Turkey - Country Assistance Strategy Progress Report

Documentof The WorldBank FOR OFFICIAL USE ONLY Report No. 33995-TU INTERNATIONAL BANKFOR RECONSTRUCTIONAND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION COUNTRY ASSISTANCE STRATEGY PROGRESS REPORT FOR THEREPUBLIC OF TURKEY FOR THE PERIOD FY 2004-2007 November 8,2005 Turkey Country Unit Europe and Central Asia Region International Finance Corporation SouthernEurope and Central Asia Department 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 World Bank authorization.  The date of the last Country Assistance Strategy was October 2, 2003. CURRENCYEQUIVALENTS (Exchange rate as of October 24,2005) Currency Unit = YTL US$l.OO = YTL1.37 FISCALYEAR January 1-December 31 ABBREVIATIONS AND ACRONYMS CAE - Country Assistance Evaluation IPO - InitialPublic Offering CAS - Country Assistance Strategy MDGs - MillenniumDevelopment Goals CEM - Country Economic Memorandum MENA - MiddleEast andNorth Africa CPI - Consumer Price Index MIGA - MultilateralInvestment Guarantee Agency ECA - Europe andCentral Asia NGOs - Non-governmental Organizations EU - European Union OECD - Organization of Economic Cooperation and Development FIAS - Foreign Investment Advisory Service OED - Operations EvaluationDepartment FDI - Foreign Direct Investment SDIF GDP - Gross Domestic Product SMEs -- Savings Deposit Insurance Fund Small and Medium Size Enterprises GFS - Government Finance Statistics VAT - Value Added Tax GNP - Gross NationalProduct WB - World Bank IBRD - International Bank for Reconstruction and Development WBI - World Bank Institute IFC - International Finance Corporation IMF - International Monetary Fund IBRD IFC Vice President Shigeo Katsu Assaad Jabre Director Andrew Vorkink Shahbaz Mavaddat (Acting) Team Leader Andras Horvai George Konda  COUNTRY ASSISTANCE STRATEGY PROGRESSREPORT FOR THE REPUBLICOFTURKEY TABLE OF CONTENTS I. INTRODUCTION ................................................................................................................. 1 11. COUNTRY CONTEXT ........................................................................................................ 1 A. Recent economic developments .......................................................................................... 1 B. Relevance of the development agendaand achievement of key outcomes......................... 2 111. BANK GROUP STRATEGY ............................................................................................... 3 A. Implementationperformance .............................................................................................. 3 B. Adjustingthe program......................................................................................................... 4 C. The planned FY06-07 assistanceprogram.......................................................................... 6 D. IFC andMIGA activities................................................................................................... 11 E. IBRD exposure.................................................................................................................. 11 F. Managingthe risks............................................................................................................ 12 IV. CONCLUSIONS ................................................................................................................. 13 TablesandBoxes: Table 1: Selected Medium-termMacroeconomic Indicators ........................................................ .2 Table 2: Indicative Lending Program FY04-07US$ million ....................................................... 10 Table 3: Summary Lending Figures............................................................................................. 12 Box 1: Status of HighCase Triggers.. ................................................................... 5 Annexes: Annex A 1 Status of Key Outcomes and Benchmarks Annex A2 Macroeconomic Performance and Its Medium-Term Sustainability Annex A3 Status of Structural Reforms Annex A4 Social Impact of Reforms Annex A5 Client Survey Annex B1 Turkey at a Glance Annex B2 Selected Indicators of Bank Portfolio Performance and Management Annex B3 IBRDHigh-case LendingProgram Annex B3 IFC and MIGA Program Annex B4 Summary of Nonlending Services Annex B5 Social Indicators Annex B6 Key Economic Indicators Annex B7 Key Exposure Indicators Annex B8 IBRD's Operations Portfolio Annex B8 IFC's Committed and Outstanding Portfolio Annex B9 CAS Matrix-Status of Country Performance Indicators and Benchmarks Annex C Country FinancingParameters  FOROFFICIALUSEONLY  This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without World Bank authorization.   COUNTRYASSISTANCESTRATEGY PROGRESSREPORT FOR THE REPUBLICOFTURKEY I.INTRODUCTION 1. The Board o f Executive Directors discussed the FY04-06 Country Assistance Strategy (CAS) for Turkey on November 6, 2003 (Document No. R2003-0181; IFCIR2003-0175). This Progress Report briefly takes stock of the implementation of the CAS, sets out some adjustments to reflect Turkey's preparation for EU membership, and extends the CAS period by another fiscal year under a largely unchanged strategic framework that, nonetheless, has been refined to address emerging issues. 2. The main text i s followed by annexes on: (i) the status of key outcomes and benchmarks (Annex Al); (ii) macroeconomic performance and its medium-term sustainability (Annex A2); (iii) statusofstructuralreforms(AnnexA3); (iv)thesocialimpactofreforms(AnnexA4), the and (v) the results of the recent client survey (Annex A5). The usual CAS annexes are also attached, including Annex B 9 that describes the status of country performance indicators and benchmarks. 11. COUNTRY CONTEXT A. Recenteconomic developments 3. It was less than five years ago when the Turkish economy suffered a serious crisis. The consequences were devastating: devaluation of the currency by some 50 percent, a jump in nominal interest rates to 100 percent, the virtual collapse of the banking system and the bankruptcy o f scores of enterprises. At the end of 2001, Turkey registered a 10-percent decline in GNP, inflation was on the order of 70 percent, and the net public debt to GNP ratio exceeded 90 percent. 4. The economy hasreboundedfromthis crisis, and GNPgrowthhasbeenstrongsince 2001 (8 percent in 2002, 6 percent in 2003 and 10 percent in 2004). At the same time, inflation has been brought under control reaching single digits (9.3 percent) in 2004 (Table l), the lowest in Turkey for 35 years. Net public debt to GNP has decreased significantly to about 64 percent by end-2004. 5. The impressive macroeconomic performance has been due to the combinationof several factors. These include stabilization measures, with strong fiscal discipline at their core allowing the maintenance o f large primary surpluses o f the public sector on the order of 6.5 percent o f GNP, an ongoing structural reform agenda, and political stability since the November 2002 elections. The Government's macroeconomic and structural reform program has been supported by the IMF through consecutive Stand-by Arrangements and significant Bank adjustment lending. While recent macroeconomic performance has exceeded expectations, implementation o f some difficult structural reforms, such as state bank privatization and social security reform, has taken longer than planned.  2 6. Implementation of important political reforms to meet the Copenhagen criteria allowed the EU's historic decision in December 2004 to open accession negotiations with Turkey in October 2005. This decision, long-awaited in Turkey, has been an important signal for the financial markets and has created a firm anchor for the country's development in the years ahead. The process of accession i s expected to provide a strong incentive to continue with political, macroeconomic and structural reforms. Nonetheless, it i s clear that the accession process will be long, lasting at least until after 2014, and that it i s controversial in light of the popular sentiment in some of the EU countries with respect to Turkey's future membership and the deadlock in adopting the new EU Constitution. If obstacles were to arise in the accession process, this could be seen negatively by investors and the market, and could lead to reform fatigue inTurkey. Table 1: Selected Medium-term Macroeconomic Indicators I 2001 2002 2003 2004 2005 2006 2007 GNP Growth -9.5 7.9 5.9 9.9 5 .o 5 .O 5.O Investment (% of GDP) 18.4 16.7 15.6 17.9 17.9 18.3 18.7 Public 5.7 5.4 4.2 3.7 3.7 3.8 3.9 Private 12.7 11.4 11.4 14.1 14.2 14.5 14.8 CPI Inflation 68.5 29.7 18.4 9.3 8.O 5.0 4.0 Nominal Interest Rate 99.1 63.5 44.1 24.9 16.5 13.8 12.8 Real Interest Rate 1/ 35.5 30.3 30.2 14.2 9.5 9.0 8.5 Current Account (billion $) 3.4 -1.5 -8.0 -15.5 -21.3 -22.0 -20.8 Exports (f.0.b.) 34.4 40.1 51.2 67.0 76.1 82.6 90.6 Imports (f.0.b.) -38.1 -47.4 -65.2 -90.9 -108.1 -117.0 -124.5 Capital Account (billion $) -14.6 1.2 7.1 17.0 27.4 31.3 21.7 FDI 2.8 0.9 1.2 1.9 3.7 8.2 5.3 Overall Balance (billion $) -12.9 -0.2 4.1 4.3 11.4 9.3 0.9 1) Computed as the average of the monthly auction rates deflated by 12-month ahead CPI inflation Source: Government, IMFand WB estimates. B. Relevanceof the development agenda and achievementof key outcomes 7. Turkey's development agenda, which is driven by the country's EU accession objective, is centered around four major themes: (a) sound macroeconomics and governance; (b) equitable human and social development; (c) attractive business climate and knowledge; and (d) strong environmental management and disaster mitigation. This development agenda, which has also provided the organizing principles o f the CAS, remains highly relevant. While it was not formally results-based, the FY04-06 CAS has laid out a set of key outcomes in each of the four areas that the Government wished to achieve during the CAS period. The status of these key outcomes i s described in Annexes A 1 and B9, and summarized below. 8. In the areas of macroeconomic management and improvement in the business climate, Turkey has over-performed the expected outcomes. Economic growth has been stronger and steadier, the reduction of inflation has been faster, and the improvements in public creditworthiness indicators have been more pronounced than originally expected. Similarly,  export growth has been faster and FDIinflows have been stronger than the objectives set out in the CAS while stability o f the financial sector has improved. 9. As for human development, extreme poverty has remained low, at about 1.2 percent and the poverty rate of 27 percent in 2002, is projected to have declined to the 21-25 percent range by 2005'. Trends in education have also improved but clearly from a lower base than originally indicated. Net enrollment in basic education has been around 89 percent, while girls' net enrollment in secondary education and the female/male ratio have improved significantly (see Annex Al). Finally, in health there have been notable improvements in child mortality towards reaching the Millennium Development Goal (from 52 to 37 per 1,000 live births since 1998) but there is no sufficiently robust data available to assess the change in maternal health. As for the fourth objective, strong environment and disaster management, there has been progress in convergence with EU environmental standards and in strengthening the nationwide disaster prevention and management system but a challenging agenda remains in both areas. IILBANK GROUP STRATEGY A. Implementation performance 10. The objective of the CAS has been to help Turkey implement fundamental reforms to reduce economic vulnerability and achieve high and stable growth, and continue the process of addressing long neglected social and environmental problems. While the previous CAS focused on crisis management, the current CAS aims at reducing the risk of reemergence of crisis and helping Turkey address the many challenges of preparing for EU membership. 11. The CAS has envisaged a US$4.5 billion lending program, including about US$2.2 billion inpolicy-based loans, under the high case scenario. The CAS has also set out a strong program o f analytical and advisory work closely linked to the lending program. Investment lending covers a wide range o f areas in the economy and i s also designed to complement policy- based lending that focuses on two main reform areas: public sector reform and the reform of the financial sector. Implementation of the CAS has been on track, as described below. 12. First,portfolio performance has beengood. However, there are some exceptions, such as basic education and agriculture, where implementation capacity constraints have slowed project implementation. As of June 2005, of the 21 operations, only about 5 percent showed an unsatisfactory performance, one of the lowest values ever recorded in Turkey, and in line with the E C A average o f about 6 percent. Total disbursement in FY05 exceeded US$1 billion; the disbursement ratio o f 25 percent compares well with previous years and with the ECA average. The adoption o f the new country financing parameters in January 2005, which are summarized in 'The availability of new, more reliable data as a result of the recent poverty assessment and the education sector work, has necessitated the resetting of the baseline information in some instances. The joint poverty assessment has redefined the poverty line and dropped the concept of vulnerability used in the CAS. Thus the vulnerability and poverty data are not comparable. In education, it appears that the situation at the time of the CAS was actually less favorable in terms of net enrollment inbasic education and the female/male ratio in secondary education.  4 Annex C, will contribute to continued strong disbursement performance particularly by easing the constraints on counterpart funding. 13. Second, having met the respective triggers, Turkey has stayed in the high case lending program (see Box 1). New project approvals, averaging about US$1.7 billion inFY04 and FY05, have reflected both the country's continued strong interest in borrowing from the Bank and its commitment to the implementation of the agreed CAS program (Table 2). The mix o f lending instruments has been appropriate. In the first two years, policy-based lending was somewhat lower than originally envisaged (US$l billion compared to US$1.4 billion), primarily because the design of the social security reform and the internal consensus building have taken longer than expected. However, there was strong demand for investment lending, including for repeater projects for successful operations (for export financing and privatization social support). Moving forward, the authorities have indicated strong interest in policy-based lending. Given the importance o f the social security reform and employment generation, policy-based lendingi s expected to remain key to the overall program. 