LAJ. 81gJ-- Document of The World Bank FOR OFFICIAL USE ONLY FIL E 0 PY Report No. P-2725-TU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOP! TO THE EXECUTIVE DIRECTORS ON A STRUCTURAL ADJUSTMENT LOAN TO THE REPUBLIC OF TURKEY February 29, 1980 This document has a resticted distribution and may be used by recipients only hu the performance of their oficial duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit Calendar 1978 July 1979 Jan 1980 US Dollar 1 = TL 24.28 TL 47.10 /1 TL 70.00 /2 TL 1 = US$ 0.04 US$ 0.02 US$ 0.01 /1 Except for imports of crude oil, petroleum products and fertilizer raw materials, and exports of agricultural products benefiting from official price supports, for which it was TL 35 = US$1.00. /2 Except for imports of fertiLizers and insecticides/pesticides, as well as raw materials and inputs for their manufacture, for which the rate is TL55=US$1.00. FISCAL YEAR Republic of Turkey March 1 to February 28 ABBREVIATIONS EEC European Economic Community LIBOR London Inter Bank Offer Rate M & LT Medium and Long Term SEE State Economic Enterprise SPO State Planning Organization TSKB Turkish Industrial Development Bank The Structural Adjustment Loan was appraised by a mission consisting of Mr. J. Thadani (leader), Mrs. S. Fukuda-Parr, Messrs. Eisa, Gowen, Gregory, Krishnamurty (consultant) and Hancock (consultant). FOR OFFICIAL USE ONLY TURKEY - STRUCTURAL ADJUSTMENT LOAN LOAN SUMMARY Borrower: Republic of Turkey Amount: US$200 million equivalent in various currencies Terms: Seventeen years including four years grace, at 8.25 percent per annum. Description: The loan will be in support of structural adjustment policies adopted, and to be adopted, by Turkey. These policies are aimed at promoting: greater reliance on market forces and less on direct state intervention and control; increased export orientation; increased mobil- ization of domestic resources; and a self-reliant State Economic Enterprise sector having higher productivity and better management and which sets own prices sufficient to cover operating costs and investment needs. The loan will finance high priority imports to assist fuller utilization of productive capacity in agricul- ture and industry. For agriculture: plant protection chemicals and raw materials and fertilizer raw materials ($100 million). For industry: steels, special steels, steel products, tin, tinplate, copper, aluminium, petro- chemicals and other chemicals ($100 million). Turkey will provide complementary funds (at least $30 million) towards spare parts for industries. Private sector firms would receive at least $65 million from the loan, and 33 percent of the total $230 million of Government and Bank funds. The loan would be disbursed in three tranches. $100 mil- lion would be available for disbursement after effective- ness, $50 million would be disbursed after the first review of the progress of the medium-term recovery program to be carried out before July 31, 1980, and the balance $50 million after the second such review before December 31, 1980. The main risks relate to possible developments in Turkey which might impede the Government's efforts to carry out the stringent short-term and medium-term recovery and structural adjustment programs it has formulated. Estimated Disbursements: US$ Millions Bank FY 1980 1981 Annual 90.0 110.0 Cumulative 90.0 200.0 This document has restricted distribution and may be used by recipients only in the performance of their oicial duties. Its contents may not otherwise be disclosed without World Bank authorization. REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED STRUCTURAL ADJUSTMENT LOAN TO THE REPUBLIC OF TURKEY 1. I submit the following report and recommendation on a proposed Structural Adjustment Loan to the Republic of Turkey, for the equivalent of US$200 million to help finance essential recurrent imports to assist with the fuller utilization of industrial and agricultural capacity. The loan would have a term of 17 years, including 4 years of grace with interest at 8.25 percent per annum. PART I - THE ECONOMY 2. A Special Economic Mission visited Turkey in April/May 1979 to evaluate the Fourth Five-Year Plan (1979-83). Following discussion with the Government in mid October 1979, its report entitled "Turkey: Policies and Prospects for Growth" (No. 2657a-TU dated December 12, 1979), was distributed to the Executive Directors on December 13, 1979. Its findings as well as those of the appraisal mission in July 1979 for the proposed loan, are reflec- ted in this Part. Annex I contains the Basic Country Data. Development Trends and Policies 3. As the result of a strong commitment to rapid growth and moderniza- tion, GDP increased at an average annual rate of 6.4 percent, 6.7 percent and 7.2 percent respectively during the First Plan (1963-67), Second Plan (1968-72), and Third Plan (1973-77) periods. This compares favorably with the experience of 55 "middle income" developing countries, whose GDP grew on an average 6.0 percent per annum between 1960-70 and 6.1 percent per annum between 1970-77. Moreover, the relatively high growth rate in Turkey was achieved without significant deposits of oil or other important natural resources. 4. Growth was accompanied by significant social changes. Although population grew at 2.5 percent per annum, rapid GDP growth allowed nevertheless substantial advances in per capita income. However, rising income levels were not accompanied by better income distribution and significant sectoral and regional inequalities in income exist, although basic needs have been satisfac- torily met. The democratic political framework was maintained despite the Army's intervention in 1960 and 1971. While the system preserved essential liberties, it was also beset by political instability, widespread terrorism, increased bureaucratization and resistance to reform. 5. The public sector has played a key role in economic and social development. Between 1963 and 1977, the share of the public sector in total fixed investment fluctuated around 50 percent, and its share of fixed invest- ment in manufacturing increased from 21 to nearly 49 percent. The public sector dominates basic industries. Nevertheless, the private sector has emerged as an increasingly important and dynamic element in the economy and is beginning to shift its orientation from consumer goods to intermediate and -2- investment goods, and from the domestic market to exports. Private sector investment increased at nearly 11.5 percent per year in real terms during 1967-77 compared to an average annual increase of only 4.8 percent between 1963 and 1967. 6. Turkish development between 1963-77, however, exhibii> a number of structural characteristics which are of considerable relevance for future development policy. First, for a country of Turkey's size and per capita income, it has a very low level of exports relative to GDP--about 4 percent in 1977--as against an import level of around 20 percent of GDP, which is more or less "normal" for middle income countries like Turkey. This disparity highlights the vulnerability of the balance-of-payments and the importance of export development to sustain the needed inflow of foreign exchange resources. Second, while the level of investment relative to GDP increased rapidly and compares favorably with other developing countries, the mobilization of domestic savings has lagged; the ratio of domestic savings to GDP is consider- ably below the average for middle income countries; the growing gap between domestic savings and investment led in the mid-70s to a relatively high level of external borrowing, and to domestic inflationary pressures emanating from excess demand and deficit financing. Third, a relatively high proportion of the labor force is still in agriculture, reflecting significant disguised unemployment and the need for accelerated job creation in non-agricultural activities; that in industry is low compared to other large middle income countries; besides, the relatively inadequate generation of additional employment has become more serious following the near cessation of workers' migration to Europe since 1974. Fourth, despite the growing dynamism of the private sector, the industrial scene is dominated by inefficient State Economic Enterprises (SEEs) which were not exposed to market forces and serve not only economic, but also social goals; their growing deficits impose inflationary burden on the budget, while their ambitious investment programs have to be financed through Central Bank borrowings, since their controlled prices do not enable most of them to generate sufficient cash to cover costs or investment expenditures. Fifth, due to the successes achieved since the early sixties through economic planning, there has been an increasing tendency to plan up to a micro-level and seek to achieve changes through administrative fiats; however, the economy has reached a stage where such excessive reliance on objectives and a pervasive and inefficient administration becomes counter productive; planning needs to be increasingly geared towards setting a frame- work in which market forces could secure the desired economic results in both the public and private sectors. The Economic Crisis 7. These economic, institutional and structural characteristics of the economy made it particularly vulnerable to the sharp increase in oil prices in 1974 and the simultaneous occurence of recession, inflation and rising unemployment in the industrial countries. These factors played a key part in the deterioration of the Turkish economic situation. However, the politically weak governments and their policies in response to these factors, played as important a role in creating the economic crisis that began in mid-1977 and still continues. -3- 8. The worsening international environment was met by an effort to raise the rate of GDP growth. This was set in motion by rapid increases in investment and consumption expenditures, spearheaded by the public sector. The growth rate of public investment in 1974-77 was 4-1/2 times higher than in 1970-73. That of public consumption nearly doubled. The budget deficit as a percentage of GDP increased. The rate of increase of money supply accelerated to finance growing expenditure, leading to a growing rate of inflation. 9. These were accompanied by unfavorable developments in the balance-- of-payments. Merchandise exports declined in volume and grew only slowly in value, while imports continued to increase rapidly. The slowdown of exports was due partly to the recession in the importing countries, and partly to the booming domestic economy which, together with an overvalued TL, provided a highly profitable market. Similarly, about half of the explosive growth of imports was due to rising world prices, especially of oil; but the other half was due to a steep rise in the volume of imports to sustain the economy and an escalated investment program. The problems were aggravated by a decline in workers' remittances caused by the recession in Europe, a holding back of remittances in anticipation of exchange rate adjustments and their diversion to other channels as the difference between official and unofficial exchange rates increased. 