUL ZUEAhCS A6D UZ U UN!E AI* 1977 197B 1979 1980 19821 196 1983 1984 1965 196 EEC 2566 1507 1076 903 33S so 53 25 39 32 CbnsMwOM 2413 1333 933 764 274 75 43 17 23 17 Bes1u'n 45 41 27 3s is a 2 3 7 0 lrnc. 1S 13 11 21 6 9 4 0 4 3 nstheriaai 83 48 40 32 n a 4 S s 12 30 72 65 51 11 0 * * * * Wu* 8a29 380 429 1493 563 175 216 n 126 189 AustuaL 563 54 23 944 184 12 7 2 16 52 8wits-la1d 246 326 406 549 39 163 209 69 110 137 Otbxs" 13669 166ss 22125 217 s655 4s125 52198 4579 47188 35387 AustzalLa 542 549 407 409 321 125 178 145 250 391 Llba am56 7726 9O25 15090 30667 2666 23292 16410 9660 8381 0 Otbags 6545 8600 U 1193- 10608 26867 22S14 29720 29164 37258 26615 TOTAL 19084 18652 23630 28503 573 4 52467 435 47353 3 Total eatS',. w.*ta molad abuse 705800 7S1223 801769 688162 952520 942828 1006355 92m22 921313 922663 SWaCzS G...tl Dlr atermt of uploy ent Exchang* Kunlstry of Labor SPO  - 31 - WE L5: 1MW I INiL SM's 0fl21A4 1950 3 2972 U7006 21246 32 1973 124 232374 SW 1974 Uig 3aM6 435 2975 Y 3Z1 4634 1976 Y5 31 4g89fl n77 IW 3876 5X 1978 15 3764 w36, 2979 25996 38. 5435 198~207 356636 81154W 367 N0 W2967 19 3 2563 3e4 ~E1 L183 ULMM 4d0 58Mf 298 (1) 19081 46731 MMJ9 15 193 4016 OM 1a6 ( M 4891 6944X bwa bow I114 to8 (s W,t bo bemr on, bd fu S's &up i If, to Im 233 d&t of Juxu 198 aEBto>  TAMA 2.1 GRASS XU&IC@AL PRODUCT BY SECTORAL ORIGI CAT C(X3RR PRICE3,I ILMIONS OF 2L.) _ScrS 1975 1976 1977 1978 1979 1960 1981 - 198 3 1: .. 1985 1986 (1) GROS VALUE ADED oMaCULTURR 136.1 177.3 219.8 301.3 465.8 925.0 1,325.4 1,678.9 2,118.1 3,397.1 4,790.3 6,484.8 INbUSZRY 93.5 115.0 158.0 217.4 479.9 1,024.2 1,572.3 2,191.5 3,096.4 5,110.1 8,060.5 11,365.1 mINSw 5.9 7.5 14.3 19.8 31.0 74.8 134.5 170.8 253.4 388.1 650.4 760.1 KANUFACT@hNGL 79.8 97.9 129.7 232.1 416.7 865.1 1,309.6 1,812.8 2,582.9 4,206.3 6,408.6 9,005.7 ENERGY 7.7 9.6 14.0 21.5 32.2 84.3 128.2 207.9 260.1 515.6 1,001.5 1,599.3 SEVicES 238.7 307.3 418.3 615.4 1,069.6 2,1t8.7 3,126.3 4,210.4 5,603.0 8.841.9 12,675.3 17,598.2 COISTRUCTO 24.6 31.0 42.1 64.0 103.9 213.0 285.4 357.1 447.6 697.4 951.2 1,410.5 TRADE 64.a 81.6 107.0 165.9 301.8 650.8 1,011.5 1,370.1 1,906.6 3,139.9 4,397.0 6,027.2 hANSPUR & OK6NIICATZON 43.3 54.8 72.2 110.1 199.6 421.1 623.6 841.9 1,136.3 1,785.4 2,711.2 3,644.5 PUNLC SEUVCUS 50.5 66.5 101.5 133.1 235.2 377.6 481.1 686.6 860.9 1,056.5 1,441.0 2,073.3 OTEE SER95CZS 55.5 73.3 95.5 142.3 229.1 486.2 724.5 954.8 1,251.5 2,162.8 3,175.0 