14. Third, the results to date indicate that the CAS program is broadly on track. Annexes A 1 and B9 show the status of Bank Group benchmarks which represent outcomes and outputs that the Bank's program aims to influence duringthe CAS period. B. Adjusting the program 15. The Progress Report extends the CAS period by a year because of special circumstances. In order to bring this CAS in line with the general 4-year CAS cycle, and in light of the continued relevance of the strategy set out inthe CAS and the timing of increased EU assistance, the CAS i s extended by a year, on an exceptional basis, to cover FY07 as well. Accordingly, a new high case CAS envelope of US$6.6 billion i s set for the 4-year period, o f which about US$3.4 billion had been approved by end-FYO5. About 40 percent o f the total envelope i s expected to be committed inthe form o f development policy loans. 16. Inaddition to the extension of the programby a year, there are several justifications for increasing the overall lending envelope. These include: (i) the excellent macroeconomic performance and the Government's track record o f prudent macroeconomic and debt management; (ii) Turkey's improved creditworthiness for Bank lending; (iii)continued progress with structural reforms and additional actions the Government plans to implement in the context o f development policy loans in the years ahead; (iv) an in-depth engagement on the main policy issues; (v) effective implementation of the CAS program; (vi) strong demand for Bank financial and non-financial assistance; (vii) an historic opportunity to help Turkey in preparing for EU accession, especially at the beginning o f the accession negotiations, which i s strongly requested and much appreciated by the authorities; and (viii) the need for continued financing at the moment when large amounts of EU grants are yet to start flowing. The proposal to intensify the Bank's program in Turkey i s fully consistent with the Bank's Middle Income Countries (MIC) agenda. The 10-percent increase in the overall envelope i s well justified by Turkey's overperformance in some key areas, such as in macroeconomic management, and by the additional actions the Government plans to take in the context of the proposed development policy loans that provide the basis for an enhanced highcase lending program.  5 Box 1:Status of High Case Triggers Macroeconomic Implementation of a satisfactory macroeconomic framework consistent with the Country Performance Indicators included in the Country Assistance Strategy Matrix. Macroeconomic indicators will be monitored on a quarterly basis. A satisfactory macroeconomicframework, consistent with the Country Performance Indicators, has been maintained. Performance has exceeded expectations. A new 3-year Stand-by Arrangement has been in placefrom May 2005. Structural Sustained satisfactory implementation of public sector reforms, including: 9 budgetreforms to improve transparency and effectiveness ofpublic expenditures; 9 tax reforms to improve efficiency and equity, andpromote growth; and 9 public liability managementreforms to managefinancial and fiscal risks. Public sector reforms are being satisfactorily implemented,including: 9 (i) the enactment of the Public Finance Management and Control Law that harmonizes and modernizes budgetary practice across the general government and whose implementation requires concerted action at all levels of government; (ii) the rolling-out of GFS budget classification in the consolidated budget and most of the special budget institutions; (iii) introduction of accrual accounting in all consolidated budget institutions; and (iv) elimination of accounts related to closed Extrabudgetary Funds; 9 continued taxpolicy reform to improveefficiency and equity of the tax system,and enactmentof a new Law on the RevenueAdministration; 9 maintenanceof astrongmiddle office for risk management in the Treasury. All of the second tranche conditions of the public sector part of the Programmatic Financial and Public Sector Adjustment Loan (PFPSAL) III have been met with one exception (the draft Agriculture Framework Law has been submittedto Parliament but is yet to be adopted). Sustained satisfactory implementation of regulatory reforms, privatization and liberalization of the energy and telecommunications sectors; and of the agriculture reform program designed to replace indirect subsidies with direct income support and promote the development of agriculture markets. The release of the second tranche of the Economic Reform Loan confirms that triggers related to the sustained implementation of regulatory reforms, privatization and liberalization of the energy and telecommunicationssectors and the agricultural reform program have been met. Sustained satisfactory implementation of financial and private sector reforms, including: 9 continuedindependence andfurther strengthening of financial markets regulatory agencies; 9 completionofprivatization of statebanks; k passageof anamended Bankruptcy Law andrevisedCommercial Code; There has been somewhat slower progress in the area of financial sector reform supported by the PFPSALIII, in particular in state bank privatization. However, there has been recentprogress in several areas. 9 Independence of the financial markets regulatory agencies has been preserved, and further institutional strengthening of BRSA and SDIF is underway. 9 Vakifbank has announced an IPOfor thefall of 2005, and Ziraat and Halk have been substantially restructured in terms of staffing and branch networks in preparation for their privatization. The authorities have announced that they are in theprocess of engagingprivatization advisorsto sell Halk. Due to their large size and impact on the market, the Governmentplans to sequence theprivatization of Ziraat after the initial steps toprivatize Halk, withfurther action on privatization of Ziraat to occur in 2006. The release of the PFPSALIII second tranche will be consideredsatisfactory for meeting the high case trigger related to thefinancial sector. 9 TheExecution and Bankruptcy Law has been amended and supporting regulations have been issued. The Commercial Code has been amended to simplify procedures for setting up a company; a new Commercial Code has been drafted. Design and implementation of the next phase of a comprehensive social security reform. A comprehensivereform of the social security system, including pensions and health insurance, has been prepared and key pieces of legislation have been submitted to Parliament. Adoption of these draft laws constitutes the core Board presentation condition of the Programmatic Public Sector Development Policy Loan. Maintenance of public expenditure targets for health, education and social protection as agreed with the Bank. Aaarepatesocial exvendituresreached aareedtargets with a sliaht underagein education.  6 17. Inorder to respond to emerging priorities, there would be further alignment of the program with Turkey's EU accession objective and increased emphasis on employment generation as described below. A significant program of lending in the energy sector i s also envisaged, reflecting the ongoing reforms in the sector, our sustained in-depth policy dialogue and the substantial investment needs. 18. The EU accession decision has generated new demand for the Bank's services in Turkey. The Bank has gained experience with the other candidate countries during the accession process that i s highly valued in Turkey. In this context, the Bank has agreed to accelerate the preparation of a new CEM on EU accession, in close collaboration with the EC. WBI will complement the CEM efforts with relevant institutional and leadership knowledge transfer activities designed to improve the ability to identify, analyze, sequence and implement policy decisions related to EUaccession. The EUaccession process also has the potential for the Bank to maintain a strong lending program in Turkey, in part because the EU's pre-accession assistance will increasingly focus on the areas where Turkey i s to adopt the acquis, which leaves many other areas requiring Bank assistance, and in part because of the need to help the absorption o f EU funds, which will not start to arrive in large amounts until after 2007. To the extent necessary, the Bank will continue to redirect its assistance to areas where the Government's EU accession agenda would require it most, including infrastructure, and social and human development. Even if the process of EU accession gets delayed, these are areas where development needs in Turkey are very significant and require external financing as well as technical advice. 19. One of Turkey's biggest economic and political challenges in convergence with the EUis to increase employment. Over the past 20 years, population growth in Turkey has been faster thanjob creation. As a result, the employment rate, the percentage of adult population that i s employed, stood at 45 percent in 2004, significantly below the EU average of 62 percent. The informal sector i s quite large. With the essential macroeconomic factors now in place, it i s time to address the foundations of growth to promote faster job creation through increased productivity. A set of reforms, which would improve labor market flexibility and reduce informality, remove constraints to private sector development, including SMEs, increase access to finance, reduce barriers to FDI, and enhance the skills o f the labor force, would be needed to support employment generation and to promote self-employment and sustainable livelihoods for the poor. Some o f these reforms, along with the continued strengthening o f the financial sector, will be incorporated in the proposedprogrammatic development policy loans. C. The planned FY06-07 assistanceprogram 20. An illustrative lending program is presented below that compares the original high case program with the one envisaged in this Progress Report (Table 2). This envisages an ambitious program o f development policy loans, two in each o f the remaining fiscal years, reflecting the Government's reform priorities and its preference to receive Bank support for the design and implementation o f such reforms. As mentioned earlier, these development policy loans are expected to go beyond the actions that constitute the high case triggers. Some o f the key actions that would be embedded in these operations include:  7 Establishment of the Universal Health Insurance Fund and Social Security Institution that merges the three social security systems as well as the Green Card (health insurance) program; Change in the unemployment insurance system to improve access to benefits for unemployed workers and easing contribution requirements in a fiscally sustainable way; Implementation of severance pay and fixed-term contracting reforms to encourage employment and labor market flexibility; and Introduction o f a new mortgage finance legislation that would enable the further expansion o f equitable and sustainable mortgage markets, contributing to growth in the construction industryand related employment. 21. The measures listed above constitute a set of benchmarks that will be closely monitored. Satisfactory progress in their implementation will allow the Bank to move ahead with the proposed development policy loans, provided the high case triggers have been met. However, if overall substantive progress was not made in these reform areas, the respective development policy loan would not be substituted but the lending envelope would be reduced. Finally, if the Bank's program shifted to the low case, new lending would be limited to about US$500 million in each of the remaining fiscal years. 22. Under the enhanced high case, the Bank would support continued public sector reforms through two Programmatic Public Sector Development Policy Loans (PPDPLs). These will aim at: (i) maintaining an enabling macroeconomic framework; (ii)supporting fiscal adjustment and improved public financial management, in particular through the reform o f the social security system, including pensions, health insurance, and social assistance, and the continuation of public finance reforms; and (iii)extending social protection through the introduction of universal health insurance and improved targeting of social assistance. The preparation o f the PPDPL operations has been based on the continued dialogue with the authorities under the PFPSAL series on public sector reforms, economic and sector work, including previous CEMs, the Poverty Assessment (FY05), the recently completed Labor Market Study (FY05), and technical assistance in modeling the impact of different pension and health insurance reform scenarios. WBI will continue to provide non-lending support to help: (i) strengthen the capacity to analyze and implement health sector reforms; (ii)modernize and improve the efficiency o f the judiciary; and (iii) improve understanding of intergovernmental public finance issues. The Public Expenditure Review (FY06) will provide further analytical basis for the formulation of policies that would improve the quality o f fiscal adjustment. 23. The Programmatic Employment Generation Development Policy Loans (PEGDPLs) will substitute, and go well beyond the scope of the former Programmatic Financial Sector Adjustment Loan series. These loans would be designed around four pillars, focusing on policies aimed at improving: (i)the investment climate; (ii)the functioning o f the financial sector, including continued banking sector reform; (iii) performance of the labor market; and (iv) labor productivity through technology adoption and upgraded skills. This increased focus on private sector development and employment creation also reflects the recommendation o f OED's recent Country Assistance Evaluation (CAE). An extensive AAA program, carried out in close  8 intersectoral collaboration, including IFC and FIAS where appropriate, supports the preparation o f these operations. The Investment Climate Assessment (ICA, FY06) will provide the diagnosis and policy prescriptions in key areas, such as competition policy, administrative barriers to firms' operations, dispute resolution, and access to land, and its dissemination will be supported by WBI activities. The ICA will be complemented by the Bank's Report on Standards and Codes on Accounting and Auditing (FY05), the Doing Business Surveys, and the ongoing assessment o f the collateral regime. Recommendations of the Investment Advisory Council, in which the Bank Group actively participates, will also be incorporated. As for the second pillar, in addition to the dialogue under the PFPSAL series, the planned joint Bank-Fund Financial Sector Assessment Program (FSAP, FY07) will make a major contribution in particular to the second operation. With respect to the third pillar, the Labor Market Study (FY05), which has recommended a package of reforms aiming at finding the balance between encouraging job creation and protecting workers, will be particularly useful. As for the last pillar, the Education Sector Assessment (FY05) and the Tertiary Education Study (FY06) will provide important input. Finally, the CEM on EU accession will also assist in designing specific elements of the PEGDPLs. 