10. The Government's reaction to the strained balance-of-payments and the exhaustion of the foreign exchange reserves was to sustain high levels of investment and growth through external borrowing - mainly on a short-term basis, given the lack of significant long-term aid at that time. Short-term external debt increased from $216 million in 1974 to $6.6 billion in 1977. By mid 1977, a crisis stage was reached. The inflow of external capital dried up. The boom collapsed, leaving a host of domestic and external problems needing resolution before stable growth could be resumed. Short-Term Issues and 1978-79 Stabilization Efforts 11. By August 1977, Turkey began taking stabilization measures. These included increases in SEE prices, increased levies to dampen imports and curbing of some new investments. By then, it was apparent that more drastic stabilization measures would be needed to stem the economic deterioration. Following elections in late 1977, a new government developed its own stabiliza- tion program in early 1978. It was designed to focus on the following short- term stabilization issues: (a) improvement of the balance of payments through stimulation of exports; (b) improved domestic resources mobilization, by limiting the consolidated public sector deficits and the growth of money suppl7i; and (c) higher M< external borrowing and rescheduling of short-term debt_. This formed the basis of the IMF's April 1978 Standby Arrangements. 12. However by 1978, the outcome was mixed, when compared to the targets and goals of the stabilization package. The balance of payment position remained weak, although the current account deficit declined to $1.7 billion, less than half of the 1977 deficit and below the Standby's target. The decline was achieved through a notable increase in exports, but more importantly, through a sharp curtailment of imports below the Standby's - 4 - goals. The resulting lack of imported inputs, despite resort by importers to the "unofficial" use of worker remittances which led to stagnation of recorded remittances, had a considerable adverse impact on domestic output, particularly industry. 13. AnoL!er cause of a weak balance of payments was the low inflow of M< foreign credits. Mobilization of new credits proved more difficult than expected. Besides, slow project implementation caused lower disbursements than envisaged in early 1978. The net capital inflow was about $900 million in 1978. The overall balance of payments deficit of $950 million, was financed by drawings from the IMF and other short-term sources. 14. The performance on domestic resource mobilization was even more disappointing. The consolidated budget deficit of TL 35 billion (2.8 percent of GNP) was significantly larger than anticipated. SEEs losses, at about TL 50 billion, were higher than in 1977 despite periodic major increases in SEE prices throughout 1978. There was a sizeable increase in public sector borrowings from the Central Bank; the resulting monetary expansion (37 percent growth over the previous year) combined with the cost push effects of import restrictions and wage increases averaging about 50 percent, raised the price level by about 50 percent during 1978. It continued to rise at a similar rate in the first half of 1979. These adverse developments were reviewed in late 1978 by Turkey and the IMF, as envisaged in the Arrangements, from the viewpoint of making necessary modifications. However, since no mutually satisfactory solutions could be found, withdrawals were suspended by the end of the year. 15. In March/April 1979, Turkey announced a new stabilization program and undertook several drastic, but essential and overdue measures; then in July, it concluded a new IMF Standby Arrangement. The principal measures taken, may be summarized as follows: (a) to improve the balance-of-payments, the TL was devalued in several steps until June, when a new buying rate of TL 47.10 per US$1 was established for most foreign trade and all invisibles 1/; the new rate represented a depreciation in export-weighted terms of nearly 75 percent since the fourth quarter of 1970, and 50 percent since the previous major adjustment in March 1978; it more than offsets the differential infla- tion rate during the course of 1978-79 between Turkey and its major trading partners; (b) to further stimulate exports of industrial and mining products, exporters were allowed to retain 50 percent (up from 25 percent) of their foreign exchange earnings to finance their imported inputs or those of their local suppliers; (c) to improve the financial position of SEEs, further substantial price increases (34 percent to 110 percent) were announced for a number of products, raising them above world prices at the new exchange rate; these increases were estimated to yield an additional TL 80 billion in FY1979, to help reduce the overall borrowing requirement of the public sector; and (d) to ensure more effective mobilization and allocation of resources, interest rates for deposits and loans were increased substantially, from up to a maximum of 16 percent p.a. to over 24 percent p.a.; repatriated savings of migrant workers were allowed an additional interest premium. 1/ Excluding exports of several price supported agricultural products and imports of crude oil, petroleum products and inputs for the production of fertilizers, for which, a rate of TL 35 per US$1 was set. -5- 16. The July 1979 Standby, covers a twelve month period. It foresaw total purchases of SDR 250 million in four tranches - SDR 70 million initially, SDR 60 million after November 22, 1979, another SDR 60 million after March 20, 1980, and the balance of SDR 60 million after June 20, 1980. It provided for a series of specific performance targets to strengthen the public finances, reduce inflation and improve the balance-of-payments situation in the short term. On the balance-of-payments side it: (a) provided for continuation of an exchange rate policy conducive to the maintenance of Turkey's competitive position in foreign markets, to be reviewed before the release of the November 1979 and March 1980 tranches; (b) excluded introduction of new multiple currency practices; (c) placed limits on outstanding foreign arrears and provided for repayments in an orderly fashion through further debt rescheduling; (d) limited contracting of new public sector or government guaranteed foreign debt with an original maturity of less than ten years to $1 billion during the period of the Standby, of which not more than $500 million with maturities of less than 5 years. On the public finance side, when the Standby was concluded, it was expected that: (a) total net public sector borrowing in 1979 could be contained at about TL 155 billion (about 7 percent less than in 1978); (b) net new Central Bank credits to the public sector would be limited to TL 94 billion during FY 1979 (about 8 percent more than in 1978); and (c) the current policy of flexible and realistic SEE prices and efforts to improve operating efficiency, to hold SEE net borrowing requirements at TL 95 billion could be continued. This implied a reduction in the SEE deficit from an estimated 4.4 percent of GDP in 1978 to 3.5 percent in 1979. To reduce inflation, the Government limited net domestic assets of the Central Bank to TL 399 billion by October 1979 and TL 444 billion by February 1980, the level thereafter to be determined in common understanding with IMF. 17. These measures were expected to prevent further deterioration in the balance-of-payments during 1979, with essential imports projected at $5.0 billion, about the same level as the previous year in real terms. A substantial increase in workers' remittances, to a level of $1.2 billion was expected to compensate for the increasing interest payments on foreign debt. At the same time, disbursements of medium-and long-term foreign aid, (including the Bank's First Program Loan) were expected to increase markedly in 1979, thus reducing the need for renewed short-term borrowing. 18. In 1978, short-term debts continued to grow. However, 1979 witnessed the completion of a major Turkish effort to alleviate the primary external debt issue through: (a) slowing the growth of short-term liabilities; (b) -' debt relief arrangements; and (c) efforts to pursue new sources of credits, especially M< credits. The first debt relief operation, arranged through the OECD Consortium for Turkey in May 1978, involved consolidation of $1.14 billion in arrears on guaranteed short-term and bilateral M< debt, as well as amounts due over the 13-month period May 21, 1978-June 30, 1979. A second such major rescheduling took place in July 1979 involving about $1.02 billion of the official bilateral and private guaranteed credits due between July 1, 1979 and June 30, 1980. A third major arrangement, finalized in July and August 1979 with commercial banks, rescheduled convertible lira deposits ($2.3 billion), banker's credits ($429 million) and third party reimbursement credits ($300 million). About $317 million in oil debt was also rescheduled. The total amount thus rescheduled was about $5.5 billion. This is perhaps the largest debt rescheduling operation anywhere. 19. Turkey also succeeded, though to a limited extent, in diversifying sources and increasing the level of M< commitments. It secured commitments of $547 million in 1978 in program loans and oil import financing credits from Libya and Iran. In addition, an agreement was reached in mid-1979 with the Saudi Fund, for $250 million in project credits. Perhaps the most important arrangement arrived was the May 1979 OECD sponsored pledging of $1.45 billion in special assistance, involving about $900 million in M< bilateral credits and export credits, besides $407 million of medium-term credits from commercial banks (finalized in September 1979). Agreements for all these funds were expected to be finalized before the end of 1979. By that time, about $750 million of this, was estimated to be disbursed. Economic Situation End 1979 20. The economic crisis still continues. The measures taken in the context of the July 1979 Standby Arrangement have essentially succeeded in arresting further economic deterioration. Since it came in effect only in July 1979, it was recognized that the stabilization objectives which could be realized within one year were necessarily limited, and the progress towards them within the remaining six months of 1979, would also be quite modest. 21. After a surge upto mid 1979, worker remittances slowed down; never- theless, they totalled about $1.7 billion, against $983 million in 1978 and the Standby's target of $1.2 billion. Industrial exports rose quite strongly in the first half of 1979 in response to the changes in the parity value of the TL in April and June 1979; but they subsequently slowed down, presumably, partly due to severe shortages of imported inputs and partly due to "holding back" in anticipation of further devaluation in the second half of that year. Overall, exports totalled about $2.3 billion in 1979, against the Standby's target of $2.7 billion. As a result of higher prices and the necessity of purchasing oil on spot markets, the 1979 oil bill rose from the targeted $1.7 billion to nearly $2.5 billion. While imports in 1979 were contained at $5.1 billion, marginally higher than the Standby's target of $5.0 billion, the large oil bill necessitated more than anticipated reductions in essential imports. The problem was compounded by much lower inflow of new capital than those envisaged in July 1979, because a significant part of the $900 million committed by bilaterals in May 1979 at the OECD meeting, had not been made effective up to December 1979; besides, only a portion of what was made effective, was available to finance imports in 1979. Disbursements were also lower than expected against the $407 million of new commercial bank financing, because of its linkage with the November 1979 tranche of the Standby Arrangements which could not take place in time due to a change of government in Turkey in late 1979. Consequently, while the estimated current account deficit of $1.6 billion in 1979 was more or less in line with the target in the Standby Arrangements, the volume of imports declined by about 15 percent in 1979, following a decline of about 30 percent in 1978. Overall, GNP growth in 1979 was about 1.5 percent. 