Turkey - Fourth Structural Adjustment Loan Project

Document of Co The World Bank FOR OFFICIAL USE ONLY Report No. P-3543--TU REPORT AND RECOMMENDATION OF THE PRESIDENT OF TEE INTERNATIONAL BANK FOR RECONSTRU'CTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A FOURTH STRUCTURAL ADJUSTMENT LOAN IN AN AMOUNT EQUIVALENT TO US4;300.8 MILLION TO THE REPUBLIC OF 'URKEY May 26, 1983 This document has a restricted distribution and may be uised by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TURKEY CURRENCY EQUIVALENTS (Annual and Quarterly Averages) Value of US$ 1959 TL 2.80 1970 TL 11.50 1971 TL 14.92 1972 TL 14.15 1973 TL 14.15 1974 TL 13.93 1975 TL 14.44 1976 TL 16.05 1977 TL 18.00 1978 TL 24.28 1979 TL 31.08 1980 First Quarter TL 61.60 Second Quarter TL 75.53 Third Quarter TL 80.10 Fourth Quarter TL 86.93 1981 First Quarter TL 94.59 Second Quarter TL102.84 Third Quarter TL118.89 Fourth Quarter TL128.56 1982 First Quarter TL142.25 Second Quarter TL153.27 Third Quarter TL171.86 Fourth Quarter TL182.85 1983 First Quarter TL194.15 May 2 TL208.00 FISCAL YEAR Republic of Turkey March 1 to February 28 - through 1981 March 1 to December 31, 1982 January 1 to December 31 - from 1983 LIST OF ABBREVIATIONS DSI State Hydraulic Works DYB State Investment Bank EEC European Economic Community MAF Ministry of Agriculture and Forestry MENR Ministry of Energy and Natural Resources OECD Organization for Economic Cooperation and Development PIR Public Sector Investment Review Report SAL Structural Adjustment Loan SDR Special Drawing Rights SEE State Economic Enterprise SPO State Planning Organization TCZB Agricultural Bank of Turkey TEK Turkish Electricity Authority TKI Turkish Coal Enterprise TL Turkish Lira TPAO Turkish Petroleum Corporation TSKB Industrial Development Bank of Turkey  FOR OFFICIAL USE ONLY TURKEY FOURTH STRUCTURAL ADJIJSTMENT LOAN TABLE OF CONTENTS Page No. PART I - THE ECONOMY 1 PART II - THE STRUCTURAL ADJUSTMENT PROCESS: 1980-82 3 Balance of Payments 6 Public Finances 8 SEE Accounts 9 Public Investment 10 The Role of the Bank 10 Bank/IMF Cooperation 11 PART III - THE SAL IV PROGRAM 12 1983 Economic Program in the Structural Adjustment Process 13 Policy Actions at the Aggregate Level 21 - Medium-Term Framework 21 - Fiscal and Monetary Policy 21 - Public Investment 22 - Reform of State Economic Enterprises 26 - Import Liberalization 28 - Export Incentives 29 - External Debt 31 Policy Actions at the Sectoral Level 32 - Financial Sector 32 - Agriculture 34 - Energy 37 Overview 39 Creditworthiness 40 Risks 41 Social Costs of Restructuring 42 PART IV - THE PROPOSED LOAN 43 - Procurement, Disbursement and Administration 44 - Monitoring 44 This document has a restricted distribution and may be usecl by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - TABLE OF CONTENTS (Cont'd) Page No. PART V - BANK GROUP OPERATIONS IN TURKEY 44 PART VI - LEGAL INSTRUMENTS AND AUTHORITY 46 PART VII - RECOMMENDATION 46 TEXT TABLES Table 1: National Accounts, 1980-82 5 Table 2: Balance of Payments, 1980-82 6 Table 3: Merchandise Exports, 1980-82 7 Table 4: Consolidated Budget Summary, 1980-82 8 Table 5: SEE Accounts, 1980-82 9 Table 6: Savings and Investment, 1980-82 10 Table 7: Selected Economic Indicators, 1981-90 12 Table 8: National Accounts: 1983 Program and Projections, 1985-90 16 Table 9: Balance of Payments: 1983 Program and Projections, 1985-90 18 Table 10; SEE Accounts: 1983 Program and Projections 19 Table 11: Savings and Investment, 1982-83 20 Table 12: Public Fixed Investment, 1974-83 23 Table 13: Sectoral Distribution of Public Fixed Investment, 1980-85 24 Table 14: Allocations for Large Projects, 1982-83 25 Chart : The 1983 Program in the Structural Adjustment Process, Figures 1-6 15 ANNEXES Annex I : Social and Economic Data Sheets 47 Annex II : Status of Bank Group Operations in Turkey 52 Annex III : Supplementary Loan Data Sheet 61 Annex IV-A: Government Letter and Statement of Development Policies - 1983 62 Annex IV-B: Overview of Structural Adjustment Program and SAL IV 77 Annex V : Use of IMF Resources 88 Annex VI : Table 1 - Operational SEEs: Summary of Financial Results, 1980-83 89 Table 2 - SEE Profit and Loss Statements, 1980-83 90 Map : No. 11656R  - iii - TURKEY FOURTH STRUCTURAL ADJIISTMENT LOAN Loan Summary Borrower : Repub:Lic of Turkey Loan Amount US$300.8 million equivalent in various currencies (including the capitalized front-end fee). Terms : 17 years including 4 years' grace, at the standard variable interest rate. Description : The proposed loan would be the fourth in a series of loans to support the Government's structural adjustment program initiated in January 1980. The principal aim of the program is to redirect the Turkish economy towards a development path placing more reliance on market forces and adopting a more outward-oriented strategy. The measures to be taken in this phase of the stabilization program are outlined in the Government's Statement of Development Policies - 1983, and fall into two main categories: (a) At the macroeccnomic level, the program includes the development of a medium-term framework, continued rationalization of the public investment program, reform of the State Economic Enterprises, import liberalization and export incentives; (b) At the sectoral. level, the program includes the implementation of measures to address structural issues in the financial, agricultural and energy sectors. The loan would finance all imports with the exception of items financed bv other sources, military or para-military items,, luxury goods and nuclear reactors. Risks . The main risks arise from uncertainties in the external environment, including adverse developments in the growth of trade, and internal factors which might. impede the Government's determination to carry out the reforms designed to restore domestic and external financial 4equilibrium, rationalize investment and carry out SEE reform.  - iv - Estimated Disbursements : The proceeds of the loan would be disbursed in two tranches, $200 million equivalent soon after effectiveness, and the remaining $100.8 million equivalent after a performance review to be held in January 1984.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED FOURTH STRUCTURAIL ADJUSTMENT LOAN TO THE REPUBLIC OF TURKEY 1. I submit the following report and recommendation on a proposed Fourth Structural Adjustment Loan to the Republic of- Turkey for the equivalent of US$300.8 million to support the Government's program of structural reforms designed to restore financial equilibrium and achieve sustainable growth. The loan would have a term of 17 years including 4 years of grace, with interest at the standard variable rate. PART I - THE ECONOMY 2. An economic report entitled "Turkey: Policies and Prospects for Growth" (No. 2657a-TU) and the Postscript th,sreto were distributed to the Executive Directors in December 1979 and Maroh 1980 respectively. The updating of the economic analysis has since been undertaken through the continuing work on structural adjustment loans (SALs) to Turkey and several special economic studies. The report of the economic mission in November/December 1980 to evaluate the investment program and entitled "Turkey: Public Sector Investment Review" (No. 3472-TU) was distributed to the Executive Directors in December 1981. The report of another mission in May/June 1981 to review Turkey's industrialization and trade strategy, entitled "Turkey: Industrialization and Trade Strategy" (No. 3641-TU), was distributed to the Executive Directors in March 1982. A mission to update economic developments visited Turkey in June 1982. Its report, entitled "Turkey: Recent Economic Developments and Medium-Term Prospects" (No. 4287-TU), is being distributed to the Executive Directors separately. A report on the energy sector prepared under the Joint UNDP/World Bank Energy Sector Assessment Program was issued in March 1983. 1/ Sector studies are also currently being prepared for the agriculture and financial sectors and should be ready later this year. 3. Turkey is about as big as France and Germany combined, with estimated GNP per capita of $1,540 in 1981. With a population of around 46 million, the density is low (78 per square kilometer of agricultural land), although the rate of urbanization is high (about 45 percent). The population growth rate (2.2 percent per annum) is below the median for middle-income countries. But the employment situation has deteriorated steadily, with unemployment currently about 16 percent, despite rapid economic growth in the mid-70s and substantial emigration of workers to Western Europe and, more recently, to the Middle East. There is little or no absolute poverty, but income distribution is still relatively skewed. Data for more recent periods are incomplete but indicate a deterioration in the position of most wage and salary earners over the last few years, with a sharp real decline in the minimum wage. There are 1/ Turkey: Issues and Options in the Energy Sector (No. 3877-TU), March 1983.  - 2- also considerable regional differences and large rural-urban disparities. Educational enrollments have expanded greatly, but the rate of adult literacy remains relatively low (60 percent in 1975). 4. Agriculture is the most important sector in the economy, even though its relative importance is declining. It contributes 21 percent of GDP (1982), employs about 53 percent of the labor force, and provides about half of merchandise exports (including processed food). Turkey is one of the very few developing countries which is self-sufficient in food. It has a modern irrigated sector producing cash crops and most exports, and a traditional rain-fed sector emphasizing grains and livestock mainly on the Anatolian plateau. Turkey has considerable potential for expanding agricultural production and exports, but faces major constraints such as inadequate research and extension services, insufficient credit, and poor utilization of irrigated areas. 5. The major emphasis of past development strategy was on rapid industrialization. Thus, in the 1970s the industrial sector absorbed up to 30 percent of total investment and today accounts for 27 percent of GDP and nearly 60 percent of exports (mainly textiles, processed foods, and leather products), but only 10 percent of the labor force. The private sector is dominant in exports and accounts for some 60 percent of industrial value-added. The aim of industrial policy had been to achieve self-sufficiency through import substitution, while giving exports a secondary role. The principal policy instruments were large public investments in State Economic Enterprises (SEEs) and high levels of protection for private investment. These policies yielded high growth rates and an expansion of domestic production of some key basic and intermediate goods, but they also resulted in the establishment of high cost uncompetitive industries--both private and public--with limited export possibilities. 6. Turkey has large underdeveloped energy resources (hydropower and lignite), but little petroleum. Energy consumption has grown in line with GDP, but remains below the per capita average for middle-income developing countries. Oil imports accounted for over 85 percent of oil consumption and cost $3.6 billion in 1982, equivalent to about 63 percent of exports. Even though the value of oil imports as a percentage of export earnings has fallen, the energy situation remains a major preoccupation of the Government. Prices for most products--especially petroleum products--have been brought into line with international prices since 1980. Investments in energy have the largest share in the public investment program. The principal impediments to development of the sector include institutional constraints, insufficient financial resources for exploration, inadequate project implementation capacity, and the absence of comprehensive energy demand management. 7. The economic policies pursued during the seventies led to rapid economic growth, especially in industry, until the mid-1970s. By then the incipient problems were greatly aggravated by the rise in the cost of oil and other imports wihich led to a sharp deterioration in Turkey's terms of trade.  The response was inappropriate--continued expansionary policies and capital-intensive import-substituting investment, based mainly on external borrowing, much of it short-term. The rapid GNP growth, averaging 7.7 percent per year in 1973-76, came to an abrupt halt in 1977 as the massive external debt burden lk-d to a loss of creditworthiness, severe shortages of imports, disruptions in industrial production, and a rapid rise in urban unemployment. By the end of 1979, GNP growth was negative, the budget deficit was 4 percent of GNP, and the inflation rate had accelerated to 64 percent. Throughout the crisis of 1977-79, economic management remained weak. It was not until January 1980 that the Government launched a policy of structural adjustment placing a greater reliance on market forces and an outward orientation. 8. A military government assumed power in September 1980 following a period of sustained unrest. This government:, like previous military regimes in 1960-61 and 1971-73, has emphasized its commitment to restore civilian rule. A Consultative Assembly was set up to draft a new constitution, which was overwhelmingly endorsed in a nationwide referendum in November 1982. Parliamentary elections based on new election and party laws are scheduled for November 1983. PART II - THE STRUCTURAL ADJUSTMENT PROCESS: 1980-82 9. The Government's program of January 1980 for restructuring the Turkish economy was a major departure from the policies pursued over the previous two decades. The principal goals of the new program were to shift from an inward-looking to an outward-oriented strategy, and to place greater reliance on the interplay of market forces. The early stages of the program focused on stabilizing a crisis situation through a series of measures designed to correct serious external and dormestic imbalances. With the easing of the immediate crisis, the Government was able to develop a more comprehensive set of adjustment policies. 10. The structural adjustment program seeks to make the transition from an industrialization strategy based on import substitution to one with an outward orientation, through measures designed to stabilize the economy while laying the foundation for sustainable growth over the medium term. The program includes the following main features; (i) a realistic and flexible exchange rate; (ii) incentives to encourage producers to export; (iii) tight monetary conditions to restrain domestic demand and control inflation; (iv) improved external debt management; (v) deregulation of interest rates to encourage private savings;  - 4 - (vi) steps to improve institutional efficiency in key sectors; (vii) rationalization of the public investment program; (viii) initiation of SEE reforms to reduce the burden on public finances and improve their efficiency; and (ix) progressive liberalization of imports including the elimination of quantitative restrictions and the rationalization of the tariff structure. 11. From the outset it was clear that the structural adjustment process would be a medium-term effort, as it represented a fundamental change in attitudes, institutions, and policies. The Government's approach has been to proceed on a year-by-year basis, setting targets in the annual programs that are formulated in line with the overall objectives. 12. After three years of the structural adjustment process, it is possible to take a broad look at the achievements of the 1980-82 period, which suggest striking success in some areas, less so in others, and some unresolved problems. Throughout the period, the reform program was strictly adhered to. Most fiscal and monetary targets in the stabilization program were met, although there were some slippages. Major structural reforms in the tax system, the import and export regimes, the SEE pricing mechanism, public investment, the liberalization of interest rates, and the adoption of a daily fluctuating exchange rate, all contributed to substantial short-term progress with favorable longer-term implications. After two consecutive years of decline, real GNP grew in 1981 and 1982 by 4.2 percent and 4.4 percent respectively (Table 1). This was due primarily to significant improvements in the foreign balance since the stabilization program allowed for only slight increases in domestic demand. 