24. The employment creation agenda will also be supported through a line of credit to SMEs and through funding of income generation projects at the local level. While the policy agenda will be pursued through the PEGDPLs, an SME Development Project i s planned for FY06 to help address the unmet medium- and long-term financing requirements of the SME sector. The line of credit will be intermediated through private banks and Halk Bank, the latter to provide credit to the under-served part of the country through its extensive branch network in these areas. As a continuation of the local initiatives component of the ongoing Social Risk Mitigation Project (SRMP), the Bank intends to support employment generation and community development based on local initiatives through an Employment and Social Development Project. Implementation of the SRMP i s coming to an end, and an independent assessment of its local initiative component will be carried out by early 2006 that will be taken into account in launching the new operation. 25. A broader program of lending support in the energy sector is envisaged to specifically bridge gaps in gas and electricity service delivery needs during the reform transition and meet EU integration challenges. The program aims to continue the reform transition and ensure that essential infrastructure that can affect energy supply reliability i s implemented. The program focuses on: (i) advancing generation sector reforms, and meeting generation supply gaps during the transition to private supply (the Energy Liberalization Project); (ii)implementing an important gas storage facility that will allow Turkey to meet demand peaks during the winter and possible interruptions in supply from its suppliers - (the Gas Sector Development Project); (iii) supporting Turkey to implement the EU market integration process agreed between the European Commission and eight non-EU members countries in South Eastern Europe - (the ECSEE APL3 Project); and (iv) rehabilitation and upgrading o f the electricity distribution system to improve system reliability, reduce technical and non-technical losses, and support the introduction of private sector participation - (the Distribution Rehabilitation Project). Some of these projects might benefit from cofinancing with the European Investment Bank (ED).  9 26. This lending program in the energy sector is based on significant AAA work. The Bank has a strong advisory support program to help the Government and the utilities in the gas and electricity sector. The Bank supported the Government in structuring and establishing the Energy Market Regulatory Authority in 2001 and in defining the detailed electricity market design. A Bank technical assistance loan supports specific implementation tasks, such as distribution sector unbundling, definition of tariff review rules, and preparation of initial vesting contracts to prepare for privatization. An independent expert panel of leading international specialists in market implementation, regulation and privatization provides the Government guidance on challenging implementation trade-offs and choices. In the gas sector a comprehensive gas development strategy was completed in 2004 to set a framework and process for introducing competition in wholesale supply. In addition to the continuing work on reform implementation, the Bank will continue its advisory work focusing on issues of energy supply security, EU market integration and helping key energy parastatals achieve credit quality that will enable them to access capital markets without sovereign guarantees. 27. The last operation in the lending program is an infrastructure project, yet to be selected by the authorities. It could include the second phase of the Railways Restructuring APL, if ready; a national level disaster management project provided the initial implementation of the Istanbul Seismic Risk Mitigation Project i s successful, or a municipal infrastructure project in the Istanbul area. Finally, the Bank also wants to engage the authorities in joint analytical work on environmental management issues, an area where OED's recent CAE felt that a more intensive dialogue would be warranted, and i s ready to carry out a review of the irrigation sector, in particular, to help the rationalization of irrigation investments.  10 Table 2: IndicativeLendingProgramFY04-07"US$ million Original High Case EnhancedHigh Case IFY04 PFPSAL I11 900 PFPSAL I11 1000 Export Finance I1 300 Export Finance I1 303 Health Sector Trans. 200 Health Transition I 61 Renewable Energy 202 Renewable Energy 202 Micro Watershed 37 Anatolia Watershed 20 Total 1650 Total 1586 FY05 Municipal Reform and Services 200 Municipal Services 275 Railway Restructuring 200 Railway Restructuring 185 Seismic Risk Mitigation 400 Istanbul Seismic RiskMitigation 400 Secondary Education 200 Secondary Education 104 PPSAL (now in FY06; renamed PPDPLI) 500 Export Finance I11 305 Knowledge Econ. (dropped) 100 Privatization Social Support I1 465 ECSEE APL2 66 Total 1600 Total 1800 PPSAL I1(now in FY07; renamed) 400 PPDPL I 400 PFSAL (renamed to PEGDPL) 400 PEGDPL I 400 SME Finance 100 SME Development 150 Energy 100 Energy Liberalization 200 Rural Development 250 Gas Development 325 ECSEE APL 3 125 Total 1250 Total 1600 PPDPL I1 400 PEGDPL I1 400 Electricity Distribution 300 Infrastructure 250 Employment and Social Dev. 250 Total 1600 I TOTAL 4500 TOTAL 6586 1/ Inaddition to US$SOO million for possible emergency lending in case of a large scale natural disaster. The amounts are rounded, The specific loan amounts will be determined during projectpreparation.  11 D. IFC andMIGA activities 28. During FY04-05, IFC continued to support Turkey's economic program through its active involvement in the main sectors of the economy. During this period, IFC committed about US$550 million supporting the corporate sector, financial sector, health and education, and infrastructure. B y end-FYO5, IFC's held investment reached about US$l.1 billion. In the financial sector, IFC has been working with mid-sized banks to strengthen their capital structure and balance sheets, and to develop new products such as the leasing industry. IFC, in coordination with the Bank, has been continuing its supporting role in the development of microfinance legislation in Turkey. In the manufacturing sector, IFC has supported restructurings and re-capitalization of its portfolio companies. In addition to helping Turkish companies diversify risk through outward investment and become competitive regional players, IFC has continued its strategy to promote south-south investments and financing of joint- ventures from other countries in Turkey. In health and education, IFC has assisted with financing to improve access to high quality services through modernization and expansion programs. IFC has also supported privatization of a cruise ship terminal, assisting the upgrading of Turkey's tourism sector. IFC has provided financing for capital expenditure programs in two gas distribution projects, which will help to bring lower energy costs to consumers and industry and reduce environmental emission by displacing more polluting fuels. As the implementation o f the Government's privatization program accelerates, IFC i s putting additional emphasis on the broader infrastructure sector, supporting flagship privatizations, attracting foreign interest, and stimulating the flow of FDI. InFY06, IFC will continue to provide support to the banking sector that i s experiencing a wave of consolidation and foreign investments, but also engage in new products, such as supporting the reinsurance of earthquake risk, and provide funding to the second auction of non-performing loans. 29. As of June 2005, MIGA's outstanding portfolio in Turkey consisted of two contracts inthe infrastructure sector with a total gross and net exposure of US$135 million and US$68 million, respectively. This corresponds to 2.6 percent and 2.2 percent o f MIGA's total gross and net exposure, respectively. MIGA has insured a number o f Turkish investors for projects in the ECA region. Currently, two Turkish investors have about US$4 million in gross exposure with MIGA in the agribusiness and manufacturing sectors. The agency i s ready to provide additional support as Turkishinvestors take advantage of investment opportunities in the E C A and MNA regions. E. IBRDexposure 30. Despite the recent sharp increase in new commitments, IBRD exposure has been carefully managed. lBRD debt outstanding and disbursed in 2004 reached US$6.2 billion, an increase of about US$800 million since 2002 but well below the US$7.0 billion projected for 2004 in the CAS. This i s due to the relatively larger role of investment lending in the first two years of the CAS period and the slower than expected disbursement of some large investment operations inthe portfolio. 31. Under the enhanced high case lending program, IBRD debt outstanding and disbursed (DOD) would increase to about US$8.2 billion by 2007. Turkey's share in IBRD's portfolio would be about 7.2 percent in 2007, up from 5.6 percent in 2004. Despite the  12 significant improvements in its economic fundamentals and upgrades by credit ratings agencies, financial markets still consider Turkey a risky country, as seen in the large, albeit reduced, premium on Turkish dollar Eurobonds over LIBOR. Turkey has a high external debt burden with a debt service ratio in the 30 percent range. As shown in Table 3, debt service to preferred creditors as a share of external public debt service i s expected to reach about 47 percent in 2005- 06 reflecting large debt service payments to the Fund, while IBRD debt service as a percentage of exports of goods and services will remain modest, less than 1 percent throughout the period. (millionUS$) 2003 2004 2005 2006 2007 Commitments 0 1,586 2,525 1,275 1,200 Disbursements 276 1,499 1,447 1,635 1,173 IBRD DOD 5,214 6,153 6,829 7,653 8,153 Share of IBRD Portfolio 4.5 5.6 6.3 6.9 7.2 Preferred creditor DS/public DS (YO) 25.9 38.7 47.O 46.8 39.5 IBRD Debt Service 1.o 0.8 0.9 0.9 0.8 (as % of exp. of goods and serv.) IBRD Portfolio 115,557 110,809 107,958 110,425 113,397 F. Managingthe risks 32. The CAS identified three sets of risks: (i) macroeconomic vulnerabilities arising from fundamental structural problems, the continuing impact of the 2001 crisis, and international and regional developments; (ii) potential loss of consensus for political or social reasons stemming a from the social impact o f reforms; and (iii) institutional challenges in implementing the program. 33. Turkey's macroeconomic performance during the first part of the CAS period has substantially reduced its economic vulnerability. The sharp decline in the net public debt to GNP ratio (from about 79 percent in 2002 to some 64 percent in 2004), the faster-than-projected reduction in real interest rates, and the increased share o f local currency denominated public debt have contributed to improved debt sustainability. Nonetheless, Turkey remains a highly indebted country with a high domestic debt roll-over ratio. On the positive side, the average maturity o f domestic debt continues to improve, as evidenced by the increase from 17 months at the end o f 2004 to 26 months in the first half of 2005. The widening current account deficit (some 5.2 percent o f GNP in 2004) also represents a continued source o f vulnerability, especially as its financing i s more reliant on potentially volatile short-term capital inflows. The deficit further widened in 2005 and as end-August reached US$15.8 billion mainly due to increased energy prices and the deterioration in the trade balance. End-year current account deficit forecasts by market analysts are significantly revised upwards to above 6 percent of GNP. Compared to Turkey's potential, FDI remained modest during 2003-04 (an average of some US$1.5 billion) but 2005 marked the largest privatization deal inTurkey's history, the sale of 55 percent of Turk Telekom for US$6.6 billion. Focusing on the quality o f fiscal adjustment, reducing the informal sector and promoting FDIwill help mitigate the macroeconomic risks.  13 34. As for the political economy of reforms, the Government has been able to proceed, albeit at varying speed, with most of the key items on its reform agenda. Following years of crisis management and with stringent fiscal policies in the past few years, it has not been easy to maintain popular support for economic reforms. Nonetheless, the temptation for populist measures has been largely resisted although pressures have emerged from time to time related to pensions, minimum wages, agricultural subsidies and regional tax incentives. The Government has also tried to build consensus around reforms through dialogue with social partners (e.g. in the area of social security reform) that has taken some time but i s expected to lead to more sustainable results over the long-term. It has also implemented measures to cushion the negative impact o f programs such as privatization on workers made redundant, through job loss compensation and labor deployment services. Nonetheless, high unemployment levels are likely to represent a threat to the political economy sustainability of the reform process as the elections approach. As noted before, the authorities have requested the Bank's assistance, included in this Progress Report, for dealing with employment issues. While tight fiscal policy has been the cornerstone o f the excellent macroeconomic performance, the quality of fiscal adjustment needs improvement. Achieving such improvement, while maintaining the 6.5 percent o f GNP primary surplus target under the Fund-supported program, will present a major challenge for the Government, especially as the 2007 elections draw closer, although the Government's popularity remains high and the opposition continues to be in disarray. Finally, a major setback in the EU accession process could lead to reduced support for reforms and potentially to a shift inpolicies. 