22. Under the great pressure imposed by extremely limited supplies of vital imported inputs and products including oil, the resulting shortfalls in export earnings, the shortages of a wide variety of consumer goods, and - 7 - much stronger pressure on wages than anticipated at the time of the Standby, the rate of inflation, on an average annual basis, reached 80 percent in 1979. This happened, despite the observance by Turkey of ceilings established under the Standby for monetary expansion, ceilings for net Central Bank credit to the public sector, lower borrowings by SEEs from the Central Bank and lower levels of public investments in 1979. Turkey's Medium-Term Economic Prospects 23. The Fourth Five-Year Plan (1979-83), approved by Parliament in November 1978, was in many essential ways, an extension of the traditional Turkish development planning. It set out to complete the unfinished tasks of the Third Plan, and continued to emphasize on a high growth rate, a large investment allocation for import substitution in basic and intermediate goods industries, and reliance on administrative controls rather than on market incentives. But it also attempted to address some development issues which came to the fore during the economic crisis, i.e. export growth and increased savings. Consequently, an export growth target of 18 percent p.a. in real terms and a marginal savings ratio of 34 percent have been set, and priority was also accorded to export-oriented investments. But investment allocations provided mixed signals, favoring import substitution. Given the unattain- ability of the marginal savings ratio and the likelihood that net capital inflows will be below the Plan's assumption of about $1.6 billion p.a. in 1978 prices, the Plan's levels of investment and growth (8.2 percent p.a) during 1979-83, are clearly not going to be achieved. 24. Against this background, the Bank has made its own prognosis based on a general equilibrium model of the economy which permits quantification of alternative policies and a detailed and consistent examination of Turkey's medium-term prospects. Given the accumulation of economic problems of the last 3 years, the political difficulties besetting the country, the additional resources needed to cover the significantly increased cost of its minimal oil imports, and the limitations which Turkey is likely to encounter over the medium-term in significantly increasing the net inflow of capital, GDP growth in real terms may average around 4 percent p.a. with a real growth of exports about 10 percent p.a., during 1980-85. These growth rates appear attainable, assuming continuation of appropriate economic policies (including those announced in January 1980), and taking into account the low export base and present underutilization of capacity. The international oil situation, following the recent substantial oil price increases at end-1979, have a major impact on future prospects. It is assumed that Turkey will continue to contain the volume of oil imports between 1980-1985, at the 1977 level, despite the growth of GNP. Even then, the oil import bill is estimated to increase to $3.2 billion in 1980 and $5.2 billion by 1985. (Even in 1979, due to higher prices and the necessity to purchase in spot markets, the oil bill was $2.5 billion against $1.7 billion envisaged in early 1979.) This implies a significant decline in annual per capita oil consumption. Annex II compares the role of the oil bill in Turkey's imports and its contribution to the current account deficits, historically and projected. As can be seen, the net oil imports as a percentage of merchandise exports and non-factor services, reached nearly 67 percent in 1979; even if oil consumption and imports are contained, this percentage is likely to remain close to 60 percent until 1985. - 8 - The pressure this will exert on Turkey's already difficult balance of payments position, is obvious. Although in constant dollars the ratio appears manage- able, in current prices, the projected current account deficit as a percent of GNP increases from 3 percent in 1979 to about 5.3 percent in 1980 and remains at a level of about 4 percent thereafter until 1984. Considering the limita- tion on the -)ss inflows of available external assistance (see paragraph 26), and given the need for sound external debt management, Turkey can sustain an average annual current account deficit of the order of $2 billion annually over the next 5 years. 25. This growth prognosis is more pessimistic than the one presented in the Special Economic Report, which as mentioned above, was based on the estimates of oil price increases considered reasonable in mid-1979, and prior to the price increases which occurred around the time that Report was circula- ted. A more detailed prognosis, as a supplement to the Special Economic Report, is therefore proposed to be presented to the Board in a memorandum. It is under preparation, and is expected to be issued shortly. 26. Taking into account international inflation and the growing obliga- tions for debt amortization, this situation necessitates a large and sharply increasing gross annual average inflow of foreign capital, rising from the current low levels to about $2.8 billion in current prices during the next five years. Such major inflows of foreign capital can only be sustained on the basis of prudent external debt management. In any case, debt service obligations are likely to remain very high over the coming 5 years. In 1978, total debt service payments had risen to 26.7 percent of exports of goods, non-factor services and workers' remittances after making allowance for the rescheduled service payments. In 1980, the ratio is projected to reach close to 35 percent, and is likely to peak between 1982 and 1985 at a high level of nearly 45 percent, before declining. This, however, should represent the culmination of the financial consequences of the present crisis and the debt burden should remain manageable, provided the export drive is sustained. PART II - NEW ECONOMIC POLICIES AND CHANGES January 1980 Economic Program and Policy Objectives 27. Despite the several difficult stabilization measures adopted since 1978 and those reflected in the July 1979 Standby Arrangements, the economic crisis persisted throughout 1979. As also explained in Part I, the additional burden imposed on Turkey's extremely tight balance of payments by the recent oil price increases, will render its early emergence from this crisis more difficult, and will thereafter result in a rather modest average rate of growth, than might otherwise have been possible. 28. Following elections in October 1979 and the ensuing resignation of the Ecevit cabinet, Mr. Demirel formed a new government, which obtained a vote of confidence only in late November 1979. Bold and far-reaching measures to reverse the economic situation were announced on January 24, 1980, transcending those which are normally found in programs for stabilizing economies of countries -9- in crisis. They are summarized in Annex III. The announced economic policy objectives which underlie these measures represent a major turnabout in Turkish economic policies, as well as a basic departure from the past planning objectives. In pursuance of these new objectives, Turkey has undertaken, through this program, essential first steps to initiate major structural changes in the key areas which are summarized in para 6 with a view to foster- ing medium-term economic development on a stable basis. 29. Recognizing the scope and ambit of this program, the IMF Board of Executive Directors approved on February 21-, a modification of the terms of the July 1979 Standby Arrangements. As a result, the release of balance of SDR 180 million then committed, was modified as follows: SDR 100 million has been provided by IMF on approval of the modification; followed by SDR 40 million by end March 1980 and SDR 40 million by end June 1980. In addition, compensatory financing of about SDR 70 million has been provided with the modification of the Standby. Together, this results in the provision of $224 million (SDR 170 million) now with $53 million (SDR 40 million) to be provided in March 1980 and again in June 1980. In addition, Germany is taking the lead in organizing, through the OECD, the provision in the near future of sizeable external assistance, as well as a further debt relief operation. The success of the January 1980 measures are clearly dependent not on Turkey's own further efforts alone, but the willingness of the international economic and financial community to provide adequate and timely assistance in the period immediately ahead. The alternative for Turkey, would be to cut back on imports, already pared to the bone; this, in turn, would postpone the possibility of economic recovery even further, jeopardize its efforts to curb inflation, and hamper the success of the bold structural changes it has initiated. 30. The new economic policy objectives underlying the Government's stated goal of "bringing about a major reorientation of the economy," can be summed up as follows: (a) Greater reliance on market mechanisms and forces by both the public and private sectors, and lesser reliance than hitherto on planning up to micro-levels and on administrative fiats to realize planned targets and objectives. (b) Reduction in the rate of inflation and improved management of balance of payments as well as of external debts, have the highest priority; in the process, Turkey may have to accept temporarily a lower GNP growth. (c) Import substitution and protection oriented policies, on which Turkish development policy hitherto relied and which resulted in a bias favoring production for the domestic markets, must give way to policies encouraging the public and private sectors to be efficient and internationally competitive. (d) In future, reliance must be placed on exports and foreign currency earning activities to finance Turkey's economic needs; the implemen- tation of rational exchange rate policies and of measures encouraging exports, are essential to achieve this objective. - 10 - (e) The SEE sector must be reformed, by exposing it to market forces, by allowing it to set its own prices and by improving its management; through such actions, it must generate its own resources to cover operating costs and investment expenditures. (f) Domestic resource mobilization efforts, unlike the ^ must be substantially augmented through increased tax efforts, the banking system, increased savings and the development of financial markets; the elimination of deficits of the public sector is an important objective of budgets from 1980 onwards. (g) Investments aiming at more intensive and fuller utilization of existing productive capacity and completion of those ongoing projects requiring modest inputs, should have first priority; thereafter, the priority should be for new invest- ments stressing exports and employment or those removing critical infrastructural bottlenecks; in any event, invest- ments should be tailored to scarce resources. (h) conditions to stimulate foreign investments in oil, industry and agriculture must be created, in contrast to the past when such investments were not encouraged; prudent external debt management policies to create confidence in and flow of large external resources to Turkey, should be followed. 31. These are radical departures from past Turkish economic policy and philosophy. Thus, the considerable effort which will be required--from now to the medium-term--to implement the new policy and complete the structural and institutional changes which the Government has initiated, should not be under- estimated. The key policy areas are: (a) a rational exchange rate policy; (b) policies ensuring increased export earnings and encouraging foreign investments; (c) reform of the SEE sector, and the use of market forces to improve its efficiency and output as well as that of the private sector; (d) policies to improve domestic resource mobilization; and (e) formulation and pursuit of rational external debt management and investment policies. 