Turkey - Agricultural Reform Implementation Project : release of second tranche - full compliance

Turkey: AgriculturalReformImplementationProject Releaseof the Second Tranche - FullCompliance (Loan No. 4631-TU) 1. This memorandum summarizes progress in the execution o f the reform program and actions taken by the Government of the Republic of Turkey to meet the specific conditions for the release o f the second tranche o f the Agricultural Reform Implementation Project (ARIP). The ARIP is a hybrid operation with an adjustment portion of US$200 million and an investment portion of US$400 million. The ARIP was approved by the Board o f Executive Directors on June 29,2001, and became effective on July 17,2001. The first tranche o f the adjustment portionwas released on June 28,2002. 2. The objective of the ARIP is to help implement the Government's agricultural reform program, which i s aimed at dramatically reducing artificial incentives and government subsidies, and substituting a support system that will give agricultural producers and agro-industry incentives to increase productivity in response to real comparative advantage. At the same time, the project i s designed to mitigate potential short-term adverse impacts o f subsidy removal, and facilitate the transition to efficient production patterns. 3. The ARIP aims to achieve these objectives through: (i)an adjustment portion, designed to provide some o f the funds for the first rounds o f Direct Income Support (DIS) payments to farmers; and (ii)an investment portion, which consists of four components - (a) building up the National Registry o f Farmers (NRF) which i s used to administer the DIS system and widening the inclusion o f agricultural areas in the land cadaster; (b) Farmer Transition grants paid to eligible farmers to assist in the conversion to alternative agricultural crops from hazelnut and tobacco production, as governmental supports to these crops are reduced; (c) an Agricultural Sales Cooperatives and Cooperative Unions (ASCs/ASCUs) Restructuring component which aims to make ASCs/ASCUs independent, financially autonomous, and self-managed organizations serving their farm members by providing financial assistance (severance payments for retrenched workers) and technical assistance during the restructuring process; and (d) support for project management and implementation. I.RecentEconomicDevelopments 4. Recent economic developments are discussed fully in the Memorandum o f the President for the Third Programmatic Financial and Public Sector Adjustment Loan (PFPSAL 111), whose MOP reference i s R2004-0095/2, dated June 14, 2004, and in the accompanying Program Document, R25795-TUYdated May 21,2004. 11. ProgressAgainst ReleaseCriteria 5. Pursuant to Schedule 1, Part A, paragraph 5 (b), o f the Loan Agreement, conditions for the release o f the second tranche of the adjustment portion requires that the Bank be satisfied that: (i)the macroeconomic policy framework o f the Borrower (Government o f Turkey) i s satisfactory, as measured on the basis o f indicators agreed betweenthe Bank and the Borrower; (ii) Borrower has achieved progress satisfactory the to the Bank in the carrying out o f the Program (the Program i s that outlined in the Letter  of Sectoral Strategy for Agriculture Sector Reform and Sustainable Development); (iii) the Borrower has registeredat least 50% of farmers qualified for direct income support payments, and at least 50% o f such registered farmers have received direct income support payments; (iv) that the Borrower's 2002 budget does not provide for credit or fertilizer subsidies and does not increase other existing direct or indirect agricultural subsidies, in real terms as compared to those in effect on January 1, 2001; and (v) the Borrower has reduced wheat purchases from all sources to a level satisfactory to the Bank by November 1,2002. 6. Macroeconomic Framework. The macroeconomic policy framework i s fully satisfactory as evidenced by the documentation concerning the Board Presentation of the PFPSAL I11in June 2004 and by the satisfactory 7th review o f the US$16.3 billion IMF Stand-by Arrangement (SBA), which was completed on April 16,2004. 7. Agriculture Sector Reform and Sustainable Development Program. Substantial progress has been made in the implementation o f the Program as outlined in the Letter of Sectoral Strategy for Agriculture Sector Reform and Sustainable Development o f June 7, 2001. The major reform areas targeted by the LSS were the reduction and phasing out o f input and credit subsidies, support price reform, and reform and privatization o f state economic enterprises (SEES). The sum o f the efforts in these areas has caused budget outlays to support output prices and subsidize inputs and credit to be reduced in 2000-2003 by 90 percent. By the end o f 2003, the reform program reduced the fiscal outlays on agricultural subsidies by about US$5.4 billion. This represents both satisfactory progress on the implementation o f the LSS and a savings o f over 2.7 percent o f GNP. The major steps in each reform area in 2001-2004 are presentedbelow. 8. Phasing Out o f Subsidies. Over half of the subsidy cuts is accounted by the US$3.1 billion in reduction in the coverage o f losses for state financed crop purchases. The elimination o f the credit subsidies and debt write-offs generated another US$1.4 billion in fiscal savings. Fiscal transfers to Agricultural Sales Cooperative Unions (ASCUs), which had reached US$lbillion per year, were also reduced by US$SOO million. The other area o f subsidy reduction was fertilizer subsidies, which were terminated in2001 (declining by US$300 million). All together, 70 percent o fthe subsidy cuts were directed at lowering agricultural commodity price supports and was primarily achieved by imposing hard budget constraints on state marketing and processing enterprises as well as the quasi-state ASCUs. The remaining 30 percent o f the subsidy cut was aimed at reducing agricultural input subsidies, notably credit and fertilizer. 