35. Implementationriskshave remained. While the availability of counterpart funding has improved over time due to better planning and an increased public investment envelope in 2005, institutional capacity constraints have persisted in several line ministries and there have been problems at times in the coordination between government agencies. The almost continuous process o f joint portfolio reviews has helped to keep these issues in the focus of attention, and technical assistance and training along with intensified supervision have been applied to improve the situation. IV. CONCLUSIONS 36. Overall, Turkey's economy has over-performed expectations during the past two years, Implementation of the CAS i s on track, and there i s a strong demand for the Bank's lending and knowledge services. A stable government and improving economy, an EU anchor and a 3-year Fund program seem to provide a favorable framework for the Bank's work in Turkey inthe remaining years of the CAS period.   Annex A1 tatus of Key Outcomes and Bank G up Benchmarks Development Themes Key Outcomes Bank Group Benchmarks Sound Stabilization of public Satisfactory macroeconomic and fiscal Macroeconomics and creditworthiness indicators at Framework consistent with the key Governance sustainable levels. The net public xtcomes. A satisfactory debt to GNP ratio has declined wacroeconomic and fiscal framework from about 79% in 2002 to about has been maintained, supported by 64% in 2004. Tonsecutive Fund programs and Bank zdjustment lending. The primary Less volatile economic growth in Furplus of the consolidatedpublic sector the range of 5%. GNP growth has reached 6.2% and 6.9% of GNP in 2003 been strong, exceeding 5% (close to znd 2004, respectively. 6% in 2003 and 10%in 2004). Implementation of public sector reforms, Single digit inflation. End-year focusing on: (i) the tax system; (ii)public CPI was reduced to 9.3% in 2004, axpenditure management; (iii) the social reaching single digits thefirst time security system; (iv) the civil service; (v) for more than 30years. local government; and (vi) anti- corruption. Implementation of public sector reforms has been on track, including: (i) tax policy reform and new revenue administration law; (ii) enactmentand initial implementation of the Public Finance Management and Control Law; (iii) presentation of draft social security legislation to Parliament; (iv) drafting of a new law on civil service; (v)passage of local government laws (although constitutional challenges have occurred); (vi) enactment of laws on freedom of information and code of conduct for civil servants; and establishmentof the ethics board. Equitable Human Low extreme poverty (1.8%) Public expenditure on health, education and Social maintained and vulnerability and social protection are sustained at pre- Development reduced from 15% in 2001 to 12% crisis levels. The benchmarks as shares in 2006. Extreme poverty has of GNP are: (i) education: 4.25%; (ii) remained low at 1.2%. The concept health: 3.25%, and (iii) social protection: of vulnerability has changed; the 7.00%. Aggregate social expenditures poverty rate of 27% in 2002 is reached agreed targets with a slight projected to have declined to the underage in education. One key issue in 21-25%range by 2005. health is to contain costs and derive better health outcomesfor expenditures. Net enrollment rate in basic I n socialprotection the issue is to curtail education maintained at not less pension deficit over the medium to long- than 99%; girls' enrollment term. increased, especially in secondary education: male/female ratio Implementation of (i) the Conditional improved from 1.20 to 1.15 by Cash Transfer (CCT) program to benefit 2006. Due to more accurate data, over 1 million children, and (ii)at least the baseline and the expected 1,500 local initiative (LI) projects to outcomes have been reset. Net support vulnerable people. CCT reached enrollment in basic education was 1.78 million children, representing the maintained at 89% between 2001 poorest 6%, and 3,700 LI sub-projects and 2004. Net enrollment is were underway at end-FYOS. expected to increase to 92% by 2006. Girls' secondary net Renovation and modernization of enrollment rate increased from schools, including in disadvantaged  Annex A1 39% to SO%, and the maleflemale ireas, and implementation of reforms in ratio in secondary education iecondary education. Implementation of decreased from 1.21 to 1.17 he Bank-financed basic education between 2001 and 2004, and is projects has been slow due to lack of expected to reach 1.15in 2006. :ounterpart funds allocation in 2003, *everalpersonal changes in the Ministry Child mortality reduced and ,f Education, and implementation maternal health improved to make :apacity problems. Reforms in progress towards the MDGs. There :econdary education have begun with has been significant reduction in in EU-financed project. The Bank- infant and child mortality since the Snanced project to support secondary 1998 survey, from 43 to 29 and 52 ?ducationwas approved in March 2005. to 37 per 1,000 live births, respectively. At the moment, there :mprovements in access and quality of are data limitations to assess iasic health provision. Significant changein maternal health. 'mprovement in access to care, ?speciallyby the poor as a result of the xpansion of green card coverage to 'nclude primary care and drugs, in iddition to inpatient care. The Government has designed a universal health insurance program which will iramatically increase access while xnifying and rationalizing health financing. The requisite draft law is Yurrently before Parliament. Attractive Business Exports growth rate exceeds GNP [ncrease in export capacity of enterprises Climate and growth rate. I n 2003 and 2004, financed through lines of credit provided Knowledge exports grew on average by 17% in by the World Bank Group. About 100 real terms (19% in 2003 and 15% exporters benefited from EFILI in 2004), exceeding the average (US$250 million) between 1999 and real GNPgrowth rate of 8%during 2003; average export growth oj the sameperiod. beneficiaries was about 1518%.EFILII (US$300million), effective since Spring Foreign Direct Investment reaches 2004, reached 190 exporters in a year. US$1.5 billion on average during EFILIII ($300 million) has been the CAS period. FDI averaged US$ recently approved. 1.6 billion in 2003-2004 (US$1.3 million in 2003 and US$1.9 million Improvements in the overall investment in 2004) and is expected to climate, implementation of the new FDI significantly exceed this level in law, and establishment of an Investment 2005. Promotion Agency (IPA). Substantial progress has been made in Stability of financial markets simplification of business registration. improved. Thefinancial sector has substantially stabilized as a result Firms' start-up time has decreased of the improved macroeconomic signi,ficantly but registration cost is environment, recapitalization of the high. Procedures related to business state owned banks, resolution oj closing are sill cumbersome. A new distressed banks, and strengthening FDI law and related legislation have of the supervisory framework. been enacted. IPA has not been Capitalhisk weighted assets ratio established. for private deposit banks was 21.2 percent in May 2005 up from 19.6 Continued independence of financial percent at the end of 2002. While markets regulatory agencies. BRSA the state bank privatization agenda and CMB remain independent entities, is yet to be completed,progress has while the insurance sector is accelerated. The authorities have supervised by the Treasury.  Annex A1 announced that they are in the Completion of privatization of state process of engaging privatization banks; passage of new Bankruptcy Law advisors. A new banking law has and Commercial Code, and been approved by Parliament. With implementation of non-bank financial the passage of the law, adoption of institutions reform. Vakiflank has many new regulations and revision announced an IPO for late 2005. In of supervisory processes are slated preparation for their privatizations, to begin. Halk Bank and Ziraat Bank have restructured their staffing and branch networks. They have also been given independent boards (before they had a shared board). All three banks have begun developing strategic roadmaps for their privatizations. The execution and bankruptcy law has been amended; supporting regulations were issued and published in April 2004. The Commercial Code has been amended to simplifr procedures for setting up a company; a new Commercial Codehas been drafted. Non-bank financial institution reforms will be addressed through an upcoming series of DPLs (PEGDPLs). Significant convergence with EU Environmental sector priorities updated environmental standards. Progress in the EU context. I n view of significant has been limited to specific EU assistance in environment, the directives, primarily the Nitrates, Bank's TA has been limited. Birds, and Habitats Directive, as Nonetheless, several Bank-financed well as Directives on projects with environmental focus have Environmental Assessment. been approved under the CAS. Disaster prevention and Introduction of mandatory insurance management system improved. The cover of private housing units; creation of Turkish Emergency Management a strict and enforced construction code Agency is in place but does not enforcement system, and strengthening of have full mandate or the capacity emergency preparedness. The Turkish to coordinate disaster response in Disaster Insurance Pool is fully case of a major catastrophe. operational and thus far has sold about Progress is being made in the 2 million policies (fewer than expected) integration of disaster related but the law on mandatory insurance has services. not been passed. In addition to the MEER, the Istanbul Seismic Risk Mitigation Project will advance the agenda of enforcement of building code and land use plans. Some progress has been achieved in strengthening national and local government institutions responsible for disaster preparedness and response, and work has started to establish a National Emergencj Command Center, equipped with state- of-the-art emergency management ana communications systems.   Annex A2 MacroeconomicPerformanceandItsMedium-TermSustainability 1. Economic activity has been robust over the past three years as evidenced by a GNP growth rate of close to 10 percent in 2004 that exceeded expectations for the third straight year. The major factors contributing to growth were private consumption, private investment and increased exports. Strong private sector capital formation bodes well for sustaining growth given that capacity utilization levels, averaging around 82 percent in 2004, reached historic highs. 2. A noticeable improvement in the sources of growth i s that it has mainly come from the private sector at a time when public sector consumption and investment expenditures have decreased due to tight fiscal policies. Preliminary indications are that despite some slowdown since the last quarter of 2004, the economy still continues to grow and that the 5 percent target for 2005 i s well within reach. 3. The high growth rates observed over the past three years were strongly supported by productivity increases on the supply side. Although the Turkish lira appreciated significantly and almost all of the large depreciation of 2001 has been eroded by now, low wages due to slack inthe labor market compensated for a stronger currency, and the unit labor cost in dollar terms still remains below its 2000 level. Firms reacted to the 2001 crisis by increasing efficiency and productivity as well as by penetrating new international markets. In doing so, they increased utilization of installed capacity. As a result, labor productivity increased by a substantial cumulative 22.4 percent between 2001 and 2004. Total factor productivity also increased significantly duringthis period. 4. With the help of increased productivity, exporters not only kept a competitive position but penetrated new markets. In addition, the majority of Turkish exports are Euro-denominated while imported raw materials are mostly USD- denominated. The appreciation of Euro against the USD in the period eased substantially the cost pressures originating from the appreciation o f the Lira. Furthermore, the change in the composition of exports towards more technology intensive products, such as automobile, electrical and electronic equipment and machinery i s a significant advantage for the sustainability of the growth inexports. 5. Despite rapidly growing exports, the current account deficit remains a major cause for concern. Imports also increased rapidly during the period due to robust demand. The current account deficit amounted to 5.2 percent of the GNP in 2004. It remained high in the first six months of 2005, mainly due to the deterioration in trade balances. The Government has actively pursued measures to ease aggregate demand including limiting consumer credit allocation by the state banks, taxing all consumer credit, and reducing tax credits for automobile purchases. 6. Turkey has not encountered difficulties in financing the current account deficit. Foreign reserves rose in 2004 as well as in the first 10 months o f 2005.  2 However, a significant part of these flows continue to be potentially volatile short-term capital. Increasing the traditionally low levels of long term financing including foreign direct investment will improve the structure of capital flows. There are indications that FDI in 2005 is likely to increase significantly. Sales of some of Turkish banks to foreigners are under process and progress towards some large privatization transactions i s well underway. The recent sale of 55 percent of the shares of Turk Telekom for US$6.6 billion i s the biggest privatization in Turkey's history. It clearly signals market confidence in the economy while at the same time it guarantees significant amount of FDInot only in 2005 but also during the next five years since the total amount will be paid in five annual installments. 7. Furthermore, the completion of auctions for shares in Turk Telecom, Tupras (oil refinery) and Eregli Demir Celik (steel) confirms the Government's commitment to the privatization program and suggests that the remaining big-ticket privatization items might successfully be sold as well. 8. Turkey, being a net importer of oil, faces increased pressure from high prices. Turkish imports of crude oil have been quite price inelastic in the last few years, indicating a potential impact on the oil bill, should the prices remain high or rise further. In2004, Turkey's fuel imports stood at US$14billion andthe average crude oil price was US$34.5 per barrel. A rough estimate of the impact of a 10 percent increase in the price of WTI crude oil will be an increase equivalent to 0.5 percent of GDP in the import bill. 9. The increased oil prices and a wider trade deficit will contribute to the increased external financing needs in 2005-06, which i s expected to be easily financed through surging capital inflows and FDI. The payments due to the IMF in 2005-07 are sizeable; 2005 i s the peak year with US$7.9 billion. In 2006 and 2007, Turkey's payments to the IMF are US$7.7 billion and US$5.6 billion. However, it i s worth noting that this reflects a one-year extension, under the new Stand-by Arrangement approved in May 2005, of the US$3.8 billion (SDR 2.5 billion) repayment that was due in 2006. Further, the availability of additional funds from the IMF in the amount of US$lO billion has eased, to some extent, the pressure on official reserves in the next two years. 