32. The new policy objectives, as well as the areas and directions of structural adjustments initiated, are explained in a letter dated February 7, 1980 to Mr. McNamara from the Undersecretary of the Prime Ministry and Acting Undersecretary of the State Planning Organization (Annex IV).1/ The actions taken by Turkey since 1978 in the areas requiring structural changes, includ- ing measures in the January 1980 program, and those planned for implementation in the medium-term, are summarized in the Table below and discussed in the succeeding paragraphs. Progress in implementing them so as to foster eco- nomic recovery in the medium-term, will be the focus of two reviews, which are to take place by July 31, 1980 and December 31, 1980, prior to making loan disbursements beyond $100 million and $150 million respectively (Loan Agreement, Preambles A and B, Section 3.08 and Schedule 5). 1/ The attachments to this letter are available in the Project File. - II - TURKEY: Key Elements f Turkey's Ongoing and ,edi-n-Tern Recovery Efforts IPolicies cad eae Bale Insees 1978/79 Treads Mesuerecuep to J, .ary 1980 f,the,Iot-r Epecend Inp-ct A. Balance of Payments E-reent ae/ deficit was 53.6 b. in '77, Adeiistratioe neasures to preoen increasic i 51.8 b. is '78 and '79. deficit bepynd '78 Ieeel. a. Eachange Rate Policy Onernaloatine and insdequate adjost-ntes Adaptiws in Acne '79 of a reali_tfe exchancn rate 're_ceet and almont auiomaiic adjus-tnnt by the Bcrecnthen cblanee of payments,; eneow-ae enpornt esenaouged impeets and capital inoeoeine tc hlep alleniste situation, wan foiloeed cp in C-toral Bank, in co-saltcti-o wich a new aya-p arid workers' remittcnces; stieulate leas capftal is-esteents; discoucaged eaparts. ian. '80 by a farther drastic devalsntion fiiing and Backing Ctordisation Conmittee, of the ifoensio' Iooesioeots. s rnte of YETL - S1, e_cept fIc fertiliIec and Ici sage rati to corer the diff-erctial nfla if.ectfcide imports. is Treigy and of hke coin trading partners. b. Experts Agricultaa aspects still dnminato; esport Melac.res -atko in '78/79 bhosted exporat by 15 pa [ Steps to ffrther minimiee o port procedarns, ECi.ifoinu enport growth by at l t 10 o ree t-1 -- erientatisn is gradually increasing in the in real terosll '78 and '79. Realiscti e-chanpgn reniet by Oct. ' I0, of the efficacy of tire flLIerf betaeen '00 asd '03. Artio hea- d iootrh Lc r industrial sece_r. Howevac, cuehereone sxport rate shouid help naiftoin growth treod. ferninelon arrongccnenu Bar export riok isurancc. and priority increase of non-tradftfonal eports, inpeono apacity restrictions and licensing procedures and mcore t exportnrs te rectin 50% no exgoet earnings for Lacens to ecedits no expactors, n cell as of utilization, arid fncreaser nrrployrest. luceative domestie eachet discr-sraged e-portc. le . porn seeds hlelped sticulateexports. Otoic irinoinstitional arragomnens te farther dnvelop Nay '79 and Jon. 'IT have reduced groedorl delays i troditieonl and non-traditionel ecxprts. Bncoctives OrasLica'ly; interim rrronoonentosno liched I and prtority for e-port oriented investments n _o rroldc export rink insorance coeerag,e prioae sertor. Study of peotectinn to he initiated a i an tern And worbiog capical credits tol in April '80. c. Extereal Debt Substantial annumolatfan of slrert-ternindebt- Gfaront-ed bilateral debts rescheduled up to Jcne I larcher ceerbedaling en exteeded erns of goarasteod BraduaB restoration of creditworthiness, to 'aicitir. ednese imposes and inordinstely h-eay bhrden, '791 lIP Standby Arrangenent in JAly '79; cnn- k bilatecal debt, containment of short-term debts oer viabic growtk and economi etahflity. in the m-dRas-tern, on halance of papments; neecial hash debts of 5429 m. reschedued and e medium-erm to no norm than crenc level op about short-tern debt -wnt sp an P 78 by another $2 b. f hrterrosedeiing of $2.D6 b. negotiated. J S2.B b., s ecorinp of new credots on as concessional hecacse Turkey Icrre..d net shert-term, and Jam. '8G eeoiraiirlc pacha iclided reasonable j terms cs pocslhle, soId c-dnletto by Oct. 'il of on cafoaPien adjustment ct old debt, due cc $ alterirotifo proposals tc settle abeot 51.9 b. of I 00goi0g stiCy to farther irpr--e arrd rehlrle hliO suipping Agaiost Earo-ncrroncios. onguaranot-d c-port credits. - enteroal dobt policy. B. Uiesatic Policies a. Inflatien i/cs enecraged consumption, discouragcd sasinga gfgart to control pubklic center rinfcinits and i Wcc the objective of reducing the race of growth Gradual redotlct io rate of grnwth of inflstion ho sad eroded potantiai keoef its frcn Governmcnt's ncrelorl Bank borrowinga in '178/79. Upwerd I of tirfilationell 'br: litoitnetnew Eerrtcol bern ' 80. Slidht declcoe in prfcate toes uopLcon aed some sickilieaiion polieies. Budget deficit of adjustmect of inLterent co too to Play '79, Bollowed croclits cc publiecosectoc to TL94n b. hol FY79/80. c,cl lee ilrr ;rrlotr fixed investnonts. lL61 h. 1.77 t SIP) asd overall public sector up Os Jan. '0 wi farther 2 percentage paint Iontioue policy cf limiticg cage iwcreases. Roinw hf deficit of 14019 b. lg.81, liP) is 'P8. Net irlre noses in all canes, and liberalizaticn of rte 'turkey'n nompOcced P'incocia 1lScct Study by be h; poblic neetrrr borrowing frcm Central Bach interstnat'ae region tbroug,h allowing borrowers i hy elf '80, rnoiewoneaslrrrrs trr enccua'', dll TL63 b. in ' 78. ars banks no airee on races for deposits beyond |tincreanes in hoosehiold saviogs cod deponits cc part O yearn end lending bpeynd 5 pears. of cetion. Reto inproec ofeax noktiiatoagnt tao f finanicin of public sotr, to he an important g eatere of 1980 and futare badgets. b. Priae Policiea of SieE Domeenaie re=ourcneemoilieation and itulA Bystemsatic increases in priees daring '78/ 79, fontinue peliey ef clcoraccole bOEs toceiprove Sirevit/res poblic seetec finances. Imprnovecseorce defbeits hace fncrensef. beficit of lEEs N.lt/. Pci/oloed rip in Ace. '00 by increases of betneen productivity and ianaenet- and gnerate their alloc ti GSP in '78. Underpricing of infirisl goods 50 to 300'/i in predacto snd servicea ci OEis, Er' I resources to cover their intiet prgmooc. prdodced or discrihoterl by SEE_, i:ag res,lc,d net TL350 b. in '80; chic nhculd oidp ollcvlatr IX is schotenclul lossees, met through the budget sicuation. Omoorcanolc. except foe coallliinit_, and Censteal Bealk kcrrowings. glas sggravated railway andshipping freighto and power tariffs inf lacfc,r cod c/re tccnoie c cisis. foe oaluinum and feerockceeme profnttlon, bOsi o:re ncc eliowed to fOe i/redo cec prices relpenidieig ccb market priece. fhS.rni, prices and improved . efficienty, c/rep are to --cer all costs aod generate cooi l rerricenvsmntsn, since their reilcoce cc thle hdget end Cestral Bask borrolnos I Per both porpones, has boen stopped. l c. Public Beccor Invest_- A disnvennent program, exce_sivn io thle light Coycawst prioritp aceorded to comyleLiont Pf tergcirro iestra ic: ten nea inceutmecns in lEght of oo.ailhlo Sizeaoble coduetion Onl pubiic fised innotTsceetLs. nest Program of availsblecreseurcesa, and emphasis on iarge projects nb/cfl tan g/ore grcnd recarnz ewith ncdeoc renerrrceIc All icvencnentn to be mo'/eActcor-dice to 0t1r,iaiate tasiec dinhurncewnrris 00 priority project prajecos wink long gestation period and mariinai ince_tment_, _od thcse kstear oanue ensi_ting serfict crfnrfacmcntioned under "fleanoten up to loans. Pocitivecoffe ct cn containing iloflatlo renurns, has increaued country's debt bolrden prondocioc c_patity Sully. New icnvs tmcnts, Aatu:ry '981rr cnlomn. Should resourecs folc sbort Promoction of publfc sector eeots and fuclled inflntion. tsilored io available re_ecrcn_, no be node n.oaty il any year no tltese estimated in the re/levant Ancalc on priority projects for reeovini iolrenteuetctnl Ocoican, they would be chosc_ll_d cc pcejectn kanioc boLt'leecks, oh proruting exports and employment. irtgrest griority aceerdirig to chat teri-ca, ithe lOst of whbich ic to be yprovided nrrrilp toh Back. - 12 - Export Promotion 33. In the policy announcements accompanying the January 1980 Program, the implementation of a realistic exchange rate policy, together with relevant policy and administrative measures, to rapidly increase foreign exchange earnings through exports, is referred to as "the fulcrum of Irkey's develop- ment strategy". While the importance of exports has been clearly recognized in Turkey since 1978, the above constitutes an important departure from the premises on which the previous Plans were based. Previously, export was generally regarded as an activity disposing of a "surplus" after domestic needs had been met. The important change now made is, that not only would the exchange rate now be periodically adjusted to reflect the differential between domestic inflation and that in Turkey's main trading partners, but that the cross rate adjustments would be made automatically and those to reflect the inflation differential would be made almost automatically by the Central Bank after consulting the new Money and Credit Committee established under the January 1980 package to bring about an effective coordination within Turkey, on all monetary and fiscal matters. This important change in direction, has been reiterated by Turkey to the IMF and is therefore an area one can expect the IMF to review during the course of its Standby Arrangement, as modified in February 1980, and in future. 34. Turkey's success in exports, will also depend on the effectiveness of complementary export policy and administrative measures. Particularly those that: relate to export incentives, provide exporters with priority access to credits and imported inputs for exports, reduce quota and tariff restrictions and remove administrative hindrances to export. Under the January 1980 program, exporters of manufacturing and mining products continue to qualify for special incentives, including tax rebates and retention of 50 percent of their foreign exchange earnings for their imported inputs. Imports of inputs made under this retention scheme, are now also exempt from customs duties. The import licensing categories have also been redefined, to eliminate some quotas and put a few items on the liberalized imports list. An important feature of the change in the payments system, is the shift of a number of payment transactions previously handled by the Central Bank, to authorized commercial banks. Previously, such banks could retain an average of 37.5 percent of their foreign exchange receipts, transferring the balance to the Central Bank. From January 25, 1980, the amount they can retain has been raised to 80 percent. More importantly, they are now authorized to effect payments for imports financed through acceptance credits and export retention quotas, which previously required approval of the Central Bank. 35. A Price Stabilization Fund has been created, from which exporters would be provided with export risk coverage, as well as priority access to term and working capital credits. This interim arrangement, will be reviewed by the end of October 31, 1980; should this review suggest that different, or more permanent, arrangements are necessary, the Government has undertaken to take appropriate action. By that time, it also plans to complete its review of other institutional arrangements which may still be necessary to promote the further development of Turkey's traditional and non-traditional export products and commodities (Loan Agreement, Schedule 5, para. 1 (a) and (b)). 