4,442.6 CDP AT PACTOR COST 468.3 599.6 796.1 1,190.1 2,015.3 4,096.0 6,024.0 8,080.8 10,817.4 17,349.1 25,526.1 35,448.t INDIRECT TAXES-SU. 50.8 64.3 6.8 84.7 140.6 230.0 389.6 539.6 714.4 863.0 2,025.7 3,720.6 CMP AT MARST PuICES' 19.1 663.9 862.9 1274.8 2155.9 4328.0 6413.6 8620.4 11531.8 18R12.1 27551.8 39168.7 NET nACTORz ICOOkE MM ABROAD 16.6 11.0 9.9 15.9 43.6 107.2 140.0 114.6 20.1 162.8 237.6 21.8 GE? AT ARKEST PRICES 535.7 675.0 872.8 1,290.7 2,199.5 4,435.2 6,553.6 8,735.0 11,351.9 18,374.8 27,789.4 39,190.5 SOURCEt SIS. (t) SI8 ESTIMTE lDATED FARCM,1987  TARL! 2.2s OCRS RIXZ0AL PRODUCT BY SCTORAL 3IGZ3 (AT 1968 CPRICES, = BILIJOS OP SL.) SECTORS 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1988 (1) ORSS VALUE ADDED AGRiCUL2W. $9.7 42.7 42.2 43.3 44.5 45.3 45.3 48.2 48.1 49.8 51.0 55.0 INDUSTRY 35.6 39.2 43.1 46.0 43.4 40.8 43.9 46.0 49.7 54.7 58.1 63.4 IUxIuG 3.0 3.2 4.4 5.6 4.7 4.5 4.2 3.9 4.2 4.6 5.1 4.9 VANUIIACUNLIfS 30.2 33.1 35.5 36.8 34.9 32.7 35.7 37.7 40.9 45.1 47.6 52.3 ENERGY 2.4 2.9 3.2 3.6 3.9 3.7 4.0 4.4 4.5 5.0 5.4 6.2 SEmVCES 84.6 92.2 97.4 101.3 101.6 102.4 106.2 109.9 114.3 120.3 125.1 133.0 CWUThRUCTIM 10.3 11.2 11.8 12.3 12.8 12.9 12.9 13.0 13.1 13.3 13.7 14.9 SRAD8 23.0 25.2 26.4 27.4 26.8 26.2 28.1 29.4 31.4 33.9 3S.5 38.7 TRANSPORS & OSJURICATI 16.3 17.8 19.0 19.5 18.6 18.5 18.7 19.1 19.7 21.2 22.2 23.2 PUBLIC SERVICES 15.5 16.6 17.5 18.6 19.4 20.5 21.4 22.5 23.J 24.1 24.9 25.8 0T3R SfYICB8 19.6 21.5 22.6 23.5 23.9 24.3 25.1 25.9 26.6 27.8 28.8 30.4 GDP AT FAMTO COST 159.9 174.1 182.7 190.6 189.5 188.5 195.3 204.2 212.1 224.9 234.3 251.3 INDIMC3 TA1M-SUBS. 17.8 19.1 18.9 16.7 16.0 15.4 17.5 19.3 19.7 20.2 23.3 27.5 GDP AX MARXE? PRICES 177.8 193.2 201.6 207.3 205.5 204.0 212.8 223.5 231.7 245.0 257.5 278.8 NBT FACR MNC MK PIGI ABROAD 3.6 2.5 1.8 1.9 2.9 2.2 1.8 1.0 0.1 0.6 0.6 0.0 8GM AT MAR13? PR1CE8 181.4 195.8 203.4 209.2 208.3 206.1 214.7 224.4 231.9 245.6 258.2 278.9 SOURCS: St8. (1) SI ESTIMSTE DATED MARCE 1987  ~~~~~~~~~~~~~~~~~~~~~~~~~~~~ t " L 611a s =*I t ) a 6'Z6- L'Z Z-10t t'Le- 1110 Ivst- 9l1VZ 8-ZC 6't Wos- 8 ,"- t-,9Z- m = D& tS- t- L- S 6- Olt V-9 LO 6- - 8 o- t ZS s8u 6-8 XW do L'S? 'St L-t V% v'Ot tV; 'gt-6 23*- 91't- I't- 0-S 6-8 *SM-San iGS: L'L X'v 0-9 *g 5'9 6'S S 0- 9-'0- 611 6S C 68 68VA 4 a L'S &L- S9 9-Z St' TIC 9?t a 's S'S 9-6 S'f u Z-C t-s 9'Z :'t IS 0 It e's ' Z'9 0-9 0-Lt u's BS I WDm Z1t $It L-L Z't Z-Z 6- 0 90'- IS-Z L 9 9-6 I's h