10. Turkey's access to international markets also continues to improve. One indicator i s the recent Eurobond issue of the Treasury which had a yield o f 4.95 percent, a historically low level. Capital market borrowings as o f mid-year totaled US$5.3 billion (against the annual program of US$5.5 billion). In the second half of 2005, Treasury i s expected to pre-finance its 2006 redemptions. 11. Strong fiscal performance has been the cornerstone o f the economic program. The fiscal performance showed no deterioration in early 2005 with the consolidated budget primary surplus amounting to 74.4 percent o f the target for the whole year in the first seven months o f 2005. In 2004, the primary surplus exceeded the target o f 6.5 percent for the first time with stronger than expected receipts of the corporate income tax and VAT. The primary surplus o f the total public sector i s estimated to be around 6.9 percent of GNP in 2004.  3 12. The net public debt to GNP ratio fell from 70 percent in 2003 to 64 percent in 2004 due to declining real interest rates, strong fiscal performance, the recovery o f economic growth and the continued appreciation of the real exchange rate. With increasing capital inflows and growing appetite for Turkish government papers, Treasury had no problem servicing the debt. The average maturity of new debt increased to 12 months in 2004 from under 10 in 2003. More encouragingly, Treasury was able to issue five 5-year floating and fixed rate bonds in the February-June period of 2005, for a total o f 13 billion new Turkish lira (YTL). 13. Since the peak of the crisis in 2001, when the debt to GNP ratio was at historical high of over 90 percent, debt ratios have been falling steadily. As of end-2004, the ratio had come down to some 64 percent of GNP. In addition, the composition o f public debt improved significantly, as the foreign exchange and interest rate exposure o f Turkey declined. An analysis of the breakdown o f the change in debt/GNP in the period 2001-2004 suggests that in 2002-2003 about 40-45 percent of the debt reduction came from revaluation, as opposed to, for example an average of 15 percent contribution from growth. The impact o f real exchange rate appreciation was down at 15 percent in 2004. 14. The total external debt to GNP ratio has shown a similar trend and declined by 25.3 percentage points, from its peak at 78.9 percent in 2001 to 53.6 percent at the end o f 2004. Two noticeable changes during that time have been the sharp increase in borrowing from international institutions, mostly from the IMF under the Stand-By Arrangement, and the improved access of private sector to international markets, especially over the last two years. On the other hand, the doubling of the Central Bank's reserves since 2001 while the ratio of the short term debt to total debt hovered around 20 percent has been a positive development for mitigating risks. 15. Monetary policy continues to follow a path of implicit inflation targeting, with the Central Bank (CBT) occasionally intervening in the foreign exchange market to dampen what are deemed to be excessive fluctuation in the exchange rate. The lira appreciated by about 10 percent against the dollar between the EU Council decision on Turkey in December 2004 and March 2005. The Central Bank intervened in the markets both in the form of direct buying and currency buying auctions. Credit growth has been particularly strong, and the process of reverse currency substitution has continued with foreign currency deposits falling to 40 percent of total deposits. Interest rates on Treasury bills continued to fall, particularly after December 2004. Although, the rise in U S Treasury bond yields and the outflows from emerging markets in March led to some increases in the Treasury bill rate as well as the exchange rate for a while, such effects neither persisted nor led to any significant deterioration in the markets. 16. Inflation in 2004 fell to single digits for the first time in more than 35 years and continues to decelerate in 2005. Cumulative CPI inflation amounted to 2 percent in the first seven months o f 2005 as a strong lira and lower than expected winter food prices helped in keeping inflationary pressures in check. Continued slack in the labor market and rising productivity have kept inflationary pressures low despite the surging economy and rising oil prices. Inflation expectations have not only remained  4 stable but also fallen below end-year target since early 2005. The year-end target o f 8 percent remains within reach. 17. Unemployment remained high at above 10 percent despite robust growth rates in the economy. Highnon-wage costs as well as rigidity in the labor market are contributing to low employment generation. Payroll taxes in Turkey are well above the middle-income country and OECD averages, while the total tax wedge on low wage earners i s the highest in the OECD zone. High non-wage labor costs are also adding to the cost o f complying with regulations. The combined employee-employer contribution rate on payroll taxes i s 37.5 percent and it rose to 43 percent including income tax on wages. On the other hand, high severance pay and restrictions on temporary work make the labor market rigidity the second highest in the OECD area. Severance pay in Turkey i s much higher than the OECD or European average. A worker with 20 years o f service in Turkey is entitled to 20 months compensation, compared to 6 months for OECD countries. Turkey i s almost alone in the OECD in having restrictions on fixed-term workers and temporary work agencies. 18. On the political front, the current government which took office after elections in November 2002 continues to enjoy an enhanced degree of political stability as opposed to the previous era of short-lived coalition governments. As the Government entered into a new three-year arrangement with the IMFinMay 2005, the concerns o f the markets for potential early elections were addressed to some extent as it showed the renewed commitment o f the Government to continue the reform process. This came on top of the European Council decision in December 2004 of setting October 3, 2005 as the date for starting EU accession negotiations with Turkey. Following intense last minute negotiations between EU member states, the EU accession negotiations were formally opened on October 3,2005. 19. Turkey has achieved significant success in improving its macroeconomic framework and reforming its public expenditure management system as well as key product markets. The medium term challenge i s now to sustain high growth rates and achieve convergence with the EU while continuing to reduce the public debt to GNP ratio and contain the achieved success in disinflation. The new Stand-by Arrangement and the EU accession create twin anchors for economic policies but strong implementation of the reforms i s a necessary condition for maintaining the current policy performance. 20. The implemented fiscal and monetary policies have proven capable o f delivering the targeted outcomes while at the same time facilitating high growth rates through improved consumer and investor confidence in the economy. Therefore, sustained implementation of the current policy framework would allow further reductions inthe public debt to GNPratio and inflation. However, medium-term sustainability of the current policy performance requires more efforts in many fields. Although, the fiscal consolidation amounting to around 8 percent of the GNP since 1999 was substantial, the quality o f fiscal adjustment i s still a concern as most of the adjustment came from increased revenues while non interest expenditures kept its ratio to GNP more or less constant. Given the high level o f interest expenditures and public sector debt, an  5 improvement in the quality of fiscal adjustment would allow a more rapid decline in the ratio of public debt to GNP by boosting growth and lowering interest rates. The social security system deficit i s substantial and immediate reforms are needed to prevent the deficit from rising in the medium term and reduce it in the longer term. The newly introduced Public Finance Management and Control Law i s a major step in enhancing the transparency and enlarging the coverage in the public sector but strict implementation of the reform as envisaged in the law i s required. 21. Monetary policy has been successful in anchoring the inflation expectations and reducing inflation to single digits. However, the challenge in the medium term i s to further reduce the inflation rate and achieve price stability. A shift to formal inflation targeting as soon as the necessary conditions are fulfilled and a more transparent monetary policy would reinforce the current monetary framework. 22. The widening current account deficit remains a major cause for concern in 2005. Increasing the amount of long term financing including foreign direct investment would enhance current account sustainability. Speeding up privatization as well as promoting greenfield FDIwould particularly be helpful in financing the widening current account deficit as well as lowering public sector debt. 23. A high unemployment rate despite robust growth is a major challenge for policy makers. Therefore fostering job creation through improved labor market conditions as well as sustained rapid growth in the economy would be important not only for reducing unemployment on its own but also preservingthe social and political support for reforms as the pressures from sustained highunemployment build up. 24. Turkey has now a healthier financial sector but its size i s relatively small and lending to the private sector i s very limited. Although there are improvements inthe business environment, bureaucratic procedures continue to be an important hurdle, especially for SMEs without substantial financial resources and legal expertise. Bank lending to those enterprises has remained very low. Improved access to bank lending as well as a better business environment would increase both domestic investment and FDI inflows. 25. Per capita income in Turkey remains low compared to the European countries, with about 29 percent of the EU25 countries in 2004. Turkey needs sustained high growth rates for longer time periods in order to achieve income convergence with the EU countries. Continued implementation of the reforms as well as the broadening of the scope of reforms would reinforce the convergence process.   Annex A3 Status of Structural Reforms 1. Wide-ranging reforms have been implemented or are being put in place by the Turkish Government to overcome structural weaknesses in the economy. These reforms have been supported by the Bank and the IMF. The Government i s also collaborating closely with the European Union (EU) as Turkey moves to adopt and implement the acquis communitaire. 2. Significant progress has been achieved in reforming the public sector, restructuring the financial sector and improving the business environment. Progress has not been even and there has been a slowdown in implementation in the period July - September 2005, as the Turkish Parliament enjoyed its annual summer recess. However, soon after the Parliament reconvened, the new banking law, initially vetoed by the President, has been re-approved and discussion on the draft legislation to reform the social security system has begun. Adoption of the social security legislation, however, i s expected to take place only after the parliamentary discussion and approval o f the 2006 budget. 3. The authorities have also announced that they are about to engage advisors for the privatization o f Halk Bank for an expected beginning sale of Halk shares in 2006. Vakif Bank has engaged two reputable investment banks to conduct an Initial Public Offering (IPO) aimed at increasing the bank's capital by issuingadditional shares for about 22 percent of the capital. The Government has approved a restructuring plan for Ziraat Bank to prepare it for privatization and such plan i s being implemented. Due to the large size o f Halk and Ziraat and their effect on the market, the Government plans to sequence the privatization of Ziraat after the initial steps to privatize Halk, with further action on privatization o f Ziraat to occur in 2006. A. Public sector reforms 4. Turkey has implemented important structural reforms in the public sector, particularly in the area o f public expenditure management (PEM). The Public Procurement Law came into force in January 2003. The Law meets UNCITRAL standards and moves Turkey towards full compliance with EU directives. The main objective o f the Law was to increase transparency and efficiency in public procurement. To support implementation of the Law, a Public Procurement Authority has been established. The Authority i s charged with resolving appeals concerning procedural infringements, drawing up secondary legislation and monitoring its implementation, providing information on public procurement legislation, preparing and issuing statistical data and keeping records of bidders banned from participating intenders. 5. A new Public Finance and Debt Management Law was enacted in 2002. It established the foundations of a risk management framework by (i) designating the Treasury as the single authorized borrower, and (ii)introducing prudent and transparent limits for government borrowing and guarantees. The enactment o f the Law was followed by secondary regulations defining the basic principles and framework for debt and risk management as well as organizational and functional changes in debt management operations at the Treasury. For instance, an office in charge of public debt and risk management (Middle Office) was  2 established. This office devises optimal borrowing strategies and it compares the risk and cost of alternative borrowing strategies under various macroeconomic scenarios. It also develops borrowing policies on the basis of these assessments. The practice of strategic benchmark implementation, aiming at increasing transparency in public debt management and ensuring an effective, performance-based borrowing at minimumcost with a prudent level of risk, was fully introduced in 2004. 