36. Despite these changes, under the present system of licensing, imports are, in many cases, still subject to quotas determined by administra- tive decisions, without due regard to prices or sufficient attention to their impact on the output of finished products. It might therefore be advantageous for Turkey to move gradually to a more automatic tariff-based protective system, so that imp'--ters might themselves determine their import needs in the light of market conditions. While a major reform of the established industrial protection and incentive system based on quotas would be impracticable in the short-term, particularly because of the tight balance of payments situation, industrial efficiency would benefit from a gradual movement over a longer-term period, towards a more rational and selective system of protection and incen- tives based on tariffs. As a step towards such a longer-term adjustment, Turkey will take steps to commence by the end of April 1980, a comprehensive study for the purpose of introducing a more rational tariff-based protection and incentive system (Loan Agreement, Schedule 5, para. 1(c)). It is expected that this study would include: (i) review of the existing commodity specific quotas and import restrictions, to determine the level and variability of protection provided; (ii) determination of the appropriate general level of incentives based on tariffs, which should be provided for appropriate export industries, import substitution industries and producers of agricultural inputs; (iii) based thereon, the designing of detailed recommendations, together with necessary complementary programs such as export compensation, financing, insurance and incentives; (iv) ascertaining of the likely impact of such proposals on import levels, industrial sub-groups and major individual firms; and (v) taking all these factors into account, the development of recommendations for the phasing-in of the new protection regime, including proposals for adjustments in the transitional period to ensure minimum adverse impact on industrial efficiency or distortions in the economy. The Government has indicated in its abovementioned February 7, 1980 letter, that it hopes to complete the study in about one year after its commencement, introduce the transitional system shortly after completion of the study, and gradually phase-in the new protection system by the end of 1984. 37. The appropriate mix of policy and institutional instruments to achieve the target of export growth rate averaging about 10 percent per annum in real terms between 1980 and 1983, cannot be specified in advance. It will involve sustained efforts. The Government has confirmed in the February 7, 1980 letter, that it would seek the achievement of a real exports growth of this magnitude by continuing to foster the structural change it has initiated of maintaining a viable exchange rate regime, and through an appropriate set of export promotion policies and administrative measures. Such measures are expected to include, but not be limited to, those discussed in preceding paragraphs. Should export growth exceed 10 percent in any year, there may not be a need for a detailed review of specific policy actions; if it does not, the Bank would expect to discuss adequate corrective actions during the policy reviews planned under the loan (Loan Agreement Schedule 5, para. 1). - 14- External Debt Management 38. A prudent external debt management policy is crucial to maintain Turkey's debt service ratio at a reasonable level up to the mid-1980's, and to support the resumption of major capital inflows from external sources to sustain the recovery of the economy. The 1979 rescheduling of nearly $5.2 billion of short-term and medium-term debts, did not cover about $1.9 billion of non-guaranteed export credits. However, the January 1980 program addresses that issue. It is hoped that the new Turkish proposals will find an encourag- ing response from creditors, since that would help open the currently closed access to supplier credits and similar trade financing. 39. Even then, Turkey's external debt management policy has to grapple with several difficult issues. First, the large overhang of debt, and the relatively hard terms of the recent debt reschedulings, together raise a question regarding the need for further rescheduling in the near-term. A substantial improvement in the repayment profile of the rescheduled debts and the containment of Turkey's short-term indebtedness over the medium-term to no more than the present level of about $3.8 billion is necessary to alleviate the heavy debt servicing burden over-the next 5 years; a critical element here, is the likely posture of commercial creditors, which cannot be easily anticipated. Second, it is important that Turkey obtains sizeable external credits on as long-term and concessional a basis as possible, to complete ongoing projects and undertake new ones in accordance with its stated investment criteria (para. 45). Recognizing the importance of these issues and the longer-term concerns regarding its creditworthiness that its creditors have, Turkey has been focussing its attention on evolving a balanced and prudent policy for external debt management. The Government has already initiated a comprehensive study of external debt, which it expects to complete well before October 31, 1980 (Loan Agreement, Schedule 5, para. 2). This study should help Turkey to further improve and refine its present external debt management policy; that should also assist Turkey in exercising greater control over the level and terms of new external financing it would seek from various external sources over the next five years. Domestic Resource Mobilization 40. Insufficient domestic resource mobilization, concomitant with an ambitious investment drive, was a significant factor contributing to the economic crisis. This has been a critical area where inadequate atten- tion was being focussed until recently by Turkish governments. While Turkey ranks fairly well as regards "tax effort", with tax revenues accounting for over 20 percent of GDP in 1978 and expected to rise to nearly 25 percent by 1983, the past growth of tax revenues was generally due to escalating inflation, given the high progressivity of tax rates and the bias in coverage to urban incomes, wages and salaries. A restructuring of the tax system is therefore long overdue. Past governments hardly ever presented tax packages to Parliament in recent years, nor has Parliament passed a tax package in the last 8 years, e.g., a tax reform bill introduced in 1978, is still - 15 - unapproved. Against this background, the new Government's major policy objective, announced as part of the January 1980 package, to seek parliamen- tary actions in future, to augment domestic resource mobilization through changes in the tax laws, marks an important change in economic policy. 41. The Government recognizes that in addition to measure to increase the efficiency of tax administration and collection, what is needed is a restructuring of the tax system. Furthermore, considerations of equity argue for an increase in the level of exemptions to improve the level of income distribution for the benefit of lower income groups. At the same time, there is need for greater contribution to the tax efforts, from all segments of the population, including the labor forces working in the agricul- ture sector. There is also significant scope, which the Government's January 1980 policy announcements recognize, for increasing resource mobilization through the introduction of indirect taxation and placing greater emphasis on excise taxes and consumption taxes, like value added. Backed by this new policy objective, the Government is taking steps to present a sizeable tax package to the Parliament, as part of the January 1980 measures. Indeed, the February 7, 1980 letter articulates as a specific goal, the elimination of the overall deficit financing of the public sector, announced for FY 1980, will continue to be an important objective of future budgets. Accomplishment of this desirable new objective, will not be an easy task. This is an area which the Bank will continue to discuss during the course of its periodic macro- economic dialogue with Turkey as well as in the reviews to be made in the context of the proposed loan (Loan Agreement, Schedule 5, para. 3). 42. The use of the interest rate policy as a flexible tool for mobiliz- ing savings and allocating them effectively, is recognized in the January 1980 package. Given the high rate of inflation and the prospects of reducing it gradually in the medium-term, Turkey recognizes the negative impact which inflation can have on the fiscalization of savings and the efficiency of the market mechanism for mobilizing and allocating resources. Over the past 18 months, a more flexible interest rate policy has been adopted. Increases in household savings and time deposits followed increased rates in mid-1978 and mid-1979, indicates that when financial facilities are provided to enable the public to make high yield investments, they will respond. Nevertheless, for a variety of reasons, it is unrealistic to expect positive real interest rates on all financial contracts at the prevailing inflation rates. It is however reassuring, that as part of its efforts to augment domestic resource mobiliza- tion, the January 1980 package not only increased all interest rates by 2 percentage points, but laid a basis for liberalizing the interest rate regime. Interest rates for time deposits of 4 years and more, as well as for loans borrowed for a duration of 5 years or more are now to be freely negotiable. In addition, the Government expects to complete, by July 30, 1980, a review of measures, besides those already announced, to encourage increases in household savings and time deposits. The Government has also invited the Bank to visit Turkey in March 1980 to discuss the tentative findings of a draft Financial Sector Study which Turkey completed some months ago, and which, amongst other matters, reviews the important role played by the level and structure of interest rates in the development process (Loan Agreement, Schedule 5, para. 3). - 16 - These discussions are expected to lead in due course to detailed proposals for implementation of certain recommendations of the Study, as well as to further analysis of those issues that merit it. 43. Another critical, area for improved domestic resource mobilization in future, is in the SEE sector. The operating deficits of SEEs imposed an enormous strain on the government budget; their borrowings from the Central Bank for their ambitious investment programs have been one of the basic causes of inflation. Attempts since late 1977 to reduce these deficits by making periodic sizeable price increases, were buttressed in 1979 by setting production and export targets in the case of some SEEs. While these efforts went in the right direction within the given economic framework, there was a need for a drastic structural change in that framework. 