Statement by Matthias Meyer at the meeting of December 21, 2000

87165 "-'>!ELOp~ co~~ (§~) lEDs2oooJ®JJ December 20, 2000 11:03:43 AM Statement by Matthias Meyer Date of Meeting: December 21, 2000 Turkey Country Assistance Strategy We would like to thank Staff for the preparation of the Country Assistance Strategy. Turkey is at a turning point. The macroeconomic adjustment achieved so far will only have a lasting effect if accompanied by a broad range of structural reforms bearing in particular on an overhaul of the social security system, a strengthening of the banking sector and accelerated privatization and restructuring of state-owned enterprises. We agree that significant assistance from the Bank Group is justified, especially in designing the structural reform measures and mitigating the negative social impacts of the overall reform package. A continuing risk for Turkey is its vulnerability to adverse developments in international financial markets. In order to reduce this vulnerability, Turkey has to address the fundamental causes of this risk. First and foremost, the authorities will need to be extremely determined in the pursuit of a primary surplus target to maintain the credibility of the reform program. Second, the Government will need to move ahead decisively with the restructuring of the fmancial sector. While we believe that most of the planned measures are adequate, we are concerned about the risks associated with the blanket guarantee offered by the Government to the entire fmancial sector. This entails a moral hazard risk, increasing the likelihood that the guarantee may actually be called. We welcome, on the other hand, the proposed strengthening of the legislative, regulatory and supervision framework for the fmancial sector as well as the technical assistance to the remaining state banks in preparation of privatization. Third, it is crucial that Turkey succeeds in attracting greater private capital flows over the next couple of months. It will need to create a more conducive environment for private sector development and tackle more aggressively the privatization of state-owned companies and banks in order to send a clear signal to markets and jump-start foreign direct investment. The remaining infrastructure bottlenecks must be removed, in particular in the transportation, telecommunications and energy sectors. While we commend the authorities' recent decision to accelerate the privatization of Turkish Telekom and Turkish Airlines (THY), the challenges in the energy sector remain great. Competition needs to be enhanced by implementing a regulatory framework, which is compatible with a market system and will allow consumers to share the This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the consent of the Executive Director concerned.  2 benefits of liberalization. The electricity market law prepared with the support of the World Bank and the establishment of an independent regulatory agency point in the right direction. This should hopefully accelerate the full privatization of the distribution companies and the state-owned thermal power plants. Fourth, the drain by the present social security system on the government budget needs to be addressed. Although the Government has tried to increase contribution payment compliance in the past, efforts have failed to arrest the rapid growth of losses incurred by the system. Further measures are needed to increase contributions and to encourage workers to remain in the formal labor force longer. This may require raising the retirement age and improving contribution collection rates by including currently "unregistered" sectors. The social safety net fmanced out of general tax revenues must also deal with workers that have not worked long enough to receive meaningful contributions or whose individually funded plans may not be sufficient. Tackling the deficiencies of the social security system will require considerable political will on the part of the Government. Finally, the agricultural sector remains extremely important in Turkey (15% of GDP and 45% of employment). However, markets remain highly distorted due to heavy subsidization. Given the heavy burden of the current agricultural policy upon the Turkish economy, we welcome the Government's intention to move away from the present commodity support system towards providing direct income support to farmers. We support the corresponding pilot program, which is being developed in collaboration with the World Bank. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the consent of the Executive Director concerned.