6. A Public Financial Management and Control (PFMC) Law was enacted in December 2003. This Law represents the cornerstone of modern public expenditure management in Turkey. It constitutes the most ambitious pillar of public sector reform and defines the modern budget preparation, implementation, accounting and reporting systems that are critical for good public management. It sets a comprehensive general government framework, strengthens policy- making through strategic planning and performance budgeting, introduces medium-term fiscal strategy as an instrument to link policies and budget, delegates central administrations responsibility for financial management to line agencies, establishes a modern internal control and audit system to ensure effective budget execution, and expands scope and mandate of the external audit regime for accountability. 7. The PFMC Law will cause expansion incoverage of the central government budget to the special budget and regulatory institutions and introduces the general framework for the budget, accounting and reporting structure for the whole general government sector to unite all general government expenditure and revenues. The Law ensures the unity o f accounting in the public sector by requiring that all public administrations within the scope o f general government use the same accounting framework. Within this framework, it brings the opportunity to consolidate all accounts and perform international comparisons. 8. The PFMC was to become effective on January 1, 2005. However, the 2005 budget was prepared according to the previous Public Accounting Law. As the budget has to be implemented in accordance with the law under which the budget was enacted, this requirement implies that the articles related to budget implementation in the PFMC Law will become effective in 2006. Nonetheless the remaining provisions of the PFMC Law became effective as of January 2005. 9. The Ministry of Finance has issued a budget implementation circular that requires that preparation and implementation of the 2006 budget be done according to the PFMC Law, Inline with this decision, the first three-year medium-term macroeconomic and fiscal frameworks were issued in mid-2005, and the first three-year budget will be introduced with the budget for 2006. 10. All budgetary special purpose funds, with the exception of the Price Stabilization Fund, and all but five extrabudgetary funds (Social Solidarity Fund, Defense Fund, Promotion Fund, Savings Deposit Insurance Fund, and Privatization Fund) have been abolished. Most of the related revenue earmarking and special appropriation structures were eliminated in July 2004. The special appropriation mechanisms that remain are strictly limited to events unpredicted during the budget preparation such as donations and contractual works. These appropriations will be subject to the PFMC Law. Revolving funds will be liquidated in 2007 and their resources will be included inthe budgets of the relevant administrations. 11, The Government has opted for strategic planning and performance based budgeting as the tools of choice for public financial management and administrative reforms. The objective o f using strategic planning in public financial management is to increase line agencies' capacity to  3 formulate public policy. Other objectives include reinforcing development plan-program and budget links, ensuring feedback between central agencies and line ministries, promoting performance and establishing relevant accountability mechanisms. A phased approach has been adopted and pilot implementation in eight designated agencies i s in progress. The newly enacted municipal and metropolitan municipality laws mandate strategic plans to be prepared by local governments with 50,000 or more inhabitants inthe year 2006. 12. The Government has complemented public expenditure management reforms with efforts to combat corruption. These initiatives include enactment o f (i)the Law on Freedom of Information for Citizens in October 2003 which enables citizens to monitor the performance of the public sector, and (ii) law on establishing a code of conduct for civil servants in June 2004 which calls for the establishment of an Ethics Board, the members of which have been appointed. 13. The draft Turkish Court of Accounts (TCA)Law further complements the PFMC Law by expanding the mandate and the scope of external auditing. The draft law was submitted to Parliament inearly 2005, and it i s awaiting approval. 14. Turkey has also undertaken a series of other reforms to improve its public financial management and accountability systems. These include (i) the establishment of an automated on- line public accounting system, called Say2OOOi, in more than 1500 accountancies all around the country, (ii)implementation of GFS consistent budget classification for the consolidated budget since 2004, to be expanded to all general government agencies starting with the 2006 budget, (iii)preparation o f the budget electronically, using BYES (Budget Management Information System), and (iv) adoption of accrual (as opposed to cash) accounting. 15. The country has also initiated important structural reforms to reduce informality, broaden the tax base, and enhance the efficiency of tax collection through simplifying and reducing distortions in the tax regime and introducing administrative reforms. The reforms create a simpler, more transparent, and stable tax environment. Efforts to simplify and align the tax regime with the EUpractices continue. 16. The Revenue Administration Law upgrades the status of the revenue administration within the MOF, restructures the administration, and separates policy functions from implementation. These changes align Turkey with best practice in OECD countries. The law entered into force in May 2005. However, there have been delays in implementation mostly due to bureaucratic inertia rather than lack of political will. 17. The Government's public sector reform also aims at establishing a more participatory, transparent, and effective public management. Important efforts remain to introduce these principles into the public administration and to facilitate decentralization. Inparticular, there i s a need to clarify the distribution of authority and resources, especially between the central government and local administrations. In this context, the new Metropolitan Municipality Law, the Municipality Law, and the Special Provincial Administrations Law were enacted in 2004 and 2005. 18. Turkey has undertaken a very ambitious comprehensive social security reform program. The program has four key elements: (a) a unique and uniform pension regime, (b) universal health insurance, (c) policy unification of the currently diversified social services, and (d) a single social security institution. The social security reform i s pro-poor. The universal health  4 insurance will provide improved access to health services for the poor, thus contributing to improved health outcomes and the MDGs. Even the pension reforms, although making pensions less generous than they would otherwise have been under the existing fiscally unsustainable system, are pro-poor as only 53 percent of the population i s covered currently under a system which i s subsidized by the general public to the tune of about 4 percent of GDP. 19. Parliamentary discussion on the key piece of legislation, on pension reform and the introduction o f universal health insurance, has begun after the Parliament's summer recess and i s expected to be completed following the debate on the 2006 budget. B. Bankingand enterprise sector reforms 20. Resolute reform steps have been taken in the banking sector since the financial crisis o f 2001. Since then, 22 banks have been taken over, the bank supervisory system has been strengthened, and public banks have been restructured and recapitalized. The Saving Deposit Insurance Fund (SDIF) was separated from the Bank Regulation and Supervision Agency (BRSA) at the end of 2003. BRSA now focuses solely on regulatory and supervisory issues while SDIF specializes in liquidating assets transferred from insolvent banks. 21. The new Bunking Law, which aims at improving the capital adequacy calculations, the risk management and internal control system and independent auditing, was re-approved by Parliament in October 2005, overriding the President's earlier veto of some o f the provisions o f the draft Law. 22. The state banks, which required a fiscal outlay of US$ 22 billion in the aftermath o f the financial crisis, are undergoing an ambitious process of privatization. The Bank has engaged significant resources to assist the authorities in preparing the privatization o f Halk Bank and Ziraat Bank. As for Halk Bank, agreement has been reached that an internationally reputable investment bank will be hired as privatization advisor, that the advisor will be compensated through a retainer fee and a success fee, and that the advisor will be required to consider all commercially viable options for the sale, including block sales and initial public offerings (IPO). Given the large size of these two banks and their impact on the market, the Government plans to sequence the privatization of Ziraat after the initial steps to privatize Halk, with further action on privatization o f Ziraat to occur in 2006. 23. The banking supervisory agency continues to build its capacity and adopt EU directives and Base1 I1 requirements. Credit markets would further benefit from improvements in accounting and auditing, credit information system, collateral regime, enforcement o f contracts as well as from more specialized instruments such as, for instance, in the mortgage market. 24. The Bank and the IMF continue work with the authorities in addressing these second generation issues in the development of financial markets. Efforts include Turkey's first time participation in the joint Bank-Fund Financial Sector Assessment Program (FSAP). The assessment i s expected for the first half o f 2006. 25. There have also been improvements in the business climate. Bureaucratic processes for the private sector have been greatly simplified. The process of incorporation has been reduced significantly both in terms of time and procedures. Progress has been made in removing administrative barriers to business entry, operation and exit. There i s still a need to streamline  5 business registration across the country and ensure compliance with EU disclosure requirements for company registration. 26. While state-owned enterprises still employ more than half a million people, there has been accelerated progress in privatization. Inthe third quarter of 2005, the Privatization Agency completed the two largest privatizations in Turkish history (Turk Telekom-telecommunications and TUPRAS-oil refinery). 27. The Government's commitment to the privatization program i s further evidenced by the on-going privatization of "big-ticket" state companies, such as Turkey's second largest GSM operator TELSIM, and the state banks which hold a combined share of about 33 percent o f total assets inthe banking system and include the largest bank inthe country (Ziraat Bank). 28. Finally, to facilitate the flow o f FDI, a new Foreign Direct Investments Law was enacted in 2003 that abolished the minimum capital requirement and the permission procedure for companies with foreign capital. C. Implementationchallengesandrisks 29. Turkey will face two major challenges in implementing public sector reforms, namely the expanded scope o f public sector reforms, and the political economy pressures for policy reversal. Risks have been reduced in the financial sector but the lack of fast enough employment growth may create political pressures for populist measures, especially as the 2007 election approaches. 30. Expanded scope of public sector reforms: The initial idea behind the public sector reform program was to improve public financial management and accountability. Then the authorities expanded the program to include (i)the restructuring of the entire public administration, (ii) a decentralization strategy, and (iii) ambitious agenda to reform public an sector governance. Financial management, public sector restructuring and decentralization, and public sector governance represent major and difficult reforms when viewed independently. The challenge grows exponentially when implementation of these reforms i s carried out simultaneously. Given the broad scope o f the reform, the key remaining challenge now i s to adopt a strategic approach to implementation. Strategic decisions about sequencing and phasing will be critical for successful implementation. The creation of a central coordinating group devoted to public financial management reform and overall public sector reform in an integrated fashion would improve the effectiveness of implementation as there i s significant overlap in these reform areas. 31, Possible policy reversals in thepublic sector:So far no major policy reversals have been witnessed in public sector reforms. However, implementation o f ambitious and comprehensive public sector reforms will be a major challenge. The Government, which came into power at the end of 2002, had no choice but to commit itself to a program of structural reforms to improve the macroeconomic and fiscal balances. Almost all policy reversals have either been corrected or been compensated through policy measures elsewhere. Above inflation pension increases, social support payments for pensioners, regional tax incentives and the provision o f fertilizer and diesel support to farmers represented ad-hoc policies. However, compensatory actions were taken to meet the fiscal targets agreed with the IMF.  6 32. Financial sector risks: Considerable progress has been achieved in bringing stability to the financial sector. In order to assess the impact on the banking sector of a purely hypothetical and, at this point, unlikely macroeconomic shock, Bank staff regularly conduct stress tests to simulate the impact o f a simultaneous increase in interest rates of 30 percentage points, an increase in non-performing loans of 20 percent, and the depreciation of the Lira by 15 percent. The simulation measures the losses or gains incurred directly as a result of the banks' on and off balance sheet positions. 33. The main result of the analysis i s that the solvency of the system i s robust and only somewhat sensitive to such scenario as the resulting aggregate capital adequacy ratio would remain well above the regulatory requirements. Interest risk and credit risk are the main contributors to the hypothetical reduction in banking sector capital. Net open foreign positions remain small for all banks outside SDIF, so the system i s not directly exposed to exchange rate shocks. 34. While there could be some individual bank failures under this scenario, such failures are unlikely to cause a systemic crisis because the inter-bank credit market in Turkey i s small. Also, Turkish banks are highly liquid due to their large holdings of Government debt securities, and unless the individual bank failure leads to a disruption of that market, which i s unlikely, the system will not experience liquidity problems. 