44. This change has been initiated through the policies and actions taken with the January 1980 package, which are designed to make SEEs accept the discipline of market forces. The list of basic commodities and services whose prices were control-Led by the Government for social and other purposes, has been abolished. In future, the Boards of the SEEs will fix prices. Only the prices of coal and lignite, rail and ship freight and power for aluminium and ferrochrome production, are to be subject to price controls. Henceforth, by setting appropriate prices, the Boards of the SEEs are not only to cover operating costs, but also generate cash for investment. Neither, in future, will be financed from the budget nor will SEEs have access to Central Bank borrowings for investment. Having lived in a controlled environment and often having relatively inefficient managements, the SEEs may initially find the reorientation difficult. Nevertheless, pursuit of this structural change by the Government should exert pressure on the SEE managements to take measures to improve efficiency and productivity. It should also help to ensure that SEE investment programs are economically viable, and equally important, are within the bounds of the resources they can internally generate or borrow from the market. However, these objectives may not be attainable without fundamental changes in the laws governing the SEE's designed to put most of them on a sound economic basis. Public Investment Program 45. As discussed earlier, the overall size and quality of the public investment programs until 1977, have contributed to the economic crisis. Actions taken over the last several months provide some evidence that given the severe domestic and foreign exchange constraints, public investment expenditures are being channelled towards projects meeting strict investment criteria. However, the January 1980 program and the policy announcements accompanying it, go beyond that. They emphasize that since control of inflation is more important at present than the past Turkish strategy of concentrating only on higher growth, the projected level of annual investments must be rigorously tailored to meet the availability of scarce resources each year. Investments in fiscal 1979 were lower in real terms than those in fiscal 1978. The GovErnment proposes to continue that trend for fiscal 1980. Priority is to be accorded first to investments designed to utilize existing productive capacity more fully and to complete ongoing projects which - 17 - can yield attractive returns with modest additional investments. Thereafter, the priority for new investments is for productive projects either contributing to exports or employment, or for those which remove critical infrastructural bottlenecks. A new Incentives and Investment Department has been established, whose purpose is to review which ongoing investments should be stopped, deferred or comipleted on an accelerated basis. 46. The Bank's concern from the medium-term perspective, is both on the level and quality of the investment program. The Government also concurs that, should available domestic and foreign exchange fall short of that estimated in the Annual Investment Program for any year, the available resources would be channeled towards those projects having the highest priority according to the above criteria (Loan Agreement, Schedule 5, para. 4). Arrangements have been made to obtain a list of major projects to which Turkey attaches the highest priority based on these criteria, and which it would seek to implement instead of other projects, in conditions of reduced resource availability. PART III - THE CASE FOR THE STRUCTURAL ADJUSTMENT LOAN Introduction 47. As discussed in Part II, through its January 1980 economic program and policy announcements that accompanied it, the Government has embarked on a bold policy of "making a fundamental reorientation in the Turkish economy", and initiated a series of structural changes in the key areas of economic management. These are: adoption of a competitive exchange rate policy; policies to increase foreign exchange earnings to meet economic needs, through increasing exports, worker remittances and foreign investments in Turkey; greater reliance on market forces and mechanisms, by both the public and pri- vate sectors to achieve their goals; policies to augment domestic resource mobilization substantially through the tax system and the liberalization of the interest rate regime and by making the elimination of the deficit financing of the public sector an important budgetary objective; poli-cies to enable the SEE sector to become self-reliant, by improving its productivity and management and by allowing it to set its own market prices sufficient to cover operating costs and future investment needs; a policy to contain investments strictly within available resources and undertake them in accordance with rigorous criteria set by the government. Performance Under the 1978 Program Loan 48. A $150 million Program Loan (No. 1627-TU), approved by the Executive Directors on November 7, 1978, was designed to help finance high priority imports to assist fuller utilization of productive capacity in agriculture and industry, as well as to meet the import needs of exporters. At the time it was appraised, the Government had not yet finalized the Fourth Plan. However, it communicated to the Bank, through a letter from the Finance Minister (President's Report dated October 19, 1978, Annex I-A), that the cornerstone of Turkey's medium-term development strategy would be a vigorous export drive. - 18 - It also summarized export goals (an average of 15 percent p.a. growth in real terms over the medium term, with agricultural and industrial exports growing at 5 percent and 30 percent respectively), as well as exchange rate and export promotion policies and complementary administrative measures by which it hoped to achieve them. The major objectives and targets reflected in that letter and the Turkish performance thereon, are summarized in the following Table: 1978 Program Loan Targets Performance 1. Growth of Exports 1978 - 1979 15% p.a. growth in real terms, between 1978-83. Compared to '77, real growth was over 25% in '78; however due to a decline in real exports by 5'. in '79 over '78, partly because of "holding back" in the last quarter of '79 in anticipation of a major devaluation, real growth over '78 and '79 averaged about 9% p.a. 2. Policy Measures i. Exchange Rate: Adjustment appropriate in relation to (A) Devaluation in April'79, June'79 and Jan.'80, adjusted differential inflation in Turkey and her trading rate from Th2S to TL70. partners (Rate TL25 = US$1). ii. Protection via tariffs and quantitative restrictions (B) Jan. '80 - stamp duty reduced from 25% to 1%; several to be kept to reasonable levels. commodities transferred to liberalized list. iii. Additional Financial Incentives to exporters consistent (C) Retention quotas of exporters of manufactures raised with reasonable fiscal burden and with GATT obligations. from 25% to 50% and their use liberalized in Mar. '79. iv. Agriculture: Transport investments; finance for export- (D) Substantial progress. oriented projects. 3. Administrative Measures i. Simplification of procedures for exports, and imported Some progress over 1979 and again in Jan. '80. inputs. ii. Export risk insurance scheme under study, to be put into Study completed and interim arrangements introduced in effect soonest possible. Jan.'80. iii. Foreign trade development institution to be set up. Proposal still under consideration. iv. SEES to become more active in increasing exports. Export targets set for 1979 but achievements unknown. v. Diversification of export commodities and destinations, Some progress. especially to Middle East. vi. Long-term trade agreements. Significant progress, especially with East Europe. vii. Special facilities and incentives for export-oriented investments: (a) Domestic Investments: Maximum investment incentives provided in 1979; January'80: New Department of Incentives and Implementation in Prime Ministry, to streamline/coordinate investment/ export incentives to serve economic priorities; priority access to domestic credit; May'79: Substantial interest rate rebates introduced; Bank's TSKB XIII loan for export industries. (b) Foreign Investments Jan. '80: Major liberalization of eligible sectors, conditions, repatriation of profits and proceeds of equity sale; new Department of Foreign Capital in Prime Ministry, to automatically approve investments upto $50m. and review larger cases. viii. Changes in support prices of export agricultural commo- Support prices for wheat, seed cotton, hazelnuts and figs were dities to bring them in line with world prices. adjusted upwards, and, with exccange rate changes, are now belcv world prices, Price changes for rice and vegetable oils made to encourage reduced limports, ix, Investments in agricultural storage and transport. $200m. investments undertaken through FY79 Grain Storage Project. 4. Government organization i, Export Coordination Committee Set up, but ineffectiye, Tn Janugry 1980, geW Department for Export Promotion set up in Prime Ministry. ii. High Planning Council to review export progress and Periodic recommendations made to Government, resulting in policies. above actions. - 19 - 49. The technical targets of this Loan have also been achieved, and in some respects, they have been exceeded. Although disbursements commenced in February 1979, later than anticipated, disbursements by the end of FY79 exceeded appraisal estimates. As of February 15, 1980, it was almost fully disbursed. Direct and indirect allocations to the private sector totalled $87 million, thus exceeding the $50 million target; similarly, allocations to exporters under the "imports for exports scheme" financed under the loan, exceeded targets. In contrast to this creditable performance, SPO's quarterly reports to Turkey's Higher Planning Council to enable it to make policy deci- sions on improved export performance, and which were to be submitted regularly to the Bank, were not received. The main reason apparently was that the Council did not meet regularly, but instead responded to developments as they occurred, and the concerned ministries then took actions. Therefore, the Government instead communicated information on relevant matters to Bank staff from time to time, and in particular to the supervision mission in April 1979, and the Special Economic Mission in April/May 1979. Macroeconomic Considerations Underlying the Proposed Loan 50. Turkey continues to suffer from an acute shortage of foreign ex- change. A return to stable growth will inevitably take time. Even with optimal economic policies, there are physical limits to the speed with which exports (particularly industrial) can expand in the short-term, given the slow growth prospects and increasing protectionism in the developed countries which are Turkey's traditional export markets. Thus, to maintain essential recurrent imports, Turkey must continue borrow externally. The position, based on provisional estimates for 1979, and that projected for 1980 and 1981, is summarized in the Table below:. FOREIGN EXCHANGE REQUIREMENTS AND SOURCES OF FINANCE (1979-81) ($ millions) 1979 1980 1981 (Estimated) ----Projections--- Foreign Exchange Requirements 7360 9410 10810 Imports of goods and NFS/I 5500 7000 7950 Of which: Oil 2500 3200 3550 Interest 900 1200 1300 Amortization 550 900 1200 Changes in reserves and short-term capital movements 383 250- 280 Others -27 60 80 Foreign Exchange Receipts 4900 6150 7150 Exports of goods and NFS 3200 4050 4650 Of which: Goods 2300 3100 3600 Workers' remittances 1700 2100 2500 Capital Inflows 2102 3260 3660 1. Identified Capital 2102 1680 1000 a. Foreign Private Capital 200 200 240 b. Disbursements from Commitments as of end-1979: Multilateral 320 280 260 Bilateral 700 950 400 Commercial 390 250 100 c. Short-Term Funds 492 - - 2. Gap to be filled by multilateral, bilateral and - 1580 2660 commercial sources./I Errors and Omissions 358 - - /1 A shortfall would imply a similar reduction in the level of imports. - 20 - 51. For 1980 and 1981, the current account deficit based on latest projections of foreign trade, increased oil bill and worker remittances, is estimated at about $2.1 billion and $2.2 billion respectively. Put in another way, the foreign exchange requirements in each of these two years, including for imports at the essential minimal level with the containment of oil imports to volumes more or less reached in 1977, as well as the heavy burden of interest payments and debt amortization, are $9.4 billion and $10.8 billion in 1980 and 1981. Against that, based on cautiously optimistic estimates of exports and worker remittance.s in light of the January 1980 adjustments in the parity value of the TL and the policy on exchange rate changes then announced by Turkey, foreign exchange receipts in each of these years is likely to be $6.2 billion and $7.2 billion respectively. Further, given the disbursements estimated to take place against multilateral, bilateral and commercial credits already in the pipeline as of end of 1979, foreign private capital inflows, and inflows of short-term funds, the balance of the capital required in 1980 is likely to be of the order of $1.6 billion and that in 1981 of the order of $2.7 billion. 