13. Growth in 1981 and 1982 was not even across sectors. 1981 saw a low rate of growth of agriculture compensated by a relatively high growth rate in the industrial sector. By contrast, in 1982 the agriculture sector, due to favorable rainfall conditions, witnessed a bumper crop leading to a 6.7 percent growth rate in value-added, which was offset by a lower than expected 3.2 percent growth rate in industry. While the overall performance of the economy during the last two years has been satisfactory, the growth rate of private manufacturing continues to be hindered perhaps by a perception that a revival of domestic demand will be slow. Private investment recovered modestly in 1982. 14. On the inflation front, the Government was able to restrain the growth of incomes and domestic demand to acceptable levels while redressing public finances and the SEE accounts. As a result the inflation rate, as measured by the wholesale price index, dropped from an annual increase of 107.2 percent in 1980 to 36.8 percent in 1981 and further to 25.2 percent in 1982.  -5- Table 1: Turkey - National Accounts, 1980-82 1980 Level 1980 1981 1982 At Current In ---Actual--- Provisional Prices Percent Real Change from (TL billions) oE GNP Previous Year (%) Consumption 3538.0 79.8 -3.4 3.0 4.2 Public 544.1 12.3 8.8 0.8 3.2 Private 2993.9 67.5 -5.2 3.4 4.3 Fixed Capital Investment 861.5 19.4 -10.0 1.7 2.6 Public 482.4 10.9 -3.7 9.4 0.8 Private 379.1 8.5 -17.2 -8.8 5.4 Stockbuilding 279.8 6.3 (3.6) (-1.3) (-1.2) Total domestic demand 4679.3 105.5 -1.3 1.6 2.5 Foreign balance -244.1 -5.5 (0.2) (2.6) (1.9) GNP 4435.2 L00.0 -1.1 4.2 4.4 Memorandum Items Agriculture 925.0 22.7 1.6 0.3 6.7 Industry 1026.7 25.2 -5.9 7.2 3.2 Services 2128.8 52.1 -0.2 4.8 3.7 GDP at Factor Cost 4080.5 100.0 -1.0 4.2 4.3 Note: Figures in parentheses are the contribution in percentage points to the growth in GNP. Source: State Planning Organization.  - 6 - 15. Balance of Payments. Developments on the external account have been particularly impressive over the last three years. The current account deficit, which stood at $3.2 billion (5.6 percent of GNP) in 1980, fell to about $1.0 billion (1.7 percent of GNP) in 1982 (Table 2). Of particular importance was the impressive growth of merchandise exports, which rose from $2.9 billion in 1980 to $4.7 billion in 1981. This 62 percent growth was followed in 1982 by a further increase of 22 percent to $5.75 billion. Merchandise exports in 1982 were close to the Government's target of $5.8 billion despite a decline in the export prices of agricultural products. Table 2: Turkey - Balance of Payments, 1980-82 ($ millions) 1980 1981 1982 Exports of goods & NFS 4102 6416 7620 Imports of goods & NFS 8760 9892 9641 Workers' Remittances 2071 2490 2187 Net Transfers - - - Current Account Balance -3207 -2089 -1035 Direct Private Investment 148 129 125 Public M&LT Capital (gross) a/ 2354 2188 2076 Amortization on M&LT Debt a/ -434 -545 -1230 Public M&LT Capital (net) a/ 1920 1643 846 Other Capital b/ 1642 983 264 Change in Reserves (- = increase) -503 -667 -200 Reserves as months of imports 2 2 2 a/ Includes private guaranteed and non-guaranteed debt. b/ Includes errors and omissions. Source: Ministry of Finance and Central Bank. 16. Throughout the period export growth has been led by the manufacturing sector, and has involved a distinct shift in destination from the EEC countries to the Middle East (Table 3). Industrial exports registered a growth of 119 percent in 1981, followed by a further 50 percent rise in 1982. The flexible exchange rate policy of the Government was the single most important factor contributing to this performance. The weakness in the domestic market was also a factor as it forced private entrepreneurs to turn to external markets for survival. Export growth was helped by a comprehensive set of export incentives, which served to offset the bias in the protection system towards domestic production, by the measures taken by the Government to improve administrative arrangements affecting exports, and by the expansion of Middle East markets in this period.  Table 3: Turkey - Merchandise Exports, 1980-82 (s millior-s) 1980 1981 1982 Value % Share Value % Share Value % Share Exports by Sector I. Agricultural Products 1672 57 2219 47 2141 37 A. Crops 1541 1934 1727 B. Livestock and Sea Products 131 285 414 II. Mining 191 I 194 4 175 3 III. Industrial Products 1047 36 2290 49 3430 60 A. Processed Food 190 412 568 B. Textiles 440 803 1056 C. Other Manufacturing 417 1075 1806 TOTAL 2910 100 4703 100 5746 100 Exports by Destination OECD Countries 1680 58 2264 48 2556 44 EEC Countries 1242 43 1503 32 1755 30 Germany 604 643 707 Other 638 860 1048 Other OECD Countries 438 15 761 16 801 14 Middle East 495 1, 1893 40 2540 44 Iraq 135 559 610 Iran 85 234 791 Libya 60 442 235 Saudi Arabia 44 187 358 Egypt 20 72 145 Others a/ 151 400 401 Other Countries 735 2'5 546 12 650 12 TOTAL 2910 10( 4703 100 5746 100 a/ Include Sudan, Syria, Jordan, Lebanon, Abu Dhabi, Bahrain, Qatar, Oman, Dubai and Kuwait. Source: State Planning Organization.  - 8 - 17. By contrast, the lower than anticipated growth in merchandise imports was mostly due to factors exogenous to Turkey. The drop in merchandise imports in dollar terms by about 2.3 percent in 1982 reflects unexpected price movements in oil and raw material imports, a stronger US dollar, reductions in stocks, and the elimination of a risk premium previously paid by Turkish importers. On the other hand, the recession in the Western economies contributed to lower than anticipated receipts of workers' remittances. The positive results in the trade balance during the period under consideration, and especially in 1982, more than compensated for the negative developments in the services accounts. 18. Public Finances. In the fiscal area progress has been in the right direction. The most notable feature is a marked retrenchment of the public sector. Government Consolidated Budget expenditures, which stood at 24.0 percent of GNP in 1980, fell to 21.5 percent in 1982 (Table 4). The budget deficit to GNP ratio, which stood at 4.6 percent in 1980, decreased to 1.4 percent in 1981, and further to 1.2 percent in 1982, while SEE transfers as a percentage of GNP showed a steady decline from 4.8 percent in 1980 to 2.8 percent in 1982. Despite these successes, the improvement in the budget balance was somewhat uneven during the period, due principally to shortfalls in tax revenues. The tax collection problem has been a source of continuing concern, and there have been systematic shortfalls in forecast revenues. Although program figures have generally been more optimistic than realizations, the Government has reacted by aligning its expenditures with its resources, thereby continuing the trend towards an eventual positive budget balance. Table 4: Turkey - Consolidated Budget Summary, 1980-82 (TL billions) 1980 1981 1982 a/ Program Actual Program Actual Program Actual Revenues 720.0 857.3 1,478.7 1,388.8 1,665.0 1,465.4 Expenditures 735.1 1,062.6 1,495.9 1,482.1 1,715.0 1,551.8 Budget Balance -15.1 -205.4 -17.2 -93.3 -50.0 -86.4 Memorandum Items (In percent of GNP) Expenditures 16.6 24.0 22.6 22.6 23.8 21.5 SEE transfers 2.4 4.8 3.4 3.3 2.9 2.8 Budget Balance -0.3 -4.6 -0.3 -1.4 -0.6 -1.2 a/ Provisional, based on a ten-month period (March-December). For comparative purposes, the ten-month data have been multiplied by 1.2 in order to put them on a 12-month basis, but with SEE transfers estimated separately. Source: Ministry of Finance.  19. SEE Accounts. The financial perfornance of SEEs has registered substantial improvement over the last three years (Table 5). A situation of chronic deficits has changed into one showing growing profits in 1981 and 1982. This turnaround reflects the Government's efforts in the short term to improve the financial situation of the SEEs through price adjustments and, in the longer term, to address the critical issues of increased efficiency and reform of the SEEs. The measures taken during 1980-82 had a significant impact on SEE accounts. Basic structural reforms, with the overall objective of having a viable SEE sector more responsive to market forces, were expected to be introduced in 1982 through a comprehensive SEE reform decree. The passage of the legislation took longer than anticipated, probably because of the far-reaching nature of the changes sought. But the reform decree was approved recently and is discussed further in para. 59. Table 5: Turkey - SEE Accounts, 1980-82 (TL billion,) 1980 1981 1982 a/ Program Actual Program Actual Program Actual Sales Revenue 1,223 1,146 1,981 1,767 2,601 2,480 Total Expenditures 1,197 1,169 2,135 1,759 2,554 2,434 Profit/Loss Before Taxes 26 -23 -154 8 47 46 Total Investment 205 459 433 616 540 633 Fixed Investment 168 281 316 406 472 508 Change in Stocks 37 178 117 210 68 125 Financing Requirement b/ 179 482 687 608 493 587 Memorandum Items (In percent of GNP) Profit/Loss 0.5 -0.5 -2.3 0.1 0.5 0.5 Financing Requirement b/ 4.0 10.9 10.5 9.3 5.6 6.7 a/ Provisional. b/ Excludes depreciation. Source: Ministry of Finance.  - 10 - 20. Public Investment. Restraining the high rate of growth in public sector investment was a major objective of the structural adjustment process. Efforts were made to constrain the level of public investment in line with available resources, to limit the number of projects to a manageable level, and to ensure that priority projects received larger allocations in order to speed up their completion. As a result, public sector investment in real terms declined by 3.7 percent in 1980, rose by 9.4 percent in 1981, and increased by only 0.8 percent in 1982. Private real investment, by contrast, declined by 17.2 percent in 1980, declined again by 8.8 percent in 1981, and rose by 5.4 percent in 1982. The aggregate figures show that the Government has been able to continue to rationalize its investment program and to lower the public sector's dependence on external resources (Table 6). Table 6: Turkey - Savings and Investment, 1980-82 (Percent of GNP at current prices) 1980 1981 1982 Program Actual Program Actual Program Actual Public Sector Investment 10.19 15.49 13.48 14.63 12.18 12.60 Savings 6.21 5.17 10.21 8.50 9.10 8.32 Gap -3.98 -10.32 -3.27 -6.13 -3.08 -4.28 Private Sector Investment 9.57 10.24 8.58 9.75 9.72 8.94 Savings 10.31 15.06 6.67 12.37 10.86 11.88 Gap 0.74 4.82 -1.91 2.62 1.14 2.94 External Resources 3.24 5.50 5.18 3.51 1.94 1.34 Source: State Planning Organization. 21. The Role of the Bank. The Bank has supported the Government's structural adjustment process through a variety of actions, of which the successive SALs form an important part. Other components include project loans, economic and sector work leading to policy recommendations, and technical assistance. A substantial part of the lending and economic programs is geared to the realization of the objectives of structural adjustment, most notably in the field of industrial policy and SEE reform. The Bank's economic and sector studies have in particular helped to strengthen the Government's policy formulation. The Bank's supporting activities also include special economic studies funded by the Bank, staff advisory assistance, for example on the External Debt Management System and the use of planning models, and a number of technical assistance packages within the project loan agreements. The Bank will continue with this comprehensive approach to structural adjustment in the coming years.  - 11 - 22. Bank/IMF Cooperation. The Bank's support to the structural adjustment program in Turkey has from its inception involved a close working relationship with the IMF. In June 1980, the IMF entered into a three-year Standby Arrangement with the Government of Turkey for a total of SDR1,250 million (about $1.6 billion). The principal conditions of the Standby are the maintenance of external competitiveness through a flexible exchange r.ce policy, ceilings on Central Bank credit to control aggregate demand, and limitations on budget transfers to SEEs. Other conditions relate to timely fulfillment of reserve requiremeni: obligations of banks, limits on the contracting of new nonconcessional public or publicly guaranteed external debt, and a performance criterion on trade and payment restrictions. The present Standby Arrangement is to expire on June 17, 1983, and the Turkish authorities have indicated their interest in a new one-year arrangement. A review by the IMF at the halfway mark (March 1982) of the Standby Arrangement showed that performance in implementing the monetary program had been satisfactory. Since then the agreed credit limits have continued to be honored and the latest (April 1983) IMF review has concluded that all performance criteria have been met despite l:he severe strain put on the banking system by the collapse of some of the money brokers in 1981 and 1982. 23. The Bank is in agreement with the Fund's basic position that stabilization of the economy is an essentiaL prerequisite for a return to a sustainable growth path. The Bank takes the view that the period of austerity necessary to bring inflation under control, redress the public finances, and improve the balance of payments should be used to lay the groundwork for a major restructuring of the Turkish economy. Thus, the Fund's attention to the country's monetary and fiscal balance, the maintenance of external competitiveness, and SEE financial performance has complemented the Bank's structural adjustment efforts in the areas of SEE reform, import liberalization, export promotion, rationalization of public investment, and the development of a medium-term framework. 24. In summary, the 1980-82 period has witnessed impressive progress in the structural adjustment process. The stabilization program is proceeding satisfactorily, export growth can no longer be termed a short-term phenomenon, and a substantial measure of monetary and fiscal discipline has been introduced in the management of the economy. Yet the structural adjustment process, and its achievements, must be viewed as part of a medium-term effort. Much remains to be done. Many of the actions so far taken must now be extended and broadened so as to ensure that the structural changes firmly take root. Thus the SAL IV program, conceived as a step forward in the medium-term plan of structural adjustment, seeks to consolidate and strengthen many of the policy reforms in SALs I through III while, at the same time, beginning to address some key sectoral issues. With the pressures for crisis management now under control, and with the Turkish economy performing in a more satisfactory fashion, it is now possible to focus more on the medium term. How the SAL IV program is placed in this context is taken up in the next section.  - 12 - PART III - THE SAL IV PROGRAM 25. The draft Fifth Five Year Development Plan (1984-1988), which will serve as the Government's medium-term framework, will be completed by mid-1983. Preliminary discussions indicate a high correlation between the Government's draft plan and the Bank's medium-term projections as set out in the Country Economic Memorandum (CEM). 1/ 26. The CEM sets out a medium-term scenario which indicates a continuation of the stabilization program until 1985, followed by a strategy aiming at a 6-6.5 percent per annum GDP growth and a manageable balance of payments. 