35. Political economy risks:A key threat to the sustainability of the reform process relates to the jobless growth experienced by Turkey following the crisis of 2001. While the economy has grown at an average of about 8 percent per year over the last three years, the unemployment rate has not relented and has hovered around 10 percent. In addition, the beneficiaries o f the reform process do not necessarily coincide with the traditional electoral constituencies of the party in Government which includes the urban poor and mral residents o f the south-east part o f the country. These two outcomes may bring the Government under pressure to distribute a "dividend" through populist measures aimed at unsustainable transfers or direct government employment programs, especially as the 2007 elections approach. 36. The IMF program covers 2005-08, and i s expected to be a strong policy anchor in the period ahead. In addition, the political forces now in opposition have not presented a credible electoral challenge to the party in Government. Nonetheless, politically-driven economic risks could not be discounted altogether. 37. Inan effort to be proactive inmanagingthis risk,Bank staff are assisting the Government in designing a comprehensive employment generation program, which this CAS Progress Report proposes to support with a series of three adjustment operations which will be designed around four pillars, namely policies aimed at improving the (a) investment climate, (b) functioning o f the financial sector, (c) performance of labor markets, and (c) labor productivity through technology adoption and upgraded skills.  Annex A4 Social Impact of Reforms Impact of Reforms on the Vulnerable 0 Most of Turkey's economic reforms have been pro-poor and have set the stage for the robust economic growth of the last 3 years. 0 The main mechanism for transmitting the benefits of this growth to the poor i s through the labor market. Thus there i s a major cause for concern that the labor market has not been generating sufficient jobs, and most new workers have moved into the informal sector. 0 Youth unemployment, at two to three times the national average, i s of particular concern, although there i s no evidence of rising deviant behavior amongst youth. However youth complain about not being included in mainstream society or decision-making processes. A Japan Social Development Fund (JSDF) grant, to be implemented by the General Directorate of Youth and Sport, has been prepared to address these issues. 0 The Secondary Education Project and the Health Transition Project both address important concerns of youth in education and reform in the health sector, respectively. 0 Turkey now has a robust poverty monitoring system based upon annual household income and expenditure surveys, however the capacity to monitor poverty disaggregated by vulnerable groups i s only now being built up within the State Institute of Statistics. Poverty Extreme poverty (US$1 ppp per person per day) i s extremely low at 1.2% in 2002. 0 Poverty itself was 27% in 2002, but higher in rural areas at 35% compared to 22% in urban areas. It i s important to note that as Turkey is now 70% urban, the absolute number of poor i s higher in urban areas than rural areas. All the major metropolitan cities harbor pockets o f poverty. 0 Women are not poorer than men statistically speaking Access to Services 0 Turkey has made great strides in making education and health services available to the population on a more equitable basis. The great challenge now i s to improve quality whilst maintaining fiscal stability. 0 Strong implementation o f the Secondary Education Project and the Health Transition Project would go a long way towards addressing these two issues. 0 However net enrolment inbasic education has improved only slowly from 89% in 2001 to an expected 92% in 2006.  2 0 A big push has been made on girls' education, both basic and secondary. The male/female ratio in secondary education declined from 1.21 in 2001 to 1.17 in 2004. One as yet untouched area for reform i s tertiary education. This is a very sensitive area and the Tertiary Education Assessment (FY06), being undertaken as part of the Education Sector Assessment i s planned to build consensus around the reforms in this sector so vital for Turkey's productivity and competitiveness. This could be subsequently supported by a Bank-financed operation, possibly using a Sector Wide Approach (SWAP),taking advantage of Turkey's progress towards usingcountry systems. 0 There are now 1.78 million beneficiaries of the innovative Conditional Cash Transfer (CCT) program targeted to the poorest 6% of children. 0 The Infant Mortality Rate (IMR) and the Under 5 Mortality Rate (USMR) were 29 and 37 per 1,000 respectively in 2003. Introduction of the Universal Health Insurance (UHI)should reduce these rates. Social Costs of Privatization Both the Privatization Social Support Project (PSSP) and its successor, the PSSP2 are specifically designed to offset the social costs of privatization through financing severance pay and laborer-insertion services. The PSSP series have been instrumental in improving the functioning of ISKUR (TurkishEmployment Organization), improving the effectiveness and targeting of active labor market programs/labor market insertion services and supporting the development of 6 successful and innovative micro-business incubators. 0 Workers in state-owned enterprises (SOEs) are relatively well paid and all covered under the formal social security system and provided with generous severance pay. Inno sense are these workers poor.  Annex A5 Client Survey In the summer of 2005, about 170 stakeholders participated in a client survey to provide views on the Bank's assistance to the country. The respondents included current and former officials of the central and local governments, representatives of the academia, NGOs, media, the private sector and donors. Some of the highlights of the survey are summarized below: Perceived overall value of the BankinTurkey Most important: financial resources, the Bank's knowledge, policy and economic advice Relatively less important: donor coordination, convener/facilitator role Areas where the Bank should be involved Most important: social/human development, economy/jobs, poverty reduction Relatively less important: natural disaster preparedness, strengthening of the regulatory framework, environment Specific areas of effectiveness Most eflective: safeguarding against corruption in projects, helping to strengthen the financial sector, helping to strengthen the regulatory framework Relatively less eflective: improving the judicial system, improving the quality of life of the poor inurban areas, helping to reduce corruption at the country level The survey confirms the importance the respondents attach to the Bank's role in middle- income countries, such as Turkey. The Bank's technical expertise and knowledge are highly appreciated. The survey also points to areas where the Bank has exceeded participants' expectations, e.g. in helping Turkey ready itself for EU membership, helping to strengthen the public sector and the development of the private sector. Some 77 percent of the respondents say that they like to work with the Bank. The survey also suggests areas of improvement. According to the respondents, there i s a need to (i)improve the Bank's effectiveness in encouraging greater transparency in governance and helping to reduce poverty; (ii) into account political realities when take technical solutions are proposed; and (iii)reduce the bureaucracy in the Bank's operational policies and procedures.   Annex B1 Page 1of 2 Turkey at a glance 9119/05 Europe 8 Upper- POVERTY and SOCIAL Central middle- Turkey Asia income Developmentdiamond' 2004 Population, mid-year (millions) 71.3 472 576 GNI per capita (Atlas method, US$) 3,770 3,290 4,770 Life expectancy GNI (Atlas method, US$ billions) 269.0 1,553 2,748 Average annual growth, 1998-04 T Population (%) 1.5 -0.1 0.8 Labor force (%) 2.2 -0.5 -0.9 Gross +primary Most recent estimate (latest year available, 1998-04) capita enrollment Poverty (% ofpopulationbelow nationalpoverty line) Urban population(% of total population) 67 64 72 Life expectancy at birth (years) 69 68 69 Infant mortality (per 1.000live births) 33 29 24 Child malnutrition (% of children under 5) 8 Access to improvedwater source Access to an improvedwater source (% ofpopulation) 93 91 93 Literacy I% of population age 15+) 88 97 91 Gross primary enrollment (% of school-age population) 91 101 106 -Turkey Male 95 103 108 Upper-middle-income group Female 88 101 106 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1984 1994 2003 2004 Economic ratios' GDP (US$ billions) 59.9 129.7 240.4 302.8 - Gross capitalformationiGDP 16.2 21.5 22.8 25.7 Exports of goods and servicesiGDP 15.6 21.4 27.4 28.9 Trade Gross domestic savingsiGDP 22.5 19.5 19.9 Gross nationalsavingsiGDP 16.4 25.3 19.1 19.9 T Current account balanceiGDP -1.9 2.0 -3.3 -5.1 Interest paymentsiGDP 3.1 3.1 2.9 2.4 Domestic Capital Total debVGDP 36.1 51.1 60.5 53.4 savings formation Total debt serviceiexports 33.0 34.1 38.4 32.6 i Present value of debVGDP 63.6 56.2 Present value of debtiexports 211.1 181.9 Indebtedness 1984-94 1994-04 2003 2004 2004-08 (average annual growth) GDP 4.5 3.1 5.8 8.9 5.0 -Turkey GDP per capita 2.3 1.4 4.3 7.5 3.7 - - - Upper-middle-income group Exports of goods and services 6.8 11.1 16.0 12.5 5.7 STRUCTURE of the ECONOMY 1984 1994 2003 2004 (% of GDP) I Growth of capital and GDP ( O h ) Agriculture 21.6 16.0 13.4 12.9 50T Industry 25.0 31.4 21.9 22.4 Manufacturing 16.4 20.2 13.3 13.9 Services 53.4 52.6 64.7 64.7 Householdfinal consumptlonexpenditure 79.6 65.9 66.6 66.9 General gov't final consumptionexpenditure 8.3 11.6 13.6 13.2 I Imports of goods and services 19.7 20.4 30.7 34.7 -GCF --O-GDP I 1984-94 1994-04 2003 2004 (average annual growth) Growth of exports and imports ( O h ) I Agriculture 1.4 1.o -2.4 2.0 ~ 4 0 ~ Industry 5.7 2.4 5.0 8.8 20 Manufacturing 6.1 3.4 8.4 10.1 Services 3.9 3.3 6.4 8.3 0 Householdfinal consumptionexpenditure 3.9 2.3 7.1 10.1 -20 Generalgov't final consumptionexpenditure 3.5 3.5 -2.4 0.5 Gross capitalformation 5.0 3.0 20.4 27.4 Imports of goods and services 9.2 9.1 27.1 24.7 ~ Note: 2004 dataare preliminary estimates. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamondwill be incomdete.  Annex B1 Page 2 of 2 Turkey PRICES and GOVERNMENT FINANCE 1984 1994 2003 2004 Domestic prices Inflation (O h ) (% change) 100 Consumer prices .. 106.3 25.3 10.6 80 Implicit GDP deflator 48.2 106.5 22.5 9.9 80 40 Governmentfinance 20 (% of GDP, includes current grants) 0 Current revenue 21.4 39.6 39.9 95 00 01 02 03 M Current budget balance .... -1.2 -5.8 -2.0 Overall surplusideficit .. -7.5 -9.1 -4.8 -GDP deflator --O -CPI TRADE 1984 1994 2003 2004 (US$millions) Export and import levels (US$ mill.) I Total exports (fob) 7,389 18,106 51,206 67,001 125,000 Agricultural and livestock 896 1,066 2,201 2,645 Mining and quarry products 239 263 469 649 1100.0001 Manufactures 6,254 16,777 44,378 59,533 75 000 Total imports (ciD 10,757 23,270 69,340 97,540 Food 50 000 359 658 404 528 Fueland energy 3,887 3,771 11,568 14,400 25 000 I I Capitalgoods 2,675 5,323 11,326 17,397 0 Export price index (2000=100) 107 114 105 122 98 99 00 01 02 03 M Import price index (2000=100) 118 105 106 120 Exports Ql Imports Terms of trade (2000=100) 91 108 99 102 I BALANCEof PAYMENTS 1984 1994 2003 2004 (US$millions) Current account balance to GDP ( O h ) Exports of goods and services 9,546 29,182 70,231 91,029 Imports of goods and services 11,340 26,297 73,736 102,180 4 T Resourcebalance -1,794 2,885 -3,505 -11,151 Net income -1,440 -3,264 -5,559 -5,519 Net current transfers 2,082 3,010 1,027 1,127 Current account balance -1,152 2,631 -8,037 -15,543 Financingitems (net) 1,086 -2,085 12,084 16,367 Changesin net reserves 66 -546 -4,047 -824 Memo: Reservesincludinggold (US$ millions) 3,899 16,519 44,957 53,649 Conversionrate (DEC,local/US$) 367 29.818 1,496,668 1,421,835 EXTERNAL DEBT and RESOURCE FLOWS 1984 1994 2003 2004 (US$ millions) Composition of 2004 debt (US$ mill.) Total debt outstandingand disbursed I- 21,608 66,250 145,367 161,801 IBRD 2,358 5,195 5,214 6,153 IDA 181 136 83 77 Total debt service 3,223 10,259 27,808 30,506 IBRD 325 1,218 719 767 IDA 4 7 7 7 Compositionof net resourceflows Official grants 90 175 150 160 Official creditors 1,061 -605 541 758 Privatecreditors 277 -30 4,959 6,687 Foreigndirect investment(net inflows) 113 559 1,254 1,874 Portfolio equity (net inflows) 0 1,059 1,133 6,064 F: 94,577 World Bank program Commitments 794 250 300 1,586 A IBRD - D -Other multilateral F - Private E - Bilateral Disbursements 628 343 276 1,499 B - IDA Principalrepayments 129 806 502 586 C IMF - G- Short-term Net flows 500 -463 -226 913 Interestpayments 200 419 224 189 Net transfers 299 -882 -450 724 ~ Deveiooment Economics 9119/05  Annex 82 Turkey Selected Indicators* of Bank Portfolio Performance and Management as of 613o12005 Indicator 2002 2003 2004 2005 Portfolio Assessment Number of Projects Under Implementation a 20 16 16 21 Average Implementation Period (years) 3.8 4.2 3.6 2.7 Percent of Problem Projects by Number 25.0 6.3 25.0 4.8 Percent of Problem Projects by Amount 18.8 6.8 21.9 5.0 Percent of Projects at Risk by Number a , d 25.0 6.3 25.0 4.8 Percent of Projects at Risk by Amount 18.8 6.8 21.9 5.0 Disbursement Ratio ("/o) e 17.5 22.1 24.2 24.8 Portfolio Management CPPR during the year (yes/no) Yes Yes Yes Yes Supervision Resources (total US$) 3.0 2.5 1.7 2.1 Average Supervision (US$/project) 142 134 90 102 Memorandum Item Since FY 80 Last Five FYs Proj Eva1by OED by Number 107 19 Proj Eva1by OED by Amt (US$ millions) 12,691.5 4,572.0 % of OED Projects Rated U or HU by Number 28.6 5.6 % of OED Projects Rated U or HU by Amt 28.8 6.3 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.  Annex B3 Turkey IBRD High-Case LendingSummary Fiscal year Proj ID US$(M) Strategic Rewards b/ Implementation b/ (H/M/L) Risks (H/M/L) 2004 PFPSAL 111 1,000.0 H H EXPORT FINANCE II 303.0 M L HEALTH TRANSITION 61.O H M RENEWABLE ENERGY 202.0 M L ANATOLIA WATERSHED REHABILITATION 20.0 M L Result 1,586.0 2005 MUNICIPAL SERVICES 275.0 M M RAILWAY RESTRUCTURING 185.0 H H ISTANBUL SEISMIC RISK MITIGATION 400.0 M L SECONDARY EDUCATION 104.0 M M ECSEE APL2 66.0 M L EXPORT FINANCE 111 305.0 M L PRIVAT. SOCIAL SUPPORT II 465.0 H M Result 1,800.0 2006 PPDPL I 400.0 H H PEGDPL I 400.0 H H SME DEVELOPMENT 150.0 M L ENERGY LIBERALIZATION 200.0 M M GAS DEVELOPMENT 325.0 M L ECSEE APL3 125.0 M L Result 1,600.0 2007 PPDPL II 400.0 H H PEGDPL II 400.0 H H ELECTRICITY DISTRIBUTION 300.0 M M INFRASTRUCTURE 250.0 M M EMPLOYMENT AND SOCIAL DEV. 250.0 H L Result 1,600.0 Overall Result 6,586.0 a/ Total FYO4-06:about US$5 billion; FYO4-07: about US$6.6 billion, b/ For each project, the table indicates whether the strategic rewards and implementation risks are expected to be high (H), moderate (M), or low (L). The amounts are rounded. Note: In addition to US$500 million for possible emergency lending in case of a large scale natural disaster.  