52. A part of this gap will be met through customary sources of capital assistance to be committed after end 1979, including in particular the proposed loan. A significant portion of it is likely to be disbursed by the end of 1980. One would expect that the remaining gap can be met by disbursements which could be expected against other new commitments likely to be made following the forthcoming OECD meeting in the near-term future, and possibly again in 1981. As noted above, the projections are based on minimal levels of imports which Turkey must make based on reasonable assumptions about oil price increases. Should new credits not materialize, in disbursement terms, at the level or in time, necessary to cover the abovementioned gaps in 1980 and 1981, this would inevitably by reflected in lower levels of imports in these years. An immediate consequence of further import cuts would be an additional drop in the already low level of capacity utilization and output. To that extent, economic recovery would be further delayed and consequently, the country's capacity to service debts would be further curtailed. It is not only essential that adequate new funds be made available in time and on reasonable terms, but the burden of the rescheduled debts, should be further alleviated through additional rescheduling on more liberal terms. Otherwise it could jeopardise the international arrangements organized to support a return to orderly development and self-sustaining growth on a viable basis in the medium-term. Sectoral Considerations Underlying the Proposed Loan 53. The shortage of foreign exchange had only a limited impact on the use of modern inputs in agriculture up to mid-1979, because of the exis- q tence of previously imported stocks and the high priority given to imported inputs for agriculture in the allocation of foreign exchange, including the First Program Loan. However, as of early July, financing had been arranged for only 21 percent of the planned imports of fertilizers needed for the fall planting. Imports of ferti-Lizer, raw materials and finished products in 1978 were about 1.2 million nutrient tons, worth about $425 million in inter- national prices. For 1979, the level is estimated to be about $550 million and for 1980, $764 million (1.7 million nutrient tons). For plant protection - 21 - chemicals, the cost of imports of inputs and finished materials was $67 mil- lion in 1978, and is estimated to be $90 million in 1979 and $106 million in 1980. Reduction in the supply of fertilizers and plant protection products could significantly affect total output and exports in the future; for each $1 reduction in imported raw material, an estimated $3 of wheat exports, or $6.8 of cotton export are jeopardized. Details are provided in Annex VI. 54. Domestic production facilities for fertilizers and plant protection chemicals have grown substantially since the early 1960s, and now account for about half of national demand. But these facilities are heavily dependent on imported inputs and are operating at low levels of capacity utilization. In fertilizers, the main reason is the shortage of raw materials and spares, although power shortages, mechanical breakdowns and personnel problems have contributed. In plant protection, lack of foreign exchange is the principal factor. Since the import cost of fertilizers would be about $520 per nutrient ton in 1980 and the raw materials for producing each ton cost only about $350, higher priority must attach to the import of fertilizer raw materials than to the finished product. Based on reasonable estimates of available capacity, about $230 million of fertilizer raw materials will be needed in 1980 to sup- port domestic production. However, in the case of plant protection materials, many needed products are not produced in Turkey; hence, financing is needed for some finished products and inputs. 55. Industrial production in 1978 and 1979, virtually stagnated, dropping well below the 10 percent annual average growth rate of 1972-77. This was reflected in the continued low level of capacity utilization, which the SPO estimated at only 53 percent for 1978, compared with unofficial estimates of 83 percent for the normal 1976 year. No figures are yet available for 1979, but the Government unofficially places it at a very low 40 to 45 percent. A number of other factors also contributed to this slowdown: continuing power shortages cut production in many industries; growing shortage of fuel oil; delays in output from major new capacity in some industries; and technical and management problems affecting a number of large plants, especially in the public sector. But the major reason was the acute shortage of foreign exchange for imported inputs for the major import-dependent industries. Petroleum products, petrochemicals and metal industries were among those most adversely affected. The output of engineering and metal fabricating industries fell conspicuously, particularly in the private sector, as domestic supplies of metals dwindled and imports cut. The downward trend was reversed only in a relatively small number of firms who could export part of their output and import their inputs under the 50 percent retention scheme, e.g. commercial vehicles, some consumer durables, and ferro alloys. Details are provided in Annex VI. 56. The general climate for industrial exports, however, has significantly improved, consequent to the several export promotion measures made in 1979 and those included in the January 1980 program, besides of course the exchange rate adjustments then made. The biggest contribution to exports is expected from the consumer goods sector; however, it faces market constraints and problems of organization and quality. Increases are also expected in inter- mediate and capital goods, especially chemicals, petroleum products, iron/steel, and machinery. - 22 - PART IV - THE PROPOSED STRUCTURAL ADJUSTMENT LOAN 57. Loan History. The proposed Loan responds to Turkey's request in May 1979, for further program assistance. The loan is viewed by Turkey as an important supporting element for its program to accomplish over the medium term, the structural and institutional changes initiated through the January 80 economic package, as well as for its immediate economic recovery program. The Government's loan proposal and supporting analyses were appraised in July 1979. Negotiations were held in Washington on February 14-15, 1980, with a delegation headed by the Acting Economic and Financial Counselor in the Turkish Embassy. 58. Loan Amount and Allocation. The proposed loan of $200 million will finance only about 3 percent of Turkey's total merchandise imports in 1980, and around 20 percent of the imports of eligible items. There will thus be no displacement of alternative financing on acceptable terms available to Turkey, either generally or for the eligible commodities. The Loan Summary provides relevant details. 59. The choice of commodities to be financed and proposed allocations are based on an appraisal of current needs in the context of the experience during 1978-79. These will have high direct and indirect impact on utilization of capacities in user sectors and multiplier effects; direct and indirect export impact; and balance between public and private sector beneficiaries. In the light of the serious balance of payments situation, high priority is being given to commodities whose imports have significant direct or indirect export impact. In view of the restricted and varied nature of the imported inputs for exportable goods, there is a limit to the amounts which can be specifically included in the loan for the direct inputs going into goods enhancing export earnings. Many commodities proposed for financing are essential inputs, direct and indirect, for most of Turkey's agricultural and industrial items. 60. The proposed allocations reflect the Government's proposal that the loan proceeds be allocated to two main categories: (a) essential inputs for the agricultural sector, i.e. inputs for fertilizers and pesticide industries and formulated pesticides ($100 million); (b) inputs for industries which support a large number of other manufacturing industries i.e. steel, special steel, engineering, copper, aluminium, petrochemical and other chemical industries ($100 million). Unlike the 1978 Program Loan, spare parts are not being financed in view of Turkey's undertaking that it would provide out of its resources, at least $30 million for spare parts for the same categories of eligible industries (Loan Agreement Section 3.04). In effect therefore, the total allocation of foreign exchange resources for the eligible items, would be at least $230 million. In addition, resources for the needs of exporters would be made available under the 50 percent automatic retention scheme which is being continued, along with other measures providing export incentives, under the Government's Januarv 1980 Program. - 23 - 61. The proposed loan allocations take into account projections of domestic production, stocks, the import pipeline and also other possible external financing for the substantial import requirements of eligible industries. It must however be recognized that the loan will not lead to full utilization of installed capacities in most cases, because of other continuing-bottlenecks, mentioned in paras 54 and 55, which can only be gradually rectified. However, the exchange rate and export measures discussed in Parts I and II, provide sufficient mechanisms for expanding exports in the longer run, to complement the impact of the loan funds. 62. Licensing. Turkey has a comprehensive system of import licensing, administered by the Ministry of Commerce with advice from the Chambers of Commerce and Industry (to which all firms belong), and substantive approval of a large proportion of import applications by other concerned ministries. Distinctive features of the system are that a significant proportion of imports is free from restrictions in normal times, where Turkish production cannot meet the demand; and positive lists ensure that only essential items are imported. The stages of the import licensing process are relatively numerous, but well understood in Turkey. Under normal conditions, the time required for typical transactions is not excessive, except under the Quota List with its semi-annual cycle. The extremely tight foreign exchange situa- tion in recent years, led to effective import control being exercised by the Central Bank and Finance Ministry. In 1979, as explained in Parts I and II, it was liberalized to allow commercial banks to use about 37.5 percent of their foreign exchange receipts to cover approved imports, and in January 1980, this percentage was increased to 80 percent and the items on the liberalized list increased. Details are provided in Annex VII. 63. Loan Administration Arrangements. The Finance Ministry and the Central Bank will have the main responsibility for administering the proposed loan, under the arrangements which have proved satisfactory under the 1978 Program Loan. Applications for import licenses will receive substantive approval from the appropriate technical ministry, taking into account: (a) the extent Turkish production cannot meet domestic demand, and (b) the equit- able allocation of import licenses amongst both public and private firms taking into account installed capacity, recent performance, and export poten- tial. To ensure rapid loan disbursements, the Government has also agreed that it will arrange for agencies to promptly approve import licenses, as well as promptly allocate and transfer the needed foreign exchange (Loan Agreement, Section 3.03). 