Turkey - First and Second Financial Sector Adjustment Loan Projects

Dom.t of The World Bank FOR OMCLAL USE ONLY Rqlt N. 12385 PROJECT COMPLlTO0I REPORT FINANCIAL SECTOR ADJUSThENT LOAN (LOAN 2714-TU) AND SECOND FINANCIAL SECTOR ADJUSThENT LOAN (LOAN 2964-TU) OCTOBER 6, 1993 MICROGRAPHICS Report No: 12385 Type: PCR Country Operations Division Country Department I Europe and Central Asia Regional Office This document has a restricted distibution and may be used by recipients only in the perfonance of ther offcial duties. Its contents may not othewi be disclosed witbout Wotld Bak authortition.  Currenoy Unit - Turkish Lira (TL) Va1ue Of U861.O0 1986 675 1987 8S7 1988 1,422 1989 2,122 1990 2,609 1991 4,172 1992 6,872 March 1993 9,374 CB - Central Bank cIas - Center for International Banking Studies CMB - Capital Narkets Board DYB - State Investment Bank EBS - Extra-Budgetary Funds IC - European Community FURRS - Foreign Exchange Risk Insurance Scheme GA?T - General Agreement of Trade and Tariffs CDP - Gross Domestic Product GNP - Gross National Product aOT - Government of Turkey 18 - Istanbul Stock Exchange OECD - Organizat ion for Economic Co-operation and Development PCR - Project Completion Report PICP - Private Investment Credit Project PSBR - Public Sector Borrowing Requirement RUSF - Resource Utilisation and support Fund SAL - Structural Adjustment Loan SMI - Small- and Medium-Scale Industries SONs - State-Owned Enterprises TRB - Development Bank of Turkey rISCAL R January 1 - December 31  FOR OMCLAL USE ONLY THE WORLD IIANK WahNn D.C. 20435 U.S.A. -asE October 61993 MEMORANlM TQ EX13alIV DIRECIeRS An1 PlSIX SUBJEC: Poject Completio Report on Turkey - Fcial Secor Adjustment Loan and Second Fmancial Sptor Adjustment Loan am 2714-TU and Loan 2964-TU) Attached is the Project Completion Report on Turkey - Fancial Sector Adjustment Loan (Lon 714-TU) and Second Fnancial Sector Adjustment Loan (Loan 2964-TU) prepared by the Europe and Central Asia Regonal Office, with Part H repared by the Borower. The PCR provides a good account of the impletation experience and lessons from these two loans. Although prgr was made on some issues, the overal reform progam was orly partially completed and some measures have been reversed. Of priar concem was the inability of the Govment to provide a stable macroeconomic envrnment to support the financial sector progam Overall, the PCR suggests that the outcome of the two FSALs was less than satisfa and not susnab, with limited institutional impact. The Government's contribution (Part II) hig ts the benefidal impact of Bank involvement and the successfil tecical assstance associated with the loans. The primy goals of the FSALs were to prevent a collapse of the financal system, coasidered imminent at that time, and to improve the alocation of credit A banking csis was Indeod fotled through bank recapitaliation and the strength g of prudental regulations. The latter objective, which was to be accomplished mainly by reducing govement taation of and interfence (by targeig preferential credits) in the flnmcial system was not achieved, however. Eucsive taxation and the use of preferential credits have continued. The planned audit wil evaluate the basic rationale for the FSAL as well as the sequencing of financial sector reform and other adjustment and insttutional development measures. Afttahment nbb doa_nm bo a muicud douftdmad mdy be used by muplean the peiform of lhi ofda dut Its mono y sot oetwe be ddws_d widao Woi Bnk authaIn  FOR 0ENIC95us.D ONLY FEnUCIAL UCTOR (LOA 271440) AND SECOND FINANCIAL SrCTOA Low JLOA 2964-10) Table of Contents Evaluation Summary . . . . . . . * . . * * * * * * * * * * * * * il PART I: PROJE'SPERSBA ....PECTIVE........ . 1 INACIAL CTO ADJUSTMENT LOAN MLOAN 2714-T) . . . . . . .1 i. IMODUCTON . 40**. *&00. . 9&. .............................. I Project Identity . . . . . . . . . . . ....... . .. 1 Turkey's Overall Economic Performance Since 1980 . . . . . 1 Developments l986-92 . ................. . 3 II. THE PSAL ADJUSTMERT PROGRAM AND ITS JUSTIPICATION . . . . . 4 Objectives and Scope of Policies under the Adjustment Program . . . . . . . . . . . . . . . . . . . 4 III. THE BANK'5 ROLE . . . . . . . . . . . . . . . . . . . . . . 5 Design of the Reform Program . . . . . . . . . . . . . 5 Appropriateness of the Program's Design . . . . . . . . . . 5 IV. IMPLEMETATION OF THE -COEINMENT'S ADJUSTMENT PROGRAM. . . 6 V. MNOITORING OF THE ADJUSTMENT PROGRAM . . . . . . . . . . . 9 Disbursements . . . . . . . . . . . . . . . . . . . . . . . 9 Loan Supervision . . . . . . . . . . . . . . . . . .. . 9 VI . LESONS LEARNED AND FOLLOW-UP MEASURE.. FSAL I . . . . .. 9 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwie be disclosed without Wor1d Bank authorition.  -Tale of Content. (contine) SECOND 1RUIANCIqA SCTOR AOJUSTILO LOA 2964-61 . .. . 10 VII. Fa II OTIVs . 6 . . . . . . . . , , * . * . . a . 10 Project Identity . . . . . . . . . . . . . . . . . . . . . 10 Fiacia Sector Adjustmet lasues Prior to PFAL II . ... 10 Scope of Policies under the Adjuetuent Program . . . . . . 11 VIII. TER RA' ROL .E 4. .*. . .. . . . . . . . . . . . . . . 14 Deign of PSAL Program .. .... .... ............... 14 T. IR9L&vENT&N OF TIME GOVKET'S AROGRAM . . . . . . . . 15 Macroeconomic Policy Developments and Actilon Taken y the Government ............ ... 15 X. SECMORALPRO RffML1NAT * . . . ..... . 17 Interest Rate Policies .................. 17 The treugtbeug of the BankingSystem. .....4.. 19 Money andCapital Mrkets.. ............... 22 I. MTORING OF =T ADJVSTHT PO 23 Disbursemeate . . . . . . . . . . 23 Loan Supervision . . . . . . . . . . . . . . . . . . . . 23 XII. LESSONS LEARNED AN- FOLLOW-UP _ES8S FL I I . . . . 23 Suetaiability . . . . . . . . . . ; . * . * * * * . . 24 PART Its PROJECT REVIEW MMCK BORROWER'S PIRSPICTIVE . ..... 27 PART IlIs STATISTICAL INFORMATION FSL Is Bsic Data Sheet ................ 43 PSL IIs BIic Data Sheet ................ 44  - 1 FINANCIAL SECTIOR ADSTHN LOIf sCoND FZEMCThL SeO ADDju8I'INT LAN LIN"S 2714-T2 AND 22