2/ Two basic assumptions on export sustainability and on fiscal discipline have guided the Bank's projections. The continued growth of exports is based on the view that the 1981-82 upsurge was not a temporary phenomenon. It is also assumed that the monetary and fiscal policy slippages observed in 1982 will not disrupt the basic shift in development strategy. Table 7 below presents the projections of key economic variables for the period 1983-1990. Table 7: Turkey - Selected Economic Indicators, 1981-90 1981 1982 1983 1985 1990 Average Annual Real Growth Rate Units Actual Eatimate Program Projected 1981 1982 1982-85 1985-90 GDP 1980 TL b 4518 4717 4943 5455 7349 4.4 4.4 5.0 6.1 Consumption " 3611 3757 3943 4310 5716 1.9 4.1 4.7 5.8 Fixed Investment 898 924 977 1129 1617 4.2 3.0 4.9 7.4 Exports of Goods Current $ m 4703 5746 6800 9811 21505 79.0 23.0 8.6 9.5 Imports of Goods " 8933 8735 9697 12825 27433 10.2 -4.1 7.7 9.1 Trade Balance -4230 -2989 -2897 -3014 -5928 Current Account Balance Current $ m -2089 -1035 -870 -485 -1757 Ratios Investment/GDP % 24.7 22.3 22.2 22.7 24.0 Savings/GDP 7 18.9 19.0 19.4 20.7 21.9 Exports of Goods/GDP % 8.9 10.5 10.6 11.6 13.5 Current Account Deficit/GDP Z -3.5 -1.7 -1.5 -0.8 -1.8 Debt Service Ratio a/ % 13.8 24.2 20.6 20.6 18.1 Public Fixed Investment/ 2 60.9 60.6 60.3 57.5 50.0 Total Fixed Investment a/ Total Debt Service including Debt Relief - Exports of Goods and NFS plus Workers' Remittances. Source: State Planning Organization and IBRD Projections. 1/ Turkey: Recent Economic Developments and Medium-Term Prospects (No. 4287-TU), June 1983. 2/ These projections do not reflect the recent decrease in oil prices. The beneficial effects of real oil price declines lead to potentially higher GDP growth rates in 1984-85 as well as lower external borrowing requirements. However, this has to be balanced against probable lower exports to the oil producing countries. The Government's 1983 growth target is likely to remain unaffected by the new situation since there is a lag in translating improvements in the current account balance into a higher growth rate.  - 13 - 27, These projections assume that merchandise imports will grow slowly in real terms through 1984 and then pick up from 7-8 percent to an average of a little over 9 percent for the 1985-90 period. The current account balance, under these assumptions, will show a decreasing deficit for 1982-85 as stabilization curtails imports while encouraging exports. As higher growth rates set in, the trend would be reversed for the 1985-90 period, and Turkey's current account deficit would increase again. The terminal -enc 1990 would show a deficit of $1.8 billion as compared to a 1985 projected deficit of $485 million. The projected c:apital account will remain manageable throughout the projection period given the constraint oa the growth of debt and the need to maintain a reasonable debt service ratio. This would permit Turkey to meet the amortization and interest payments arisiag from the debts rescheduled during the 1978-82 period and maintain foreign exchange reserves equivalent to two months' imports (para. 100). 28. Consistent with this scenario, the projections indicate a GDP growth of 5 percent per annum for 1982-85 (the stabilization period), and a higher figure of 6.1 percent per annum for 1985-90 (the growth period). Achievement of these growth rates will depend on the growth of the productive sectors, namely agriculture and manufacturing. This in turn will depend to a large extent on the Government's determination to render the public sector more efficient and to create a more favorable investment climate for the private sector. 29. The medium-term scenario presented above assumes an increasingly important role for private investment in line with the policy of rationalizing public investment. Private investment is expected to grow at an average annual rate of 9.6 percent during 1982-85 and 11 percent during 1985-90. As a corollary, the growth of public investment is projected to slow down from a high of 7.8 percent per annum in real terms during 1980-82 to a more moderate 5.0 percent during 1982-85 an,d eventually to 4.4 percent per annum for 1985-90. This is consistent with the medium-term goal of a one-to-one ratio between private and public fixed investment by 1990. 30. The Bank's medium-term scenario is, of course, only one of many possibilities and is used in this report specifically to illustrate Turkey's potential given the present view of future resources. In what follows the Government's 1983 program has been placed against the backdrop of past achievements (1980-82) and the Bank's medium-term projections (1984-90) in order to better illustrate the place of SAL IV in this continuum. Turkey's 1983 Economic Program in the Structural Adjustment Process 31. The Government's 1983 economic program (upon which the Government's 1983 Statement of Development Policies is bz.sed) has been conceived as the continuation of the structural adjustment process. It should be construed as another incremental step towards the twin goals of stabilization and the restructuring of the economy for the purpose of regaining a sustainable growth path. The measure of its reasonableness is how it builds on already established trends and how well it fits into a medium-term scenario of the type described in paras. 26-30 above.  - 14 - 32. At the macro-level the program revolves around two central objectives: (i) further progress in the reduction of the rate of inflation in line with the trends of the last three years; and (ii) a further reduction in the current account deficit in preparation for the additional foreign exchange requirements of anticipated higher growth rates in the coming years. The attainment of these objectives is in turn dependent on fiscal and monetary policies designed to control the budget deficit, limit the financing requirement of the SEEs, and define the credit ceilings to be adhered to by the Central Bank. Moreover, with respect to the external accounts, the successful pursuit of further reductions in the balance of payments deficit depends critically on the continuation of the flexible exchange rate policy. 33. With a real GNP growth rate targeted at 4.8 percent, the program reflects the continuous improvements noted since 1980 and projects a slightly higher growth rate than the 4.4 percent realized in 1982. Figure 1 illustrates the growth trends since 1980 and places the 1983 program in the context of the Bank's medium-term projections in the CEM. 1/ As shown in Table 8, the 1983 program growth rate of 4.8 percent will be due primarily to a projected increase in domestic demand of 4.3 percent (versus 2.5 percent in 1982) and a 0.5 percent contribution from the foreign balance (versus 1.9 percent in 1982). The impetus to this growth is expected to come from an improvement in private fixed investment which is projected to grow at 7.0 percent in real terms, compared with 5.4 percent in 1982, as confidence gradually picks up. The stabilization program is achieving its aim of lowering inflation, redressing the fiscal and monetary balances and laying the groundwork for a progressive increase in private sector activity. It must be borne in mind, however, that austerity programs are not compatible with private investment booms as demand is usually deficient and interest rates high. In the case of Turkey, in the 1980s, a resurgence of private investment can only be achieved gradually over the medium term. 1/ The Base Case in these projections reflects a 6.1 percent per annum average real growth of GNP over the 1985-1990 period.  - 15 - TURKEY THE 1983 PROGRAM IN THE STRUCTURAL ADJUSTMENT PROCESS 110- Figure 1: GROWTH 110- Figure 2: INFLATION 901 8- 80- 7- be 703 5- ~~~~~iz50- 03 4- 40- a2 20- 9801982 1984 1986 1988 199019801982 1982 1984 19861988 1990 -1980 1982 1984 1986 1988 1990 -1 -108 ' LU~~ 0 198 Actual__________983__________jt__IBRD__Projection Source: Figusre 3: DEBT ce SERVICE RAank Figurta e 4:nnn BUDETBAanCEzaStioFnP for 1980-83; IBRD Projectionsfor1990. lo- ~~~~~~~~0 0 ~ ~ ~ ~ ~ ~ I 0-4- 1980 1982 1984 198'6 1988 1I990 1980 Figure 5: SEE PROFIT/LOSS AS % ODF GNP ~ 'Figure 6: PUBLIC SECTOR BORROWING AS % OF GNP za 12- a CD 10- ae 8~~~~~~~~~~ ii ~~0 0 LU~~~~~~~ r)~~~~~~~~~IC 0- 7 1982 1984 1986 1988 1990 0 1980 1982 1984 1986 1988 1990 1980a -1- [ ]Actual 001983 Program II BRD Projection L- - -j ~~~~~~~~~~~World Bank - 24949 Source: Ministry of Finance, Central Bank and State Planning Organization for 1980-83; IBRD Projections for 1990.  - 16 - Table 8: Turkey - National Accounts 1983 Program and Projections, 1985-90 IBRD Projections 1980 Level 1983 Program 1985-1990 In billions In Percent Percentage Average of Turkish of GNP Change from Growth Rate liras Previous Year (%) (At 1980 Prices) Consumption 3538.0 79.8 4.3 5.8 Public 544.1 12.3 3.6 5.0 Private 2993.3 67.5 4.4 6.0 Fixed Capital Investment 861.5 19.4 5.9 7.4 Public 482.4 10.9 5.2 4.5 Private 379.1 8.5 7.0 11.0 Stockbuilding 279.8 6.3 (-0.1) - Total Domestic Demand 4679.3 105.5 4.3 6.2 Foreign Balance -244.1 -5.5 (0.5) (-0.2) GNP 4435.2 100.0 4.8 6.0 Agriculture 925.0 22.7 3.4 3.1 Industry 1026.7 25.2 5.5 9.2 Services 2128.8 52.1 4.9 5.7 GDP at Factor Cost 4080.5 100.0 4.7 6.1 Note: Figures in parentheses are the contribution in percentage points to the growth in GNP. Source: State Planning Organization, except for IBRD Projections.  - 17 - 34. In sectoral terms the 1983 program calls for a growth of 3.4 percent in agriculture and 5.5 percent in industry. With agriculture to a great extent dependent on the vagaries of the weather, the program target represents more or less an average long-term growth rate. The industrial growth rate of 5.5 percent represents a marked improvement over the 3.2 percent performance of 1982 and reflects the same expected improvements, based on trend evidence, as seen in GNP and private investment growth since 1980. 35. The Government intends to continue lo restrain the growth of domestic demand to acceptable levels while concurrentLy improving the public finances and the SEE accounts. The Government has sought a new one-year arrangement to follow the current Standby Arrangement with the IMF, which expires on June 17, 1983. The credit ceilings agreed u2on as part of the arrangements will continue to restrain the growth of the monetary aggregates in line with the 1983 inflation target of 20.0 percent. Figure 2 places the 1983 inflation program (as measured by the wholesale price index) within the context of past trends. 36. The Government feels that continued improvement in the current account balance is essential as the 1984 capital account will begin to come under the pressure of repayments of rescheduled debt. Moreover, given the need to increase imports in line with an accelerating growth rate in the medium term, it is clear that the efforts of the Government to sustain the export expansion of the last three years must continue if Turkey is to be able to meet both its growth targets and its external commitments. The 1983 program is designed to further decrease the current account deficit by about $200 million (Table 9). The program calls for a 17 percent growth in the value of exports of goods (from $5.8 to $6.8 billion) and some improvement in the contribution from workers' remittances, both predicated on the assumption of a revival in the growth of the industrial economies. Imports of goods, on the other hand, are programmed to reverse their 1982 trend and increase in value terms by about 12.8 percent, mainly on the strength of the continuing improvement in the growth of domestic demand partly offset by some favorable developments in oil prices. 37. The 1983 program for the balance of payments represents a reasonable incremental improvement in the ratio of current account deficit to GNP. Viewed against the actual trends of the last three years (-5.6 percent in 1980, -3.5 percent in 1981, and -1.7 percent in 1982) as well as the medium-term projections, the programmed -1.5 percent current account deficit to GNP ratio is realistic. This ratio is expected to worsen again from 1985 onwards as the foreign exchange requirements of increased growth manifest themselves, but should not become a problem as the debt service ratio is expected to decline (Figure 3).  - 18 - Table 9: Turkey - Balance of Payments 1983 Program and Projections, 1985-90 ($ millions) 1983 1985 1990 Program IBRD Projections Exports of goods and NFS 8894 12523 26681 Imports of goods and NFS 10853 14293 30080 Workers' Remittances 2350 2622 3508 Net Transfers - - - Current Account Balance -870 -485 -1757 Direct Private Investment 127 144 233 Public M&LT Capital (gross) a/ 1690 1487 2438 Amortization on M&LT Debt a/ -1105 -1783 -2705 Public M&LT Capital (net) a/ 585 -296 -267 Other Capital b/ 130 924 2448 Change in Reserves (- increase) 28 -288 -657 International Reserves 2049 2138 4573 Reserves as Months Imports 2 2 2 Ratio of Current Account Deficit to GNP (%) -1.5 -0.8 -1.8 a/ Includes private guaranteed and non-guaranteed debt. b/ Includes errors and omissions, net IMF, short-term and unidentified capital inflows. Source: State Planning Organization and Central Bank, except for IBRD Projections.  - 19 - 38. Public finances have improved significantly in the last three years. But there is still need for further retrenchment in the public sector's call on resources and credit. The Government's 1983 program, in line with this objective, calls for a decline in the expenditure to GNP ratio from 21.5 percent in 1982 to 20.8 percent in 1983 and in the budget balance from -1.2 percent of GNP in 1982 to -0.6 percent in 1983, and for SEE transfers to stabilize (at 2.8 percent of GNP in 1982 and 2.7 percent in 1983). Figure 4 places the 1983 targets within the framework of past trends and the Bank's medium-term projections. 39. The Government's program for the SEEs calls for continued improvements in their financial performance. Total profits before taxes are projected to increase from TL46 billion in 1982 to TL68 billion in 1983, and the ratio of profits to GNP to increase from 0.5 percent to 0.6 percent (Figure 5). The financing requirement, excluding the depreciation offset, also shows an incremental improvement in thE! program, going from 6.7 percent in 1982 to 5.9 percent in 1983 (Table 10). The changes introduced under the SEE reform decree are discussed in para. 59 below. Thus while the 1983 program for the SEEs shows a modest improvemient in the overall accounts, it is anticipated that with the passage of the decree there will be substantial progress in 1984, especially in the ratios of profit and financing requirement to GNP. Table 10: Turkey - SEE Accounts, 1983 Program and Projections (TL billions) 1983 Program Sales Revenue 3386 Total Expenditures 3318 Profit before Taxes 68 Total Investment 7016 Fixed Investment 61L Changes in Stocks 95 Memorandum Items 19B3 1990 Program IBRD Projections (In percent of GNP) Profit 0.6 1.7 Financing Requireraent a/ 5.9 4.0 a/ Excludes depreciation. Source: Ministry oE Finance.  - 20 - 40. With respect to public investment, the 1983 program represents a further narrowing of the gap between public savings and public investment, and underlines the Government's continuing efforts to decrease the claim on outside sources of funds for public investment. The savings-investment gap of the public sector, which stood at 10.3 percent of GNP in 1980, 6.1 percent in 1981 and 4.3 percent in 1982, is now targeted to decrease to 4.1 percent in 1983 (Table 11). Figure 6 charts a related trend, namely the ratio of the public sector borrowing requirements to GNP. Table 11: Savings and Investment, 1982-83 (Percent of GNP at current prices) 1982 1983 Actual Program Public Sector Investment 12.60 12.35 Savings 8.32 8.27 Gap -4.28 -4.08 Private Sector Investment 8.94 9.19 Savings 11.88 12.39 Gap 2.94 3.20 External Resources 1.34 0.88 Source: State Planning Organization. 41. The Government's macroeconomic program represents a realistic and feasible improvement on the gains already achieved since the inception of the structural adjustment process in 1980. It is compatible with both the shorter-term stabilization and the medium-term structural adjustment process. It is also the basis on which the Statement of Development Policies - 1983, which serves as the basis for the Government's request for a fourth SAL, has been formulated. A description of the policies contained in the Statement follows. 