Annex B3 Turkey IFC andMIGA Program,FY2002-2005 As of 6/30/2005 2002 2003 2004 2005 IFC Original Commitment (US$m) 184.4 191.7 260.5 289.9 Sector (%) OriginalCommitment Activity IFC - 2002 2003 2004 2005 Accommodation & Tourism Services 2 Chemicals 10 Collective Investment Vehicles 5 Education Services 4 2 Finance & Insurance 27 47 35 41 Food & Beverages 0 Health Care 4 7 Industrial & Consumer Products 6 22 36 Nonmetallic Mineral Product Manufacturing 28 31 Oil, Gas and Mining 29 Primary Metals 14 15 10 Professional, Scientific and Technical Services 3 Pulp & Paper 12 Textiles, Apparel & Leather 2 Transportation and Warehousing 4 Utilities 4 TOTAL 100.0 100.0 100.0 100.0 Investmentinstrument(%) Loans 92 82 100 60 Equity 5 2 Quasi-Equity (Loan Type) 3 18 38 Total 100.0 100.0 100.0 100.0 MIGA OutstandingGuarantees (US$m) 260 214 173 135  Annex 64 Turkey Summary of Nonlending Services Product Completion FY Cost (US$OOO) Audience a/ Obiective b/ Recent completions CEM FY03 350 GDPB KG,PS CAS FY04 300 GDPB KG Impact of Agriculture Sector Reforms FY04 185 GDB KG,PS Knowledge Economy Assessment FY04 280 GDPB KG,PD,PS Gas Sector Note FY04 85 GB KG,PS Caspian Oil and Gas Dialogue FY04 25 GB KG NGO Outreach FY04 25 GPB PD,PS Modeling ReaVFin. Sector Interaction FY05 180 GB KG Poverty Assessment FY05 170 GDPB KG,PD,PS Rural Sector Study FY05 170 GDB KG,PS Environment/Forestry FY05 65 GDB KG,PS Energy FY05 43 GB KG,PS Labor Market Study FY05 380 GDB KG,PD,PS Education Sector Assessment FY05 450 GDB KG Underway/planned CAS PR FY06 150 GDPB KG Public Expenditure Review FY06 280 GDPB KG,PD,PS CEM FY06 400 GDPB KG,PD,PS Investment Climate Assessment FY06 125 GB KG,PS Regional Poverty Update FY06 110 GDPB KG,PD,PS Rural Finance Study FY06 135 GPB KG,PS Tertiary Education Review FY06 110 GPB KG,PD,PS CAS FY07 250 GDPB KG Financial Sector Assessment FY07 250 GB KG,PS Private Sector Development FY07 200 GDPB KG,PD,PS Environment/lndustrial Pollution FY07 135 GDPB KG,PD,PS Irrigation Sector Review FY07 120 GB KG,PS CEM Follow-UP FY07 200 GDPB KG,PD,PS Fiduciary Assessment FY07 60 GB KG,PS a/ Government, donor, Bank, public dissemination. b/ Knowledge generation, public debate, problem-solving.  Annex B5 Turkey SocialIndicators Latest single year Same regionlincome group Europe & Lower- Central middle- 1975-80 1985-90 1997-2003 Asia income POPULATION Total population, mid-year (millions) 44.5 56.2 70.7 472.2 2,655.5 Growth rate (Yoannual average for period) 2.1 2.2 1.7 -0.1 0.9 Urban population (% of population) 43.8 61.2 67.0 63.8 49.8 Total fertility rate (births per woman) 4.5 3.0 2.4 1.6 2.1 POVERTY ("A of population) National headcount index Urban headcount index Rural headcount index INCOME GNI per capita (US$) 1,920 2,270 2,800 2,580 1,490 Consumer price index (1995=100) 0 5 4,430 Food price index (1995=100) 5 5,805 INCOME/CONSUMPTION DISTRIBUTION Gini index 40.0 Lowest quintile (% of income or consumption) 6.1 Highest quintile (% of income or consumption) 46.7 SOCIAL INDICATORS Public expenditure Health (Yoof GDP) 4.3 4.2 2.7 Education (% of GDP) 3.7 3.8 3.5 Net primary school enrollment rate ("A of age group) Total 89 88 93 Male 93 91 93 Female 86 85 93 Access to an improvedwater source (% of population) Total 81 93 91 82 Urban 92 96 98 94 Rural 65 87 80 71 Immunization rate ("A of children ages 12-23months) Measles 27 78 75 92 86 DPT 42 84 68 90 88 Child malnutrition (Yo under 5 years) 8 11 Life expectancy at birth (years) Total 60 66 69 68 69 Male 58 64 66 64 67 Female 63 68 71 73 72 Mortality Infant (per 1,000 live births) 103 64 33 29 31 Under 5 (per 1,000live births) 133 78 39 36 39 Adult (15-59) Male (per 1,000population) 218 317 213 Female (per 1,000 population) 120 136 131 Maternal (modeled, per 100,000live births) 70 58 121 Births attended by skilled health staff (Yo) 81 86 Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age. 2005 World Development Indicators CD-ROM,World Bank  Annex B6 Page 1 of 2 Turkey Key EconomicIndicators - Estimate Projected Indicator 2003 2004 2005 2006 2007 2008 National accounts (as YOof GDP) Gross domestic producta 100 100 100 I00 100 100 Agriculture 13 13 13 13 12 12 Industry 22 22 22 23 23 23 Services 65 65 65 65 65 65 Total Consumption 80 80 79 79 78 77 Gross domestic fixed investment 15 18 18 I 8 19 19 Government investment 4 4 4 4 4 4 Private investment 11 14 14 14 15 15 ~xp01-t~(GNFS)~ 27 29 28 29 29 29 Imports (GNFS) 31 35 35 36 35 35 Gross domestic savings 20 20 21 21 22 23 Gross national savings' 19 20 21 21 22 24 Memorandum items Gross domestic product 240,376 302,786 355,584 375,327 403,170 434,087 (US$million at currentprices) GNI per capita (US$,Atlas method) 2810 3770 4520 5070 5460 5730 Realannual growth rates (%, calculated from 1987 prices) Gross domestic product at marketprices 5.8 8.9 4.8 5.0 5.0 5.0 Gross DomesticIncome 6.2 10.2 3.1 4.1 4.8 4.9 Realannual per capitagrowth rates (%, calculated from 1987 prices) Gross domestic product at marketprices 4.2 8.0 3.5 3.8 3.8 3.8 Total consumption 4.0 8.0 3.0 2.4 2.8 2.9 Privateconsumption 5.0 9.0 3.2 2.8 3.3 3.3 Balance of Payments (US$ millions) EXPOITS (GNFS)~ 7023 1 91029 104238 113194 122972 133298 Merchandise FOB 51206 67001 76050 82650 90572 99087 Imports (GNFS)~ 73736 102180 121183 130761 139100 148177 MerchandiseFOB 65216 90925 108100 116987 124511 132742 Resourcebalance -3505 -1 1151 -16944 -17567 -16128 -14879 Net current transfers 1027 1I27 1322 1533 1425 1401 Current accountbalance -8037 -15543 -21326 -22028 -20793 -19959 Net private foreign direct investment 1254 1874 3668 8169 5300 4042 Long-term loans (net) 264 7950 10599 9532 8330 8035 Official -1217 415 20 230 -266 -150 Private 1481 7535 10578 9301 8596 8185 Other capital(net, incl. errors & ommissi 10566 6543 14123 9315 5042 6240 Changein reservesd -4047 -824 -7064 -4988 2121 1643  Annex B6 Page 2 of 2 Turkey Key EconomicIndicators - (Continued) Estimate Projected Indicator 2003 2004 2005 2006 2007 2008 Memorandum items Resource balance ("ho f GDP) -1.5 -3.7 -4.8 -4.7 -4.0 -3.4 Real annual growth rates ( YR87 prices) Merchandise exports (FOB) 15.9 12.9 6.8 9.0 10.0 8.5 Merchandise imports (CIF) 24.6 25.1 10.5 9.1 7.6 6.1 Publicfinance (as YOof GDP at market price$ Current revenues 30.0 31.3 30.3 30.5 30.4 29.8 Current expenditures 34.3 30.7 27.9 26.2 25.6 25.5 Current account surplus (+) or deficit (-) -4.2 0.6 2.4 4.3 4.7 4.1 Capital expenditure 4.8 5.4 5.9 6.3 5.6 3.9 Monetary indicators M2IGDP 23.0 25.2 26.4 26.1 26.1 25.9 Growth o f M2 ("h) 33.7 31.2 17.4 9.6 9.7 8.6 Price indices(YR87 4 0 0 ) Merchandise export price index 92.8 107.6 114.3 114.0 113.6 114.5 Merchandise import price index 98.3 110.6 118.0 117.0 115.8 116.4 Merchandise terms o f trade index 94.4 97.3 96.9 97.4 98.1 98.4 Real exchange rate (US$/LCU)' 139.0 155.2 155.1 155.1 154.9 154.7 Real interest rates Consumer price index ("hchange) 18.4 9.3 8.0 5.0 4.0 4.0 GDP deflator (% change) 22.5 9.9 6.8 6.0 4.5 4.0 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use o f IMF resources. e. Consolidated central government. f. "LCU" denotes"local currencyunits."An increaseinUS$/LCU denotesappreciation.  Annex B7 Page 1of 1 Turkey - Key Exposure Indicators Estimate Projected Indicator 2003 2004 2005 2006 2007 2008 Total debt outstanding and 145367 161801 173517 184404 194226 204857 disbursed (TDO) (US$m)a Net disbursements (US$rn)a 4457 12280 12084 10934 9870 10679 Total debt service (TDS) 27808 30345 36850 38088 38099 36610 (US$m)a Debt and debt service indicators (%I TDO~XGS~ 198.6 171.2 160.1 156.2 151.5 147.9 TDOiGDP 60.5 53.4 48.8 49.1 48.2 47.2 TDSiXGS 38.0 32.1 34.0 32.3 29.7 26.4 ConcessionaliTDO 3.5 3.2 2.9 2.6 2.3 2.0 IBRDexposure indicators (%) IBRDDS/public DS 5.3 4.5 4.6 5.2 5.2 6.6 Preferred creditor DSipublic 25.9 38.7 47.0 46.8 39.5 29.2 D S (%)' IBRDDSiXGS 1.o 0.8 0.9 0.9 0.8 0.7 IBRD TDO (US$mld 5214 6153 6829 7653 8153 8928 Share o f IBRDportfolio (%) 4.5 5.6 6.3 6.9 7.2 7.6 IDA TDO (US$m)d 83 78 72 67 62 56 a. Includes public and publicly guaranteed debt, private nonguaranteed, use o f IMF credits and net short- term capital. b. "XGS" denotes exports o f goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and thl Bark for International Settlements. d. Includes present value o f guarantees. e. Includes equity and quasi-equity types o f both loan and equity instruments.  m m Q X I C .-$u~ ~ ~ d ~ ~ N O m r r . w b 0 r . 0 w w r . 0 m w ~ N N w m o w ~NmNm - o d b r n o r n ~ m - LD d 7 - r - m ~ m m 3 L 8 O 0 m d 7- m In 0 m L a, a ... m l o l 01  Annex B8 IFC's Committed and Outstandinq Portfolio in Turkev As of Q6l3Ql2QQ5 12005 Acibadem 20.00 0.00 0.00 0 00 10.00 0.00 0.00 0.00 199812000 Aiternatif Bank 0.25 0.00 0.00 0.00 0.25 0.00 0.00 0.00 199511996120011200312005 Arcelik 158.86 0.00 0.00 114.17 158.86 0.00 0.00 114.17 2000 Arcelik LG Klima 7.77 0.00 0.00 0.00 7.77 0.00 0.00 0.00 1994119971200212005 Assan 42.50 0.00 10.00 0.00 22.50 0.00 0.00 0.00 2002 Atiiim 6.50 0.00 0.00 0.00 6.50 0.00 0.00 0.00 2000 Banvit 8.33 5.00 0.00 0.00 8.33 5.00 0.00 0.00 19941199612000 Bayindirbank A.S 1S O 0.00 0.00 0.00 1.50 0.00 0.00 0.00 2002 Beko 30.69 0.00 0.00 21.92 30.69 0.00 0.00 21.92 2001 Bilgi 8.00 0.00 0.00 0.00 8 00 0.00 0.00 0.00 1994119951 199611997 Borcelik 8.18 9.66 0.00 0.00 8.18 9.66 0.00 0.00 2004 Borusan Holding 30.00 0.00 7.85 0.00 30.00 0.00 7.85 0.00 2004 BTC Pipeline 76.00 0.00 0.00 76.00 76.00 0.00 0.00 76.00 1994 CBS Holding 3.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 19901199312002 Conrad 7.28 0.00 0.78 0.00 7.28 0.00 0.78 0.00 2002 EKS 10.27 0.00 0.00 0.00 10.27 0.00 0.00 0.00 2004 Ege 10.00 0.00 0.00 8.00 10.00 0.00 0.00 8.00 1995 Entek 18.00 0.00 0.00 8.28 18.00 0.00 0.00 8.28 199211999 Finansbank 2.22 0.00 0.00 0.00 2.22 0.00 0.00 0.00 1994119981200012004 Garanti Leasing 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 1999 Gumussuyu Kap 4.00 0.00 3.43 0.00 4.00 0.00 3.43 0.00 2001 Gunkol 4.24 0.00 0.00 0.00 4.24 0.00 0.00 0.00 1998 indorama lplik 4.38 0.00 0.00 0.00 4.38 0.00 0.00 0.00 2005 Intercity 15.00 5.00 0.00 27.75 6.26 5.00 0.00 11.59 19981200012002 lpek Paper 17.95 0.00 5.00 2.14 17.95 0.00 5.00 2.14 1990 Kepez Elektrik 1.62 0.00 0.00 0.00 1.62 0.00 0.00 0.00 1988/ 199011996 Kiris 26.33 0.00 0.00 0.00 26.33 0.00 0.00 0.00 1996/2004 Koclease 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 1991 Kula 5.05 0.00 0.00 0.00 5.05 0.00 0.00 0.00 2003 MESA Group 11.oo 0.00 0.00 0.00 11.oo 0.00 0.00 0.00 1993/ 1996 Medya 0.00 0.00 0.00 0.00 0 00 0.00 0.00 0.00 2004 Meteksan Sistem 0.00 0.00 8.50 0.00 0.00 0.00 8.50 0.00 2002 Mill Re 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 199812002 Modern Karton 13.79 0.00 0.00 0.00 13.79 0.00 0.00 0.00 1991 NASCO 3.95 0.00 0.00 1.38 3.95 0.00 0.00 1.38 2004 OPET 25.00 0.00 0.00 40.00 8.33 0.00 0.00 25.00 199712004 Oyak Bank 50.00 0.00 0.00 0.00 50.00 0.00 0.00 0.00 2005 PALEN 2.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2005 PALGAZ 10.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 199812002 Pasabahce 1.E8 0.00 0.00 0.00 1.88 0.00 0.00 0.00 19831199411998 Pinar ET 3.14 0.00 0.00 0.00 3.14 0.00 0.00 0.00 199412000 Pinar SUT 11.04 0.00 0.00 0.00 7.60 0.00 0.00 0.00 1999 SAKoSa 9.29 0.00 6.19 6.22 9.29 0.00 6.19 6.22 19861199011998 Silkar Turizm 1.63 0.00 0.00 1.86 1.63 0.00 0.00 1.E6 1993119961200212003 Sise ve Cam 52.83 0.00 18.18 34.93 52.83 0.00 18.18 34.93 199812002 Soktas 2.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 19641196711969119721197311975119761 TSKB 0.00 0.00 50.00 0.00 0.00 0.00 50.00 0.00 1980119821199212005 1979119821198311989119911199611999 Trakya Cam 0.00 0.27 0.33 0.00 0.00 0.27 0.33 0.00 1995119991200212005 Turk Ekon Bank 11.11 0.00 65.00 0.00 11 11 0.00 65.00 0.00 2001 Turkish PEF 0.00 9.59 0.00 0.00 0.00 2.25 0.00 0.00 1999 Unye Cement 5.13 0.00 0.00 0.00 5.13 0.00 0.00 0.00 1999 Uzel 8.40 0.00 0.00 4.95 8.40 0.00 0.00 4.95 197011971119821198311998 Viking 7.36 0.00 0.00 0.00 7.36 0.00 0.00 0.00 2005 YUCE 4.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00    2 a a a E T i v p xE -3e u .-8 vi a M        I I I '      Annex C TURKEY:COUNTRYFINANCINGPARAMETERS The country financing parameters for Turkey, approved by the Regional Vice President, ECA, are summarized below. Item Parameter Remarks/ Explanation Cost sharing. Limiton the up to 100% rheBank may finance up to 100% proportion o f individual project costs if the costs of individual projects, that the Bank may finance )utwill only do so after :onsidering the context o f these iperations, the extent to which :ounterpart funds are available, mdthe implications for the overall iortfolio. In general, Bank rinancing i s expected to be below loo%, especially in sectorwide lpproaches (SWAPS).More specifically, the Bank could Finance up to 100% for social sector projects, while for other sectors we expect to remain within the cost-sharing range applied over the past three fiscal years - i.e. between 34 and 87 percent. Recurrent costfinancing. Any No country-level The Bank will continue to monitor limits that would apply to the overall limit the overall fiscal situation, and the amount of recurrent expenditures that Government's continued demonstration of commitment to sound fiscal management, and its implications for recurrent cost financing. In determining Bank financing of recurrent costs in individual projects, the Bank will take into account sustainability issues at the sector and project levels including the temporary nature of financing needs; and the Government's ability to sustain recurrent costs once Bank financing i s completed. The Government i s currently not expressing any interest inBank financing of civil servants.  Local costfinancing. Are the Yes The two requirements are met. requirements for Bank financing of The Bank may therefore finance local expenditures met, namely that: local costs in the proportions (i)financingrequirementsforthe needed in individual projects. country's development program would exceed the public sector's own resources (e.g., from taxation and other revenues) and expected domestic borrowing; and (ii) the financing of foreign expenditures alone would not enable the Bank to assist in the financing of individual projects Taxesand duties. Are there any No, except that the At the project-level, the Bank taxes and duties that the Bank would Bank will not would consider whether taxes and not finance? finance value-added duties constitute an excessively tax (VAT) for high share of project costs. entities that are entitled to obtain refund of VAT expenditures included inproject expenditures.