9. The reform of agricultural output subsidization has been facilitated by greater market deregulation through reduction and phasing out o f state-set prices, and reduced intervention purchases financed by the budget. The Sugar Law was enacted in April 2001. It phased out price supports for sugar beets and introduced production quotas on refined sugar. In the sugar sector, sugar beet prices have been set on an annual basis under agreements reached directly betweenthe operators o f sugar factories and growers. Inthe tobacco sector, an auction systemfor tobacco was established by the Tobacco Law enacted in January 2002. State set prices were reduced by a third over 1999-2001, and were abolished starting with the 2002 harvest. Over the same period tobacco purchases from farmers fell by 30 percent. The price o f tobacco produced under contract between  the producers of tobacco products and the growers is set by mutual agreement. Tobacco producedby growers other thanunder written contracts i s sold on open auction method. 10. In the grains sector, the Turkish Grain Board (TMO) reduced its volume of interventionpurchases by over 45 percent from 1999 to 2001, to about 2.4 million tons. In 2002-2003, these purchases were reduced further to 0.8-1.2 million tons, and TMO ceased announcing minimumpurchases. Wheat import tariffs were reduced substantially, though they remain at about 45 percent. In the hazelnut market, the intervention purchases and announced support prices made by the parastatal Fiskobirlik declined by about 25 percent and 40 percent, respectively, over the 1999-2001 period. These purchases declined further in 2002 and were discontinued entirely in 2003. The Government has since agreed with the Bank on a hazelnut market restructuring plan which i s being implementedin2004, with the restructuring o f the Fiskobirlik. 11. Reform o f State Economic Enterprises. Inthe area o f reform and privatization of SEES,the Government transferred all state-owned sugar factories (SEKER) under the scope of the privatization program in December 2000, and the state tobacco company (TEKEL) was included inthe PrivatizationAdministration's portfolio by a Privatization High Council decision dated February 2001. A comprehensive privatization plan for TEKEL was approved in March 2003. The firm was tendered, but this tender was not finalized owing to the low bids offered, as deemed by the Government. TEKEL i s to be re-tendered during the course o f 2004. Concerning the sugar company (SEKER), the plan for its privatizationwas approved by the PrivatizationHigh Council (PHC) inJune 2003. The Privatization Administration and SEKER have jointly determined the portfolio groups/companies which will be tendered for sale under the privatization program and identified the factories to be liquidated. The timetable for including these portfolio/companies in the privatization program has been established. It foresees that those put into the privatizationprogramwill have their privatizationtenders completed by December31,2004. 12. Considerable progress has also beenmade towards transforming the ASCUs from parastatal organizations, controlled by the Ministry o f Industry and Trade and supported financially by the Treasury, into financially autonomous and sustainable cooperatives that can compete with private traders while operating for the benefit o f the farmers who own them. Institutional arrangements for implementation of the ASCUs/ASCs component have beenfully inplace since June 2002 and all are operating inan effective manner.No new DFIF (Price Stabilization and Support Fund) credits have been provided to the ASCUs from the budget, with funds made available limited to those available from the DFIF Revolving Fund only. Five ASCUS-- Marmarabirlik, Trakyabirlik, Taris Olive, Taris Fig and Gulbirlik-have completed their restructuring plans and been declared eligible for forgiveness o f their pre-May 2000 debts to DFIF. Annual fiscal savings associated with imposition o f hard budget constraints on ASCUs have reached roughly $800 million, equivalent to 0.4 percent of GNP. 13. Implementation of the DIS System. With a total of just over four million farmers, and a participation rate o f 3.29 million farmers in the 2003 DIS Program, over 80 percent o f farmers have been registered in the NRF (as shown in the table below). With payments o f over 2.1 quadrillion made on the 2002 DIS Program by July 2003', The timing of DIS payments has exhibiteda pattern under which roughly 500-800 trillion TL of the given year's Program payments are made in the last quarter of the given calendar year's program,  75% of all farmers hadbeen paid. Therefore, the tranche release condition (iii) has above been met by a wide margin. In addition, under the agreement reached in'May 2004 by the Government and the Bank on the Agricultural Policy Paper, the DIS Program will remainthe predominant agricultural policy instrument inthe period2005-20 10. 14. The share of farming households registered in the NRF exceeds the share of cultivated agricultural area registered in the NRF partially because the maximum area o f any farm household 1 which can qualify for DISParticipation and Payments 1 2001 2002 2003 DIS payments is 50 Paymentperhectare 100mil TL 135 mil. TL 160mil. TL hectares. The other Hectares participating 11.8 - - 16.2 16.5 factor i s that farmers (million) cannot receive DIS Share of agricultural area 48% 66% 67% payments on land participating farmed for which legal Farming households 2.18 million 3.05 million 3.29 million participating title i s not in the same Share o f farming 54% 75% 81% name as the current householdsparticipating head of the farming Value O f Program 1.18 2.19 2.64 (quadrillionTL) 15. Input Subsidy Reform. As noted above, direct and indirect output subsidies borne by the budget and credit and input subsidies fell substantially in 2000-2003. In 2002, all fertilizer and credit subsidies were phased out, and by 2003 all subsidies taken together (excluding DIS payments) had fallen by 80 percent from the level in effect on January 1, 2001. As a result o f these steps, the tranche condition (iv) noted above was met. 16. Grain Purchases. As noted above, grain purchases by the Government (through TMO) were reduced to 0.8 million tons in 2002, which i s a level considered satisfactory to the Bank. As a result o fthis step, the tranche condition (v) notedabove was met. 111. Conclusion 17. In view of the overall performance and progress with the implementation of the Program supported by the Loan, and in compliance with the specific conditions of release as described in Schedule 5, Part A, paragraph 5 (b) o f the Loan Agreement, the Bank has informedthe Borrower of the availability o f the secondtranche ofthe adjustment portion of the Loaninthe amount ofUS$lOOmillion. immediately followingthe summer-fallregistrationandverificationperiod. The bulk of payments is made inthe first quarter ofthe next calendaryear. Finalpaymentsare madebythe endofthe second quarter.