1/ 1/ The policy measures to be supported by SAL IV are set out in detail in the Statement of Development Policies - 1983, attached to a letter from the Minister of Finance to the Bank dated April 22, 1983 (Annex IV-A).  - 21 - Program Review 42. The policy actions contained in the Statement fall into two main categories: (i) Aggregate Level - Medium-Term Framework - Fiscal and Monetary Policy - Public Investment - Reform of State Economic Enterprises - Import Liberalization - Export Incentives (ii) Sectoral Level - Financial Sector - Agriculture - Energy Each of these areas is discussed more fully below. As with previous SALs, the SAL IV package encompasses a number of decisions already taken, some in process, and others that will need to be addressed during the course of the program spanning 1983 and early 1984. The miain actions are also summarized in matrix form (Annex IV-B). Medium-Term Framework 43. Beginning in 1983, the Government will undertake annual reviews and draft its next annual program in the context of its most up-to-date medium-term projections. The aim is to ensure that the 1984 economic program is compatible with the recent improvements in the basic macroeconomic variables, and with the medium-term objectives of the Fifth Five Year Plan, the first draft of which is expected at the end of June 1983 while final publication is anticipated for mid-October. In order to monitor progress in the development of the medium-term plan as well as in its annual implementation, it would be a condition of tranche release under SAL IV that there be satisfactory progress in the development of a 1984 annual program (Loan Agreement, Schedule 4). The Bank would examine whether the program reflects, in its targets, the continuation of stabilization, albeit at a slower pace, as well as the implementation of the first year of a plan where expenditures are in line with resources, and where there are no unwarranted discontinuities in the trends of the macro-aggregates. With respect to the formulation of the Plan as a whole, the Bank will continue its dialogue regarding the medium-term prospects with the Turkish authorities through a Plan Review Mission which is currently scheduled to visit Turkey in the second half of 1983. Fiscal and Monetary Policy 44. The broad aim of the Government's fiscal and monetary policy in 1983 is to support the growth targets in the 1983 program. This is to be done by achieving relative price stability and increasing public savings, as well as  - 22 - by meeting the credit demands of the productive sectors and supporting the export effort. Of primary importance is a continued improvement in the budget balance, the inflation rate and the public sector borrowing requirements. 45. In the monetary area, the expected new one-year Standby Arrangement with the Fund will govern the 1983 monetary program to help ensure a 20 percent inflation target and a further improvement in the public sector accounts as spelled out in some detail in paras. 33-41. In the fiscal area, in addition to the measures described in the Statement of Development Policies, the Government will apply the measures stipulated in the February 1983 "reconciliation" law designed to facilitate the settlement of pending tax cases. Moreover, personal income tax collections would now be governed by a new system, under which assessment would be based on the principle of living standards. 1/ The advance tax payments system would also be abolished and replaced by the living standards system. Finally, draft legislation for introducing a value-added tax is currently under discussion in the Consultative Assembly. With these measures the Government is reiterating its commitment to the principle that expenditures should be matched by revenues in line with a more efficient and equitable tax system. Public Investment 46. Public and private investment are expected to play complementary roles in the development strategy. The restoration of private investment depends in part on the availability of infrastructure and essential inputs, such as power and basic materials, that can only be provided by the public sector. This role of the public sector became blurred in the period prior to 1980, which witnessed the evolution of a public investment program whose size encroached on private sector savings and whose composition was unrelated to sectoral objectives. The redefinition of the role of public investment under the structural adjustment program includes as a basic medium-term objective the restoration of an approximately equal balance in the ratio of public to private fixed investment (as against the 60:40 ratio that prevailed in 1982) and the removal of physical and social bottlenecks to economic growth. In order to allow the private sector to play its leading role in output and export expansion, it is the Government's objective that public investment should increasingly be financed by public resources and, therefore, that the ratio of public sector borrowing requirements to GNP should decline over time. 47. Bearing the above in mind, the Government intends to continue its investment strategy that: (i) restrains the growth of public investment so as not to create excessive pressures on domestic and external resources; (ii) focuses public sector investment on high priority projects in infrastructure, agriculture, and energy, with manufacturing increasingly left to the private sector; 1/ Living standards are defined on the basis of a combination of income and wealth, whereby non-wage income is estimated according to a wealth schedule and added to wage income to determine taxable income.  - 23 - (iii) establishes rates of return criteria for all new investments while improving project evaluation methods; (iv) concentrates the public investment program on a smaller number of projects to shorten completion times; and (v) progressively raises the share of SEE investments financed from their own resources. 48. The level of public f-ixed investment programmed for 1983 is TL 1043.5 billion at 1982 prices (TL 1258.8 billion at 1983 prices). This represents no change as compared to the programmed level for 1982 (TL 1043.0 billion at 1982 prices) and a 5.2 percent increase over the estimated level achieved in 1982. The latter increase is attributable to a shortfall in investments in 1982, which registered a growth in real terms of only 0.8 percent over 1981 as against a target of 6 percent. This was a major achievement in expenditure control. A notable feature of 1982 was the adoption by the Government of a deliberate policy to make no supplementary budgetary allocations during the course of the year. The 1983 program shows a reduction in the share of pubLic investment in total fixed investment as compared to the two previous years. This share is expected to decline in future years in line with the Government's stated policy. Table 12 below shows the movement of public investment during the period 1980-83 as compared to the period 1974-78. Table 12: Turkey - Public Fiyed Investment, 1974-83 Growth Rate (x) Actual Est. Prcgram Ann. Avg. 1980 1981 1982 1983 1974-78 1980 1981 1982 1983 Public Fixed Investment (TL billions 1982 prices) 898.9 983.6 991.9 1043.5 9.8 -3.7 9.4 0.8 5.2 Share of Fixed Total Investment (percent) 57.0 62.0 61.0 60.0 Source: State Planning Organization. 49. The increases in the investment allocations in the 1983 program reflect the Government's concern to rehabilitate and expand infrastructure for supporting exports and removing bottlenecks in energy production. The Government has also taken into account the major improvement in domestic resource mobilization in 1981 and 1982, which has enabled the financing of a greater proportion of public investment out of public savings without pre-empting resources from private sector investment. With the increase in public savings from 5.2 percent of GNP in 1S980 to 8.3 percent of GNP in 1982, the gap between public investment and public savings has been progressively reduced from over 10 percent of GNP in 1980 to 4.3 percent of GNP in 1982 (Table 6).  - 24 - 50. The changing sectoral composition of public investment is shown in Table 13. Most noteworthy is the maintenance in the allocation for energy at about 34 percent of total public fixed investment and the increase in the allocation for agriculture and transport from the 1980 levels. On the other hand, the share of manufacturing has dropped from 29.7 percent in 1980 to 16.3 percent in 1983. Table 13 also shows how closely the sectoral pattern of public investment in the 1983 program compares with the pattern for 1982-85 suggested in the Public Sector Investment Review Report (PIR), which called for increases in energy, agriculture and transport and a decline in manufacturing. Table 13: Sectoral Distribution of Public Fixed Investment, 1980-85 (percent) Actual Actual Est. Program Suggested a/ 1980 1981 1982 1983 1982-85 (Average) Agriculture 7.0 9.9 10.9 11.3 12.5 Mining 7.6 9.6 7.9 9.4 9.8 Manufacturing b/ 29.7 24.8 19.9 16.3 19.7 Electricity c/ 24.7 23.6 24.1 23.8 22.8 Transport and communications 17.7 17.2 20.6 19.2 19.1 Other sectors 13.3 14.9 16.6 20.0 16.1 TOTAL 100.0 100.0 100.0 100.0 100.0 Memorandum Item Energy d/ 35.2 35.2 33.8 34.5 34.2 a/ A suggested distribution in the PIR Report (based on Table I.4, p. 13 of Volume I). b/ Includes petroleum exploration and refining (about 11 percent of the sector total). c/ Referred to as energy in Turkish official publications. d/ Comprises power, coal and lignite mining, petroleum exploration and development, refining and distribution. Source: State Planning Organization. 51. The Government has assigned priority to projects having high rates of return and capable of being completed within a short period. Other criteria for priority include projects designed to help develop indigenous energy resources, rehabilitate or extend the infrastructure in energy, transport and agriculture, and support exports generally. Both the 1982 and 1983 Investment Programs reflect the application of these criteria. The 1983 Program has reduced the number of ongoing projects to about 6600 as against 7400 in the 1982 Program (and over 9000 in the 1980 Program). No new large projects (i.e. costing over  - 25 - TL 5 billion) have been included. A number of large projects, the economic viability of which had not been established, have been dropped, deferred for restudy or substantially reduced in scope in the 1983 Program. 1/ Projects in this category (40 in all) received less than 6 percent of the total allocations for large projects in the 1983 Program. 52. The 1982 and the 1983 Programs also reflect a determined effort to speed up the project completion rate by focusing funds on a more limited number of projects. In 1982, over 80 percent of the funds allocated for large projects wient to the 87 projects identified as high priority. In the 1983 Program the share has increased to about 85 percent (Table 14). 2/ The Government completed 51 major projects (including 10 in irrigation) in 1982 and expects to complete 65 major projects (19 in irrigation) in 1983. Table 14: Turkey - Allocations for Large Projects, 1982-83 a/ 1982 Estimated Total Cdst Expenditure 1983 Allocation as t Amount as X Amount as % Amount as Z No. of Toital TL Bil of Tctal TL Bil of Total TL Bil of Total Large projects 187 100.0 5715.2 1OC.0 388.5 100.0 520.4 100.0 of which: Priority 112 59.9 2894.2 5C.6 315.8 81n3 440.3 84.6 Priority to be confirmed 40 21.4 1427.6 21. 6 32.9 8.4 29.8 5.7 aI Total project cost over TL 5 billion. Source: State Planning Organization. 1/ Some of these projects are: Agriculture: Eber Aksehir, Seyhan Catalan, Palu-Kovancilar, Isikli Baklar and Middle Ceyhan Menzelet; Manufacturing - dropped: Seydesehir Alumininum Project, five tobacco projects, Sivas steel; deferred: Iskenderun expansion, Bartin cement, and heavy industries equipment; Energy: Central Sakarya-Yenice, Derbent and Kralkizi (DSI), Keles (TEK). Transport: 15-2000 DWT Ship, Izmit-Sakarya Road and Istanbul Second Beltway. In line with the recommendations of the National Transport Master Plan, the Government has revised the scope as well as the completion date (1997 as against 1990) of the Arifiye-Sincan High Speed Railway. 2/ The total number of large projects and the number of priority projects have increased from 157 and 86 respectiv,ely in the 1982 Program to 187 and 112 respectively in the 1983 Program as a result of upward revisions in the estimated total project cost. No new large projects have been included in the 1983 Program.  - 26 - 53. Weakness in project preparation, evaluation and selection in the various agencies is one of the reasons for the questionable quality of some projects in the investment program. The Government is trying to build up its evaluation capability primarily in the State Planning Organization (SPO), supplemented by that in key agencies and the State Investment Bank (DYB). The head of a reorganized project evaluation unit in SPO was appointed in early 1982 and the department is now in operation. Staff from the Bank's Economic Development Institute (EDI) visited Turkey in November 1982 and held consultations with SPO, DYB, and the Ministry of Finance on the subject of training in project preparation. As a result, proposals are under consideration for organizing regular training courses in Turkey for Government and SEE staff as well as for instructors who could conduct training courses in the future. The first joint EDI/DYB course is to be held in Ankara later this year. Meanwhile, courses in project evaluation conducted by the DYB are being strengthened. The Government has also set up a Planning and Programming Department in the Ministry of Energy and Natural Resources, one of whose principal functions would be to review large energy projects. 54. The momentum launched by the PIR and maintained by the monitoring of public sector investment through the SALs will help the Government achieve the longer-term objective of an approximately equal balance between public and private investment. The Fifth Five Year Plan will continue to restrain public investment below the level which would endanger the gains made in the last three years. In order to continue to monitor progress, it would be a condition for tranche release under SAL IV that the Government should make satisfactory progress towards rationalizing public investment and concentrating resources on high priority projects (Loan Agreement, Schedule 4). An appropriate benchmark would be that the mid-year investment review should confirm that at least 85 percent of the funds allocated for major projects would go to the 112 priority projects as programmed. Reform of State Economic Enterprises 55. The State Economic Enterprises (SEEs) in Turkey were established starting 50 years ago to fulfill needs not adequately served by the private sector. Over the years, they have come to play a dominant role throughout the economy--in industry as well as in traditional public utilities, transport, and agricultural marketing and supply. The SEEs currently account for a substantial share of public investment (40 percent), GDP (8 percent), and non-agricultural employment (10 percent). In industry, SEEs have a virtual monopoly in petroleum refining, steel, alcoholic beverages, and basic metals, and have large shares in fertilizers, pulp and paper, cement, coal, sugar, machinery, and chemicals. 56. Since the late 1970s, the operating losses and growing investment demands of the SEEs have placed substantial burdens on the budget and added to inflationary pressures. While some SEEs were well run and profitable, in aggregate they showed increasing losses through 1980. Since then, as a result of certain interim measures taken by the Government, primarily relating to liberalization of output prices, the profitability picture has changed significantly, and the SEEs recorded an overall net profit of nearly TL46 billion in 1982. What has not happened, however, is any major improvement in SEE efficiency. Consequently, the burden of economic and  - 27 - technical inefficiency has in many cases merely been reallocated from the budget to customers and the private sector generally. 