64. The Central Bank's Consortium Section, which handled disbursements under the 1978 Program Loan, will continue to do so under the proposed loan. The Finance Ministry will continue to monitor progress, identify problems and expedite. To speed procurement, short-term bridge financing arrangements with three foreign commercial banks have been arranged to cover the period between payments and reimbursement from the proposed loan. However, to simplify disbursement procedures, a minimum withdrawal limit of $25,000 ($5,000 under the 1978 Program Loan) has been set. The loan is expected to be disbursed within about one year of the effectiveness date. - 24 - 65. Public-Private Sector Balance. Most eligible imported inputs are currently used by both public and private sector firms. Goods produced with these inputs are sold to firms in both sectors. The Chambers of Commerce and Industry, to which all private firms belong, provide substantive advice on allocation to the import licensing authorities, and generally apply equitable criteria in allocation. Nevertheless, assurances have been obtained that equitable licensing as between public and private sector firms would be maintained (Loan Agreement, Section 3.03). Agreement has also been reached that not less than $75 million of the $230 million provided through the loan and in complementary Government funds, will be allocated, directly or indirectly, to meet the import requirements of private firms (Loan Agreement, Section 3.05). This will not distort normal patterns of imports. 66. Counterpart Funds. Counterpart funds will be deposited in the special account created last year for the 1978 Program Loan. As under that loan, the Government expects to use the counterpart funds to help finance the local currency portion of capital expenditures on its most important develop- ment project, the Elbistan Power Project (TU-1023). 67. Procurement. Imports will be made directly by actual users, except in those cases where import by certain SEE's for sale to both private and public sector enterprises, is prescribed by law. Bulk imports costing $5 million or more, will be procured on the basis of ICB procedures consistent with Bank guidelines. All contracts of lesser value, will be awarded under the normal procurement procedures of the public and private sector firms concerned. The procurement procedures of public sector firms already provide for substantial international bidding, which is satisfactory. Certain com- modities will be purchased through their organized international markets, which is acceptable. Private firms have adequate choice of international suppliers to ensure reasonable availability and price. About half of the loan is expected to be procured under ICB. These procedures should permit rapid disbursements. 68. Disbursement Tranches and Monitoring. The loan will be disbursed in 3 tranches: $100 million after the loan is declared effective, $50 million after a satisfactory first performance review takes place before July 31, 1980, and the final $50 million after a second performance review before December 31, 1980. Retroactive financing of up to $10 million for expenditures made after February 1, 1980 has been p'rovided to ensure a smooth supply of the critical items being financed. The Government would submit to the Bank, two weeks before the agreed date of each review, a report on the progress made on the structural changes initiated through its January 1980 program as well as on medium term macro economic policies and measures proposed to facilitate economic recovery. These will be monitored in the context of the targets and policy objectives explained in the February 7, 1980 letter to the Bank, to determine the direction and adequacy of the progress made. Review missions would, with the support and assistance of the Central Bank, the Finance Ministry and SPO, evaluate l:heir adequacy. - 25 - 69. Disbursements beyond $100 and $150 million will be contingent upon progress achieved on the following specific items: (a) the adequacy of policies to facilitate real export growth at 10 percent p.a.; (b) a review by October 31, 1980 of the efficiency of export credit and risk insurance facili- ties and of *nstitutional arrangements to promote exports; (c) initiation by April 30, 1980 of a study for the rationalization of industrial protection systems; (d) completion by October 31, 1980 of an ongoing study on external debt management; (e) the adequacy of measures to increase domestic resource mobilization including the elimination of the overall deficit financing for the public sector in 1980; (f) the completion of a review by July 31, 1980 of measures to increase household savings and time deposits; (g) review and further study of matters covered by the Government's financial sector study; and (h) the harmonization of public investments to available resources and the Government's investment criteria of completing ongoing high priority projects, using existing capacity, removing critical bottlenecks, and stressing exports and employment generation. (Loan Agreement, Preamble B, Section 3.08, Schedule 5.) 70. Risks. There are no special risks. The administrative arrangements in respect of import licensing, foreign exchange allocations, transfers, docu- mentation and disbursements made for the 1978 Program Loan have functioned satisfactorily, and will be maintained. Procurement procedures are in line with Bank policy, and have been simplified to reduce excessive paperwork. With these provisions, the risks of slow disbursements have been reduced to a minimal level. The loan will be disbursed in tranches, ensuring release of the second and third tranches being subject to satisfactory review of progress on major macroeconomic issues. There is, however, the overall risk that political developments in Turkey might impede the Government's efforts to carry out its new economic policy objectives and the structural and institu- tional changes in key areas initiated through the January 1980 program, which would affect the release of the tranches. PART V - BANK GROUP OPERATIONS IN TURKEY 71. A large lending program for Turkey, essentially began following the introduction of its 1970 Stabilization Program. To date, the Bank/IDA have lent $2,120 million through 58 projects. Agriculture accounts for 30 percent of funds lent, industry and DFCs for 34 percent, power for 14 percent and urban development, transportation, education and tourism for the rest. Annex V contains a summary statement of Bank loans, IDA credits and IFC investments as of December 31, 1979, with notes on the execution of ongoing projects. 72. Since mid-1975, the implementation of private sector projects has been satisfactory. Political uncertainty, limited coordination amongst ministries and staffing problems resulted in uneven and delayed project implementation in the public sector. Therefore, a system of joint project reviews between Turkey and the Bank was instituted in June 1975. This resulted - 26 - in distinct, but modest, improvements up to end 1977. The situation was therefore reviewed with the Government in March 1978, and further discussed during my visit in April 1978. Subsequently, Turkey established a new high- level coordination team. This team set up procedures for monitoring and achieving realistic implementation and disbursement targets. As of December disbursements increased to 69 percent of appraisal estimates against 51 percent in June 1975. The last joint review was held in April 1979. The encouraging progress that is now manifest, allows cautious optimism that performance will gradually improve further, permitting an expansion of lending. 73. Bank lending is now aimed at supporting Turkey's efforts to improve its: (a) capacity to earn foreign exchange, through promotion of industrial and agro-industrial exports; (b) income distribution, employment opportunities and living standards, through rural and urban development; (c) lagging public sector savings, through the encouragement of improved management and financing of the investments of key SEEs; and (d) infrastructure posing critical bottlenecks for development. The Bank has begun discussions with the new government on how its lending can best contribute to the government's medium- term objectives, especially export promotion, without being handicapped by past policy and institutional obstacles. Meanwhile, agriculture and industry remain the key sectors for lending. In agriculture, projects emphasize livestock, exports, and rural development; in industry (including DFCs), the emphasis is on promotion of exports and employment, as also the gradual strengthening of the SEEs. Projects for urban development, public utilities and transportation supplement these efforts. Besides the reviews planned in the context of the tranches of the proposed loan, we propose to maintain a close macroeconomic and sector dialogue with Turkey. The economic and sector work planned over the next few months includes the March 1980 mission for the Economic Sector Study Review and follow-up visits and work that will be entailed, a research study on Public Sector Enterprises and Management, an updating economic mission, and completion of sector memoranda on industry, energy and agriculture. 74. A thirteenth TSKB Loan designed to stimulate investments in export projects of the private sector, two loans for a Private Sector Textile Project and an engineering loan to assist the alleviation of air pollution in Ankara, were approved by the Board in the first four month of FY80. Other projects being processed for this and future fiscal years include those for hydro- electric development, public sector textiles modernization, livestock, pilot secondary oil recovery and oil exploration, fruit and vegetables, livestock products, rural development, fertilizer production, employment generation in selected cities, pulp manufacture, seed production and sewerage disposal in Istanbul. 75. The Bank Group's share of the estimated total external debt (includ- ing short-term obligations) was 5.9 percent in 1978, and is expected to grow to 10.0 percent by 1981 and to 12.5 percent by 1985. The Bank's share of service payments is projected to fall slightly from its level of 7.7 percent in 1978 to 6.4 percent in 1981, thereafter increasing to 7.6 percent by 1985. 76. IFC has invested in synthetic yarns, pulp and paper, glass, aluminum, iron and steel products, motor bicycle engines, piston rings and cylinder - 27 - liners, and tourism. It has also invested in TSKB. As of December 31, 1979, gross IFC commitments totalled $208 million, of which $99 million were still held by IFC. New investment opportunities are being pursued. PART V - LEGAL INSTRUMENTS AND AUTHORITY 77. The draft Loan Agreement between the Republic of Turkey and the Bank, and the Report of the Committee provided for in Article III, Section 4(iii), of the Articles of Agreement are being distributed separately to the Executive Directors. Features of special interest are described in paras. 35, 36, 39, 42, 46, 63, 65, 68, and 69 of the report. 78. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 79. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments February 29, 1980 Washington, D.C. - 28 - ANNB I tILE 3A Page 1 of 6 ThZfU - SOCIAL DMOZA2VI DATA SE- ja6AZC.0 .nrun=EN G100?5 (ADJU$I:7 AqLA41S ______ ______ ______ _____ K4 S! 11C MET ST:t !Z M04L 750.6 SAM SAM anE S Zb ACX=~ThAL 552 .0 mSm 1NS! QOGAPC 290DM L!C09 1960 /b 1970 /b UZDZ /lb 7.i0o /e oata /e 7oo i GM m CAPITA (055) 290.0 520.0 1200.0 290.3 1097.7 1942.6 EKEJCY CDOSUMPTION PU CAPITA (13LOG&A1 OF CO4AL
Группа Всемирного банка · President's Report
Turkey - Structural Adjustment Loan Project
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