57. The majority of the problems affecting the SEEs arise from the fact that while the enterprises have been organized as economic entities with the objectives of efficiency, productivity, and profitability, they are subject to constant intervention by the Government in pursuit of different and often conflicting objectives. The causes of poor performance include price controls, uneconomic investments, overstaffing, lack of autonomy, frequent changes of management, inadequate salaries for managerial and technical staff, excessive centralization of decision making:, and a confusion between economic, social, and political goals. 58. SEE reform has been a major goal of the Government's structural adjustment program. During 1980 and 1981, the Government implemented a number of interim measures to improve short-term financial performance, redirect the SEEs' investment programs and finance them increasingly from non-budget sources, and undertake legal reforms to institutionalize these changes. These measures have had some impact, as mentioned earlier (para. 19). There is also some evidence of a greater propensity on the part of some SEE managers to make use of the discretion that is available under the law. The financial position of the operational SEEs, together with the Government's projections for 1983, are provided in Annex VI. These are summarized in Tables 5 and 10 and in the text. Reference has already been made to the steady improvement in SEE profitability. It may also be mentioned that the share of wages and salaries as a percentage of sales has steadily gone down, from 33 percent in 1979 to 15 percent in 1982. The Government's strici: controls on SEE employment continue to be in force. Total employment has declined from 550,000 in 1979 to around 520,000 in 1982. 59. The core of the Government's program for SEEs is a wide-ranging reform decree that has recently been approved. The new decree classifies State enterprises into different categories and lays down uniform principles relating to the composition of their Boards of Directors, the tenure of Board members and the qualifications required of top management. The enterprises will henceforth be allowed to determine their product prices; if for any reason the Government establishes prices, the loss, if any, to the enterprise will be made up by the Government. Employees of the enterprises will be subject to a new personnel regime different from that applicable to Government employees. The enterprises will also have greater autonomy in determining their investment programs, within the framework of the national plans. The Government's strategy is to bring about greater efficiency in SEE performance through decentralization of responsibility, greater management autonomy and competition. The ultimate objective is to place the SEEs in an economic environment where they would compete on an equal footing with private sector firms, especially with regard to output prices, factor inputs, and credit. While the Government recognizes that the challenge is to change deep-rooted attitudes, not merely laws, the new decree should have considerable impact by signaling the new approach towards SEEs. Within the framework of the SEE decree, the Government intends to seek the Bank's assistance in providing technical assistance aimed ait improving the overall performance of selected SEEs.  - 28 - 60. With regard to the financial aspects of SEE performance, reference has already been made to the targets in the 1983 program relating to overall profitability, SEE investments, and financing requirements (para. 39). In addition, the Government has decided to limit budget transfers to SEEs in 1983 to TL292 billion, representing a zero rate of real growth over 1982 given present inflation assumptions, and within the above ceiling, to maintain the share of manufacturing SEEs at or below the 1982 level in real terms. It will also ensure that reimbursement of SEE duty losses is limited to TL95.5 billion in 1983, representing a small decrease in real terms over 1982. The Government's policy of not permitting SEEs automatic access to Central Bank financing or to additional transfers from the Treasury will be continued, and whenever possible, SEEs will be encouraged to raise their own funds. Import Liberalization 61. The objective of opening the Turkish economy to competition from abroad is an essential component of the Government's structural adjustment program. The Government's long-term policy is that import restrictions should not be used to protect domestic producers except in special circumstances such as, for example, fostering infant industries. It is keenly aware that efforts to reduce the effective level of protection and the bias towards domestic production are essential to restructure the economy and stimulate competitive exports to support growth. Nevertheless, because of entrenched domestic forces dependent on protection and international trade restrictions, it recognizes that the process will entail considerable effort at the political level. The Government's intention is to gradually shift from a licensing system of import control to one relying on tariffs and to reduce these tariffs over the medium term. In doing this, it will draw on the results of the ongoing protection studies including the Bank-sponsored study expected to be completed by September 1983. 62. The Government has been taking legal and administrative steps to liberalize the import regime over the last two years, including the abolition of the quota list in 1981, shifting of over 200 items from Liberalized List II 1/ to the more liberalized lists (List I 2/ and the Levy List 3/), allowing duty-free importation of inputs going into exports, thus bypassing the normal regime, and providing some additional de facto liberalization by permitting imports of items domestically produced which are indirectly needed for exports or to keep domestic prices down through competitive pressures (e.g. steel and PVC). The 1983 Import Regime continued the policy by shifting 1/ Includes items which require an import license, issued normally if the goods cannot be supplied locally in comparable quality and quantity, and at a reasonable price. 2/ Includes items which are noncompetitive with domestic production and freely admitted. 3/ Introduced in the 1982 Regime--includes items which can be imported without restriction but are subject to a flexible levy that is adjusted from time to time.  - 29 - another 26 items 1/ (including long fiber cotton, dry batteries and video casettes) to List I and the Levy List. There is no information available on the value of imports entering in 1982 under List I, List II and the Levy List separately, although the Government expects to have this breakdown available by the end of 1983. It has been estimated, however, that on the basis of 1982 imports, the value of the items shifted from List II to List I in January 1983 amounted to $40 million, or about 1 percent of the 1982 total non-oil and non-investment goods import bill. 2/ As part of the 1983 Import Regime, steps were also taken to reduce the rates of import guarantee deposits, and improve procedures for extending the period of validity of import licenses. In addition, foreign exchange earners are allowed to open foreign currency accounts of up to 5 percent in value of their annual export earnings which may then be used for imports under List I and List II. 3/ 63. The Government is proposing to move in a more systematic way from a licensing system of import control to one relying on tariffs over the medium term. Preparation of a concrete action plan for liberalization is dependent on the results of the Bank-sponsored Protection Study. 4/ Some Bank involvement is foreseen in the final stages of the study, especially in the preparation of a set of policy recommendations. This should enable the preparation of the action plan by September 1.983. The Government has confirmed that it will adopt a plan to rationalize the existing tariff system by introducing a rational tariff structure, including providing for the industrial restructuring necessary to produce a more competitive and export-oriented industry, and set out a timetable for shifting from a licensing system to one relying on tariffs. The Government will begin implementing the plan starting with the 1984 Import Regime, when a substantial share of imports will be shifted to the more liberalized lists. Satisfactory progress in import liberalization would be a condition of tranche release (Loan Agreement, Schedule 4). Export Incentives 64. Sustaining the growth of exports is central to the new development strategy. Much has been done to improve export incentives since January 1980. By far the most significant change has been the maintenance of a realistic exchange rate, adjusted daily since May 1981 against a trade-weighted basket of currencies. Between June 1981 and November 1982, the 1/ Of which 13 were shifted to List I and 13 to the Levy List. 2/ In the 1982 Regime, the Government had slhifted 35 items to List I, with an import value estimated at $110 million oni the basis of 1981 imports (3 percent of non-oil and non-investment goods imports). 3/ In the case of imports frcom List II, no Licensing would be required for imports of up to 20 percent of the allocated 5 percent. As a result of this relaxation, it is expected that about $70 million worth of goods under List II will be imported without a license in 1983. 4/ Entitled "The Study on Restructuring the Existing Protection and Incentives System", approved by the Research Committee in April 1981, and currently expected to be completed in September 1983.  - 30 - real effective exchange rate was depreciated by about 13 percent. Low cost export credits, indirect tax rebates, and privileged access to foreign exchange and imports have further increased the attractiveness of exports. 1/ Certificates entitling the exporter to export credits covered about 80 percent of the total value of exports during 1981 and the first half of 1982. This percentage has recently come down to about 75 percent. Altogether, the average subsidy rate on industrial exports was 11 percent in mid-1981, helping to offset the bias in the protection system towards domestic production as well as the costs for inexperienced Turkish firms of learning to penetrate export markets. 65. The Government further liberalized the export regime in 1982. The number of items requiring an export license was reduced from 25 to just two: tobacco and opium. Also in February 1982, for exports exceeding $4 million per year, the minimum tax rebate was increased from 5 to 6 percent. In April 1982, the export tax rebate scheme was revised and additional benefits were granted depending on the volume of exports realized in a calendar year. Further, in line with the objective of reducing export subsidies in the medium term and placing greater reliance on the exchange rate policy, the subsidy provided from the Interest Rate Rebate Fund on long-term credits for export-oriented investment was reduced from 40 to 35 percent. The Central Bank also amended the rediscount rates for export credits in April 1982. For manufactures of investment goods for export, the rate was increased to 34 percent from 27.5 percent; and for credits from the Export Promotion Fund to 23.75 percent from 15 percent. 66. Under the foreign exchange retention scheme, industrial exporters were allowed to retain one-half of their net foreign exchange earnings which, prior to December 1982, could be transferred to other users. In December 1982, the export retention scheme was modified to remove features which gave rise to what was essentially a multiple currency practice; the right of exporters to transfer foreign exchange to a third party was abolished, so that exporters could use foreign exchange obtained under the scheme only to meet their own import requirements following current import regulations (as modified by the 5 percent relaxation described in para. 62 above). 67. As domestic conditions become more prosperous, the time will come when incentives must be designed more carefully if exports are to continue at the desired level. Under more normal conditions, the two incentives that are now important will lose much of their force: domestic demand will revive, and interest rates for non-exporters will fall. The indirect tax rebate will also weaken to some extent. Thus, in an environment where potential exporters enjoy stronger domestic demand, Turkey will need to redesign its incentive structure if exports are to continue. Several recommendations in this regard have been made in recent economic studies, including: 1/ A fuller description of these incentives and their importance is given in the Industrialization and Trade Strategy Report (No. 3641-TU), Chapter 2.  - 31 - (i) continued lower-interest loans to exporters, perhaps for longer terms (e.g. 12 to 18 months); (;i a separate program of multi-year credits for exporters of capital goods to develop the potential in that sector; (iii) continued free access to imported inputs, free of duty; (iv) a system of export credit insurance; (v) the exclusion from the benefits of preferential export credits, of exports with less than 20 percent of value-added; (vi) a system of credits for indirect exporters; and (vii) most important of all, a foreign trade regime including a tariff policy that removes the bias in incentives favoring the domestic market against exports. 68. Although the management of a flexible exchange rate during the last two years has been a major incentive to exports, the bias favoring the domestic market over exports is still strong. This is reflected in a level of protection that is still too high. Since explicit export subsidies cannot be increased beyond present levels, a practical solution would be a reduction in protection of domestically produced goods that compete with exports. As part of the SAL IV Program, the Government will carry out during 1983 a detailed review of export incentives including the recommendations set out in para. 67. External Debt 69. As the size and complexity of the external debt file increased, the Government recognized that the major obstacle in formulating a proper debt management policy was the inability to compile and evaluate the appropriate data rapidly and accurately. In order to facilitate data handling, the Bank supported a program under SAL I for the Ministry of Finance to undertake the computerization of Turkey's debt recording system. The timetable for this effort set forth in SAL I has not yet been fulfilled. The Ministry of Finance underestimated the complexity of the task and relied heavily on in-house skills supplemented by an outside consultant. Although a system was designed, it has recently been judged inadequate for Turkey's needs by the Ministry of Finance. A Bank evaluation of the system cane to similar conclusions. 70. The Government has reaffirmed its intention to close the gaps in the present manual debt reporting system, computerize it, and install and properly staff a system for better management of external debt. The Ministry of Finance is seeking outside help and is looking both to the Bank and Fund for assistance in designing a computerized system, under a timetable to be agreed with the Bank.  - 32 - Financial Sector 71. An important determinant of the success of the domestic mobilization effort as well as the revival of private investment will be the effectiveness of changes being introduced in the financial system. Its present structure and mode of operation are not conducive to enhanced efficiency in either domestic resource mobilization or resource allocation. Two-thirds of all credits are allocated at heavily subsidized rates, the capital market is underdeveloped, enterprises are undercapitalized, and the large industrial groups are closely linked with the banking system to the detriment of new entrepreneurs. The banking system's cost-effectiveness compares unfavorably with countries at a similar stage of development. The fiscal burden imposed upon it is also, in international comparative terms, exceptionally heavy. These problems are of a structural nature and will need to be resolved in the medium term. There are also short-term problems. The most pressing one appears to be the high level of the real cost of credit, currently of the order of 28 percent on average for non-agricultural enterprises. This has created acute problems of liquidity for banks and firms alike. Moreover, there is considerable disparity between the cost of concessional and non-concessional credit. The supply of concessional credit is restricted leading to arbitrariness and delays in allocation. 72. In line with the program for restructuring the Turkish economy, the Government, in July 1980, deregulated commercial bank interest rates to reflect market conditions and to encourage private savings. With this liberalization, and as inflation went down, the average real interest rate paid on sight and time deposits rose from -46 percent in 1980 to 18 percent in 1982. Increased competition from within the banking system, from brokers, and from the higher rates paid on short-term Treasury bonds, created strong pressures and led many banks unofficially to offer nominal rates of around 60 percent for 6-month time deposits in 1982. 73. The increase of deposit interest rates to abnormally high levels, together with the high intermediation costs in the banking system and heavy taxation of financial operations, gave rise to serious problems. Lending rates increased sharply, particularly for non-preferential credits for which rates rose to around 60 to 70 percent. This culminated in a crisis in July 1982, when Banker Kastelli, the largest brokerage house with an estimated $600 million in deposits, collapsed. The firm's collapse was attributed to: (a) the acceptance of progressively poorer risks in order to keep up with growth in placements on which it depended; and (b) the inability of brokers to maintain a high rate of inflow of funds into their operations in the face of high interest payments due and a restrictive monetary policy.  - 33 - 74. The Government acted ,quickly to meet the crisis by guaranteeing payment of normal interest and principal on deposit certificates and bonds surrendered as security against deposit by brokers, and allowed banks in temporary trouble to call on emergency funding from the Central Bank. However, the brokers' crisis prompted savers to switch funds from smaller banking institutions to larger banks. Even the larger banks found the increase in deposits a mixed blessing because of the prevailing high real deposit rates paid, and difficulties in finding enough creditworthy borrowers in a recessionary environment. 75. The Government introduced several measures at the beginning of 1983 which are designed to lower thie cost of credit. Interest rates on time deposits (6-12 months) were lowered by 10 points to 40 percent, and on one-year deposits by 5 points to 45 percent. In order to make time deposits somewhat less attractive, the interest rate cn sight saving deposits was raised from 5 percent to 20 percent. To reduce the cost of intermediation and to compensate for the reduction of the interest rates on deposits, the withholding tax on interest income was reduced from 25 to 20 percent, the highly differentiated cash reserve requirements (with separate rates for sight and savings deposits and substantially lower rates for deposits used for specific purposes) were replaced by an equivalent single rate of 25 percent, and the rate of interest paid by the Central Bank on reserves unified at 1.5 percent monthly. In addition, the liquidity ratio, which varied from 10-15 percent according to the size of the bank and was being monitored once a month, was replaced by a single rate of 10 percent monitored continuously. The permissible ratio of Government bonds has also been increased from 25 to 50 percent. To ease the problem of undercapitalization of firms, legislation has been enacted to allow industrial firms to revalue their fixed assets and accumulated depreciation without incurring an immediate tax liability. Legislation to regulate the accounting profession is under consideration. 76. The measures taken by the Turkish authorities so far are a positive step towards simplifying the maze of regulations surrounding banking operations and improving the performance of money and capital markets. The Government intends to review the results of the January 1983 measures (this might take till the third quarter of the year) before considering further action with regard to interest rates. 77. The SAL IV program supports the Government's policies to reduce high real interest rates. The Government intends to reduce the cost of intermediation by gradually reducing the financial transactions tax in two or three steps by June 1984, with a reduction to 10 percent by June 1983, and seeking alternative source of revenues to make up for the loss in tax receipts. Furthermore, to facilitate the creation of an interbank money market which would ease the liquidity problems of individual banks, it is the Government's intention to reduce substantially the financial transactions tax for transfers between financial institutions. To lessen the excessive demand for non-preferential credit, interest rates applied to preferential credits are to be reduced by end-1984 with the lowest, rates set equal to the rate of inflation. The Government has also agreed that as long as real interest rates on non-preferential credits exceed 20 percent, the real interest rates on preferential credits should, in principle, be set at a positive level. A  - 34 - study will also be undertaken by the Government to explore the possibilities of introducing a system of floating interest rates for medium- and long-term credits. 78. As part of the SAL IV Program, the Government is considering proposals for revision of the Banking Law which will inter alia increase the role of the Central Bank in the supervision of the banking sector, introduce a standardized accounting system for banks, improve the system of monitoring bad debts, introduce a deposit insurance scheme, and review credit extension limits by commercial banks to a single customer. An enabling law has been passed that would permit the Government for a period of six months to amend the Banking Law through decrees. 79. With regard to revitalization of the capital market, the Government intends to ensure that the Capital Market Board begins to function effectively as the authority in charge of supervising the securities market, both primary and secondary. 1/ As part of the same effort, the Government will, in addition to issuing treasury bills and Government bonds at competitive rates, encourage bond issues by development banks which can independently service their debt. The Government has also agreed under the SAL IV Program to undertake studies related to: (a) devising strategies for long-term development of the equity market including measures in the areas of accounting and auditing standards; and (b) reviewing the introduction of medium- and long-term bonds with interest rates indexed to the announced interest rates on time deposits. 80. In order to monitor progress in achieving these objectives, a condition for tranche release under SAL IV would be that there is satisfactory progress towards reduction in the level of the financial transactions tax (Loan Agreement, Schedule 4). Agriculture 81. The importance of the agricultural sector in the economy is declining, but it still accounts for an unusually large share of GDP (21 percent), labor force (53 percent), and merchandise exports (47 percent including processed food) compared to other middle-income LDCs. Moreover, Turkey is able to meet its domestic food needs, and the agriculture sector also indirectly contributes substantially to industrial exports. Production grew on average by a little over 3 percent per annum in the 1970s due to an extension of the irrigated area, and a tripling of fertilizer use and the tractor fleet. The sector has a large positive trade balance ($1.97 billion in 1982), which helps to offset deficits in industry and energy. However, imported inputs for the sector, such as fertilizer and its raw materials, plant protection chemicals and fuel, remain substantial. 1/ At the request of the Government, the IFC is providing assistance to the Government in the development of an efficient capital market in Turkey.  - 35 - 82. The sector's main contribution to structural adjustment over the next few years will be to maintain, and if possible, increase its positive trade balance. Agricultural exports are projectecL to grow at 3 percent per annum in volume to reach $5.9 billion in nominal terms by 1990, while agriculture imports are projected to reach $580 million by then. To achieve these targets, sectoral GDP growth will have to be in the order of 3.1 percent per annum. With the closing of the arable land frontier in the 1970s, growth in the sector must come from productivity increases, in terms of improved irrigation, research and extension, and credit facilities. 83. The Government has already initiated measures designed to promote agricultural productivity and exports, and the Bank has supported these through SAL operations and project lending. The export-oriented strategy initiated in 1980 encourages Turkey to produce in accordance with its comparative advantage in a wide range of commodities, particularly fruits, vegetables, pulses, cereals and livestock products. Export growth of both agriculture and agro-industries has been promoted by the exchange rate policy, and a range of fiscal and financial incentives. Production and investment incentives have also been introduced. This new development strategy aims at minimizing market distortions and Government intervention by shifting from a support to a floor pricing policy, and by reducing or eliminating input and pricing subsidies. 84. This shift in strategy led initially to some disarray in the agricultural sector. The rate of growth of agricultural GDP fell in 1980 and 1981, but has rebounded in 1982 (6.7 percent real growth), aided by good weather and an apparent adjustment by farmers to the new agricultural environment. Agricultural exports have also responded to the new incentives, and earnings grew at an average annual rate of 29 percent in 1980 and 1981. In 1982, however, export earnings declined by 3.5 percent, due primarily to a fall in prices of the key export crops, hazelnuts, tobacco and cotton, despite an increase in exports, in volume terms, of 15 percent. In line with the Government's policy of encouraging exports with a higher value-added, agro-industrial exports grew by 38 percent. The diversification of exported agricultural products has continued, with exports of livestock products, barley, lentils and other pulses growing markedly; the shift in export markets towards Middle East and Nortlh Africa has also become more marked. 85. There are several Ministries and other official agencies responsible for different aspects of agricultural development. Thus the Government recognizes that an improvement in the overall planning and coordination within the sector is essential to its sustained development. To improve production efficiency and marketing technologies, the Government has decided to set up an inter-ministerial working group to set priorities for technology generation and to develop medium-term plans for reorganizing and consolidating agricultural research activities. Another inter-ministerial group will be set up to develop medium-term plans for reorganizing and consolidating the Government's diverse extension services, including decentralization of responsibility to the regional level and strengthening links with research entities. The Government has also decided to take an important step in improving agricultural technology by revising the seeds decree to enable an efficient and expeditious testing of imported varieties of seeds and to encourage the formation of joint ventures with foreign firms for commercial seed production.  - 36 - 86. In 1981-82, the Government undertook a reorganization of the Ministry of Agriculture, designed to consolidate fragmented services. To improve inter-agency coordination, the Government has decided to establish an inter-ministerial working group to develop a medium-term planning capability to analyze agricultural policy and make recommendations for policy reform. Once the working group with responsibility for this area has been set up, the provision of technical assistance by the Bank could be considered. 87. There has already been considerable progress in developing an agricultural sector more responsive to market signals. The measures taken include deregulation of agricultural exports, simultaneous reductions in the subsidization of agricultural inputs and progress in replacing support prices by commodity floor prices. Implicitly, farmgate price stabilization has become the main policy objective in lieu of incentive pricing and income parity. In the context of SAL IV, the Government has agreed to continue its policy of moving from producer support prices to floor prices, and to this end, will develop an appropriate methodology for setting floor prices in line with domestic and international commodity price trends and the exchange rate. Substantial progress has already been made in reducing the fertilizer subsidy: fertilizer prices were increased five-fold in 1980, and increased again in September 1981. In line with its commitment under SAL II, the Government intends to complete the phased elimination of the fertilizer subsidy over the next three years. Progress has also been made in increasing water charges, and further progress is expected in reducing the subsidies on irrigation development. 88. If production in accord with comparative advantage is to take place without an undue rise in the domestic price of food commodities, the imports of food and food products must also be liberalized. To analyze the situation more comprehensively, the Government plans to initiate a review of its self-sufficiency policies by the end of 1983, including examining the implications of liberalizing food imports and the feasibility of removing restrictions imposed on the exportation of wheat by the private sector. 89. The system of agricultural credit suffers from serious distortions, misallocations and wastage of scarce resources. These problems are being addressed in the context of the proposed Second Agricultural Credit Project. In particular, agreement has been reached on achieving a positive real interest rate for agriculture, as well as to promote, inter alia, the development of other financial institutions in the rural sector and to improve the efficiency of TCZB, the major agricultural finance institution. Another major weakness in the system of agricultural financing is the inefficiency of the sales cooperatives, which undertake the Government's support purchases. As part of the SAL IV Program, the Government has agreed to develop and implement proposals for improving the efficiency and accountability of the sales cooperatives, and to study measures to make them financially self-sufficient with their credit obtained on commercial terms. 90. The public investment program for agriculture was substantially improved in 1982 under the SAL III program, by achieving a better balance between subsectors and focusing on a more limited number of projects, especially quick yielding irrigation projects. The Government has effectively  - 37 - dropped or deferred a number of large projects in the agriculture sector in line with the Bank's recommendations. In the context of SAL IV, continued progress in the rationalization of the program would be sought, and the Government has agreed to maintain the share of the 1983 investment program allocated to agriculture at at least 11 percent, the same as in 1982. Energy 91. The central importance of energy in Turkey's economic prospects can be gauged from the fact that in 1981, Turkey's petroleum imports reached $3.9 billion, which amounted to over 80 percent of total exports and 40 percent of all imports. Total energy consumption in 1981 was estimated at about 33 million tons of oil equivalent (t.o.e.), while total domestic production of energy amounted to about 19 million t.o.e. The Energy Assessment Report 1/ indicates that in order to sustain acceptable GDP growth rates of about 5-6 percent through 1990, energy demand will continue to rise at about 8 percent per annum throughout the 1980s. Thus by 1990, total energy demand is expected to amount to some 65 million t.o.e. Turkey is well endowed with hydropower potential and low quality lignite, both relatively unexploited. The Government's policy has been to reduce the dependence on oil imports by concentrating on the expansion of domestic energy production while attempting to restrain the growth of consumption through demand management. The task of developing and executing a rational energy management program has been the concern of the Government and the Bank over the past two years. In addition to the Energy Assessment Report which has recently been approved by the Government, detailed work has been undertaken relating to the power subsector. Similar studies need to be carried out to gain a better understanding of the lignite subsector. 92. The Government's principal objectives in the energy sector include: (a) improving the efficiency of key institutions; (b) improving energy planning and inter-agency coordination; (c) carrying out a review of the major projects in the energy sector to determine their feasibility and priority, and focusing investment allocations on high priority, economically viable projects; (d) stepping up efforts at energy conservation; and (e) taking steps to increase the participation of the private sector, both domestic and foreign, in the development of energy resources. While a measure of success has been achieved in attaining these objectives, much more work remains to be done. The major sectoral issues will be systematically addressed in an energy action plan that the Government expects to develop in consultation with the Bank in the course of the next few months. 1/ Turkey; Issues and Options in the Energy Sector (No. 3877-TU), March 1983.  - 38 - 93. Improvement in the performance of Turkey's major State institutions in the energy sector is fundamental to the success of the energy development program. Many of the key problems underlying SEE inefficiency are being addressed through the SEE reform package (paras. 55-60). Proposals to reorganize TPAO 1/ are under active consideration, and consultants have recently been selected (to be funded under an ongoing Bank loan) to carry out a thorough review of TPAO's existing management and planning systems. Technical assistance is similarly to be provided to TEK 1/ and TKI 1/ in areas such as management information systems, financial and cost accounting, inventory control, and manpower planning. A new petroleum law with several important provisions that are expected to make Turkey more attractive to foreign exploration companies was enacted in March 1983. Revisions to the mining law designed to stimulate private sector involvement in lignite production are in an advanced stage of consideration. These measures should serve to strengthen the institutional capability in the energy sector. 94. The 1983 public investment program accords high priority to energy, with energy investments receiving over 34 percent of the total allocations. 2/ The program concentrates resources on projects with high rates of return which can be completed quickly or which help to make better use of existing plant capacity. Seven major projects in the energy sector were completed in 1982, while 10 projects are scheduled for completion in 1983. As part of the SAL IV Program, a Planning and Programming Department has recently been established in the Ministry of Energy and Natural Resources. This Department will bear the responsibility for inter-agency coordination with TEK, TKI, TPAO and SPO with regard to energy investments. It will carry out a detailed review of the large energy projects included in the investment program, undertake pre-investment studies, and evaluate all new project proposals. It will also be responsible for formulating and updating energy demand forecasts (the first update is to be completed in 1984) and for translating these into appropriate investment plans. 95. During 1983, the Government plans to continue its policy of adjusting energy prices to reflect changes in the economic cost of energy. Frequent adjustments are being made to petroleum prices to keep pace with international prices and changes in the exchange rate. In November 1982, for example, petroleum prices were raised by close to 20 percent. Price levels for petroleum products are currently above international costs. Other energy prices are also being adjusted regularly to cover costs, although distortions 1/ Turkiye Petrolleri Anonim Ortakligi (TPAO), the agency responsible for oil exploration and for producing, importing, refining, transporting, and marketing oil; Turkiye Elektrik Kurumu (TEK), the agency responsible for generation, transmission, and distribution of almost all the electricity sold in Turkey; Turkiye Komur Isletmeleri Kurumu (TKI), the agency with responsibility for extraction of coal and lignite. 2/ This comprises electricity (referred to as energy in Turkish publications), petroleum exploration and refining (about 11 percent of manufacturing investment), coal and lignite mining (about 90 percent of mining investment), and pipelines (about 2 percent of transport investment).  - 39 - still exist in relative prices of different sources of energy. Under SAL IV, the Planning and Programming Department in MENR will review, by end-1983, existing energy pricing policies with a view to identifying appropriate relative pri-es between petroleum products and lignite to encourage the most efficient use of energy resouices. The Energy Assessment Report has recommended that the present bulk and retail tariffs for electricity be restructured to reflect the long-run marginal cost of supply including a reasonable real rate of return on assets. Tne Government has accepted this recommendation in principle, and further action on it will be pursued through ongoing project work. 96. It is clear that increased efficiency in the use of energy must play an important role in reducing the pressure on existing resources. The Government intends to strengthen considerably the current institutional and incentive arrangements for encouraging energy efficiency. A new energy conservation law is expected to be enacted in 1983 and will be followed by the formulation of a comprehensive national conEervation program, which will define the objectives and guidelines for enErgy conservation in all sectors of the economy. Two energy conservation divisions are being set up in the MENR; one will monitor energy efficiency and consE!rvation programs, and the other will carry out research in energy conservation and environmental protection. 97. Overall, the Government's approach to the development of the energy sector consists of a combination of carefulLy selected investments, institutional improvements, and incentives, supported by changes in the legal framework. The Government has thus far concentrated most of its efforts to reduce dependence on importecd oil by expanding lignite and power output. There is, however, a limit to what the State lignite and power development agencies can be expected to accomplish, even if all the proposed institutional reforms are carried out quickly and effectively. In order to reduce Turkey's dependence on imported energy, the Government would have to place a higher priority on a complementary approach comprising the expansion of efforts to develop other known primary energy resources, particularly the recovery of oil from proven reservoirs, the development of gas resources, the exploitation of geothermal fields, and the more extensive use of forestry resources and wood plantations for fuelwood. A second important element would be the enlistment of the skills and resources of the private sector, both domestic and foreign. The third element of the complementary approach would be the encouragement of greater efficiency in the use of existing energy resources. This includes instituting pricing and other policies thal: encourage greater efforts to reduce energy consumption, and establishing institutions that can provide technical assistance to industry in energy savings. While none of these approaches alone will solve the problem of the high dependence on imported energy resources, together they should be able to make a substantial impact on the problem. Overview 98. The Government's structural adjustment program represents a systematic effort to change the basic direction of Turkey's economic development. It is a medium-term program, since the structural changes that are being attempted will take several years to be completed. Furthermore, deeply-entrenched attitudes will change only slowly, as more evidence becomes  - 40 - available that the new development strategy is being consistently applied and will not be reversed. As this report shows, much has been achieved during the first three years of the program, principally in the areas of macroeconomic policies (including domestic resource mobilization, export promotion and import liberalization), rationalization of public investment and improvement in SEE performance, and in policy reforms in the agriculture, industry and energy sectors. The principal challenge for the Government in the coming year is to broaden and deepen the structural adjustment process, building on the progress already made, and to place it in a medium-term framework that sets out the primary economic goals for the 1980s. The SAL IV Program represents a positive response to this challenge. If successfully implemented, it will result in significant incremental achievements in all the main areas of economic performance. Moreover, although the Government's own medium-term plan is expected to be finalized only in October of this year, the work already done on it in Turkey suggests that it will be fully compatible with the goals of the structural adjustment program and will help to guide the process in the years ahead. Creditworthiness 99. At the end of 1978, Turkey faced an overwhelming debt burden of $7.2 billion in short-term debt and $6.9 billion in medium- and long-term debt. It was faced with service payment obligations (mostly on short-term debt) of $5.1 billion (including arrears), or nearly three times the value of merchandise exports in 1977. Following the resolution of the 1978 debt crisis, Turkey pursued a very conservative policy of external borrowing which was restricted almost entirely to long-term borrowing. Much of this was arranged through the OECD Consortium for Turkey and was extended on concessional terms. Also, between 1978 and 1980 Turkey rescheduled some $9.6 billion of outstanding obligations through a series of rescheduling arrangements concluded with official and commercial creditors. Approximately $6.0 billion of short-term debt, including $2.6 billion in convertible TL deposits and bankers credits and $1.2 billion of non-guaranteed suppliers credits, were consolidated into medium-term loans or partially converted into TL obligations. As a result of these actions, short-term debt as a percentage of total debt outstanding fell from 49 percent in 1978 to 12 percent in 1981. Inflows were mostly from official sources--major creditors being the OECD countries, the World Bank and the IMF. Of the total debt outstanding at end-1981, 87 percent constituted medium- and long-term debt. Based on the growth scenario outlined earlier, debt outstanding and disbursed as a percent of GDP is projected to rise from 28 percent in 1981 to 31 percent in 1982 and then fall to 29 percent in 1985 and 26 percent in 1990. 100. Debt service obligations are likely to be high over the coming years. The debt service ratio increased to about 24 percent in 1982 from about 14 percent in 1981 as a result of a large repayment of previously rescheduled debt under the earlier OECD agreements. The medium-term projections show a decline of the debt service ratio to 19 percent in 1984, an increase to 21 percent in 1985 (again on account of repayments of rescheduled debt), and then a fall to 18 percent in 1990. The projections assume a conservative level of commitments from commercial banks of about $120 million per year during 1984-85 and about $200 million per year during 1986-90.  - 41 - However, the projections also indicate that Turkey will require additional annual gross capital inflows of about $1.0-$3.0 billion during 1985-90 in order to close the anticipated balance of payments gap. A significant proportion of it, perhaps on tlhe order of an additional $500 million - $1.0 billion, will have to be borrowed from commercial banks during 1985-90. There are some recent encouraging signs of Turkey's ability tc enter the commercial market. In 1982, Turkey concludec a prefinancing of $200 million for the agricultural cooperatives through a syndicated loan with about 30 Japanese and Gulf Banks participating. In addition, about $100 million is expected to be raised soon to prefinance imports of oil from Iraq. Very recently, Morgan Guaranty has received a mandate from the Turkish Government to take the lead in raising medium-term finance of $200 million from commercial banks for a loan to the Central Bank for balance of payments needs. Risks 101. The Turkish economy is at a transitional stage in its structural adjustment. The medium-term prospects outlined in this report are derived on the assumptions of export sustainability and a revival in private manufacturing investment accompanied by fiscal and monetary discipline. Besides a continuation of the policies introduced since January 1980, this implies significant progress in key areas of structural adjustment such as SEE reforms, financial and banking reforms, impcrt liberalization and further rationalization of public sector investment. Without these adjustments, it would seem difficult to envisage a rapid development of an efficient private sector, on which the new development strategy hinges. The prospects are favorable, but there are nevertheless some risks which could slow down progress. They include external factors such as adverse developments in the trade environment and the availability of support from the international commercial capital markets. Moreover, the costs of the stabilization process in the form, for example, of increased unemployment and a decline in real wages, may lead to pressure on the Government to abandon stabilization policies earlier than desirable and revert to a high growth strategy before an adequate foundation for it has been laid. 102. The factors underlying the remarkable growth of exports over the last two years have been analyzed in the report. Factors which threaten the sustainability of future export growth include a quick revival of domestic demand, the instability of the new export markets in light of the recent decline in oil prices, the sluggishness of private investment in manufacturing and the possible weakening of export incentives, including some relaxation in the exchange rate policy of maintaining as a minimum existing external competitiveness. These risks are not inconsequential since the recovery of the Turkish economy and its ability to service a reasonable level of debt depends heavily on a successful expansion cf exports. Failure of the export drive, given the dependence on imports, could mean that Turkey would have to resort to a strategy of reduced growth as a mechanism of adjustment, if it is to avoid a repetition of the problems of the late 1970s. 103. Turkey's prospects for future comraercial borrowing appear good although it is unlikely that the level and composition of concessional medium- and long-term commitments realized in 1980 will be repeated. Hence Turkey  - 42 - will need a significant amount of foreign commercial bank medium-term credit, in addition to the diversification of its bilateral aid arrangements. The recent major improvement in the balance of payments should enable Turkey to begin again to borrow medium- to long-term in international markets. However, there are risks involved, since in addition to the reluctance on the part of donors to lend to Turkey in light of its past history and recent slow progress in debt management, the payment difficulties affecting developing countries in general may severely affect the syndicated loan market. 104. Another major risk concerns the adequate response of private investment to the adjustment process. The new development strategy including sustained export growth is dependent on the revival and redirection of private investment in the medium term. An inevitable consequence of the current stabilization process is the low level of private investment and the threat to solvency of some of the commercial banks and private firms. Depressed domestic demand, the inadequacy of the Turkish financial sector, high interest rates, and the lack of equity funds are the major medium-term issues facing the recovery. For the immediate future, the existence of substantially underutilized capacity in many industries offers the prospect for expansion of production without further investment. But in the medium term, the current low level of private investment will have to be raised. The current steps to restructure the financial sector assume great importance in this respect. In addition, the stabilization process should lay the groundwork for a progressive increase in private sector activity by succeeding in its aim of lowering and then stabilizing inflation. The revival of the private manufacturing sector is also dependent on continued progress in the control and improvement in the composition of public investment. This calls for a modest public investment program in coming years with more emphasis on infrastructure, energy and agriculture to support the private sector and the export drive. The major risk in this regard is the possibility of Government formulating a large public sector-oriented Fifth Five Year Plan. 105. On balance, while these risks are serious, they are not insurmountable. The demonstrated capacity of the Turkish Government to carry forward its program, devise flexible responses to new circumstances, and hold steadfast to essential policies, gives confidence that the Turkish adjustment program will continue to show commendable progress. The prospects of declining concessional funds and the increased need to resort to the commercial markets, make it all the more important that the program be kept on track. Yet the biggest risk may well be in the political arena, for the re-emergence of party political activity is bound to have some impact on the direction of economic policy. The new Government will need to be particularly adept at reconciling the inevitable sharper focus on the social costs of several years of stabilization that will follow the restoration of democracy with the restructuring objectives Turkey has set for itself. Social Costs of Restructuring 106. The adjustment program, which combines stabilization policies and reform measures, has entailed some transitional costs, primarily in terms of depressed domestic demand, increased unemployment and some possible distortion in income distribution. While data on unemployment remain poor, they indicate  - 43 - a deterioration in the employment situation, with unemployment increasing from 14 percent in 1979 to about 16 percent at present. The available data on income distribution indicate a significant ceterioration during the last three years in the position of government employees and industrial workers. The principal cause for this has been the decline in real wages. 107. The overall erosion in real personal incomes will be mitigated as inflation is brought under control. Over the medium term, the unemployment problem will be reduced if there is substani:ial economic growth resulting from increased private investment and exports. 3uccess in pursuing the new development strategy hinges upon the maintenance of the policy of real positive interest rates and encouragement of exports, both of which should reduce the bias in favor of high capital-intensive investments and promote employment. PART IV - THE PRO-POSED LOAN 108. The proposed loan is the fourth in a series of loans supporting the Government's structural adjustment program initiated in January of 1980. The main developments of the program have been described in this report. A letter from the Minister of Finance dated April 2., 1983 sets out the major refinements in the program and the new policy actions envisaged for 1983 and early 1984. The letter and its updating St:atement of Development Policies - 1983 are attached as Annex IV-A. Preliminary discussions on the possible content of the SAL IV package were held wil:h the Government in October 1982, and the proposed loan was appraised in March 1983. Negotiations were held in Washington on May 24, 1983. The Government delegation was headed by Mr. Tunc Bilget, Chief Counselor for Financial and Economic Affairs, Embassy of the Republic of Turkey. 109. The proposed loan of $300.8 milliDn (including the capitalized front-end fee) would finance about 3 percent of Turkey's total merchandise imports and about 9 percent of the gross capital inflows over the disbursement period (mid-1983 to mid-1984). The loan is designed to continue Bank support for the structural adjustment program through 1983 and early 1984, and has been determined partly in light of the overall size of the Bank's lending program for Turkey. 110. The proposed loan would finance cEll goods to be imported into Turkey except for goods financed by other sources and a specific list of excluded items such as military or paramilitary items and luxury goods such as tobacco, precious stones and jewelry, gold, and nuclear reactors and parts. Counterpart funds would be deposited in a special account with the Central Bank; as under previous SALs, the Government would continue to use these to help finance expenditures included in its development programs. While the Bank has not sought to influence the Government in its allocation of funds, the Government has indicated that it would expect to continue to allocate the funds to high priority development projects.  - 44 - Procurement, Disbursement and Administration 111. The satisfactory administrative arrangements made for SALs I-III would be continued, with the Ministry of Finance and the Central Bank bearing the main responsibility for administering the proposed loan. Procurement and disbursement performance under the SALs has been entirely satisfactory. To simplify disbursement, the minimum amounts for invoices and withdrawal applications established under the previous loans, $5,000 and $25,000, respectively, would be retained (Loan Agreement, Schedule 1, para. 1 (e) and Section 2.10 (b)). The loan would be disbursed against only foreign expenditures, with retroactive financing permitted up to $40 million of expenditures made after June 1, 1983 (Loan Agreement, Schedule 1, para. 1 (c)). The retroactive financing is to ensure a smooth flow of commitments and payments during the transition period between the third and fourth loans. Imports would be made directly by actual users, with imports costing $10 million or more procured through international competitive bidding in accordance with the Bank's Guidelines for Procurement. Certain commonly traded commodities may be purchased through price quotations from organized international commodity markets. All contracts of lesser value would be awarded through normal trade channels on the basis of normal procurement procedures of the public and private sector firms concerned. The procurement procedures of public sector firms provide for substantial international bidding or shopping and are satisfactory. Firms in Turkey have adequate choice of international suppliers to ensure reasonable availability and price. Monitoring 112. Monitoring of performance under the SALs involves essentially two complementary and inter-related activities: a more general monitoring of the progress on implementing the program and the monitoring of specific progress as a condition of tranche release. Time and data considerations place limits on the actions that can be meaningfully monitored before tranche release. Proposed conditions for release of the second tranche of $100.8 million include: (a) satisfactory progress in the development of a 1984 annual program (para. 43); (b) satisfactory progress towards rationalizing public investments and concentrating resources on high priority projects (para. 54); (c) satisfactory progress in import liberalization (para. 63); and (d) satisfactory progress towards reduction in the level of the financial transactions tax (para. 80). PART V - BANK GROUP OPERATIONS IN TURKEY 113. Through May 31, 1983 the Bank/IDA have lent $3,939 million to Turkey, through 71 projects. Agriculture accounts for 18 percent of funds lent, industry and DFCs for 34 percent, power for 13 percent, structural  - 45 - adjustment and program loans for 26 percent, and urban development, transportation, education and tourism for the remaining 9 percent. As of March 31, 1983, IFC commitments to Turkey totalled about $236 million, of which about $82 million were still held by IFC. Annex II provides a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1983, with notes on the status of ongoing projects. 114. The execution of Bank-financed projects in the public sector has been slow, due in part to weak management, limited coordination amongst ministries, staffing problems, and the serious external and domestic financial crisis from 1977 to 1979. There has been notable improvement since September 1980. Nevertheless, problems persist in many cases, reflecting difficulties in staffing the public sector at current salaries, over-centralized bureaucratic structures, and continuing constraints on the availability of local funds. The implementation of private sector projects has generally been more satisfactory. Recently, however, the high interest rates for working capital combined with depressed domestic demand and reluctance of investors to take the foreign exchange risk, have led to slow commitments under DFC lending. Disbursements average 53 percent of appraisal estimates (excluding structural adjustment loans) as compared to 55 percent for Tunisia and 45 percent for Morocco. 115. Bank lending is aimed at supporting Turkey's medium-term objectives of redirecting the Turkish economy towards a development path placing more reliance on market forces and adopting a more outward-oriented strategy. These objectives also include increasing donestic savings and reorienting a restrained public investment program to reflect the Government's priorities of completing ongoing projects f'aster and emphasizing quick-yielding new investments with positive balance of paymenl:s impact. The main vehicle for the Bank's operational discussions with the Government has been the structural adjustment lending (SAL) program. Three SALs have so far been approved, and the proposed loan would be the fourth. 116. Agriculture, industry, transportation and energy will continue to be the key sectors for project lending. In agriculture, projects are expected to emphasize irrigation, credit, and reform of the extension and research services. In industry (including DFCs), the emphasis will be on the promotion of exports, employment, and increasing operitional efficiency. Energy projects underway are for power generation '7ased on domestic hydro and lignite resources, as well as enhanced oil recovery and oil and gas exploration. Future projects will emphasize both the oil/gas and coal/lignite sub-sectors. In addition, transportation projects will focus on developing the infrastructure to facilitate exports and improve the efficiency of operations. Projects for industrial training, urban and regional development and public utilities may supplement these efforts. 117. The close macroeconomic and sector dialogue established with the Government in recent years is expected to be pursued. The economic and sector work undertaken recently inc'Ludes studies of the agricultural and financial sectors. Topics likely to be covered in the future include a review of the next five-year development p'Lan, employment, SEEs, transportation and the agro-industrial subsector.  - 46 - 118. This loan and a loan for power transmission are the third and fourth operations of this fiscal year to be presented to the Executive Directors at the same time. A loan for development of the Thrace gas field is also expected to be ready for Board presentation shortly. Other projects being processed include: technical assistance to SEEs, industrial training, agricultural extension, gas utilization and rehabilitation of the paper industry. 119. The Bank Group's share of the estimated total external debt was 9 percent in 1981, and is expected to grow to about 17 percent by 1985; its share of total debt service payments is projected to increase from about 13 percent in 1981 to about 14 percent in 1985. 120. IFC has invested in synthetic yarns, pulp and paper, glass, aluminum, iron and steel products, meat processing, motor bicycle engines, truck manufacture, piston rings and cylinder liners, and tourism. It has also invested in the Industrial Development Bank of Turkey (TSKB). New investment opportunities are being pursued. PART VI - LEGAL INSTRUMENTS AND AUTHORITY 121. 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 to the Executive Directors separately. Features of special interest are described in paras. 43, 54, 63, 80, and 112 and listed in Section III of Annex III of this Report. 122. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 123. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President by Ernest Stern Attachments May 26, 1983 Washington, D. C.  - 47 - ANNEX I Page 1 of 5 TABLE 3A TURKEY - SOCIAL INDICATOR, DATA SHEET TURKEY REFERENCE GROUPS (WEIGHTED AVERAGES AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)-- TOTAL 780.6 MOST RECENT MIDDLE INCOME INDUSTRIALIZED AGRICULTURAL 377.4 1960 /b 1970 /b ESTIMATE /b EUROPE MARKET ECONOMIES GNP PER CAPITA (US$) 320.0 580.0 1470.0 2323.9 10328.2 ENERGY COY'J}'- ION PER CAPITA (KILOGRARSOfr COAL EQUIVALENT) 249.6 488.4 770.9 2107.4 7277.7 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (THOUSANDS) 27509.0 35321.0 44858.0 URBAN POPULATION (PERCENT OF TOTAL) 29.7 38.4 47.4 47.9 78.0 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 67.1 STATIONARY POPULATION (MILLIONS) 108.5 YEAR STATIONARY POPULATION IS REACHED 2075 POPULATION DENSITY PER SQ. KM. 35.2 45.2 56.2 83.3 138.6 PER SQ. KM. AGRICULTURAL LAND 73.9 92.0 116.2 155.4 509.7 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 41.2 41.0 39.0 31.1 22.7 15-64 YRS. 55.2 54.3 56.5 61.2 65.7 65 YRS. AND ABOVE 3.5 4.7 4.5 7.7 11.6 POPULATION GROWTH RATE (PERCENT) TOTAL 2.8 2.5 2.4 1.6 0.8 URBAN 6.1 5.1 4.5 3.5 1.4 CRUDE BIRTH RATE (PER THOUSAND) 42.8 38.3 32.2 23.6 14.5 CRUDE DEATH RATE (PER THOUSAND) 15.6 12.7 9.6 9.2 9.3 GROSS REPRODUCTION RATE 3.1 2.7 2.1 1.6 0.9 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 65.6 66.6/c USERS (PERCENT OF MARRIED WOMEN) 5.3/h 8.2 38.0/e FOOD AND NUTRITION INDEX OF FOOP PRODUCTION PER CAPITA (1969-71-100) 96.0 100.0 110.0 116.0 111.1 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 115.1 110.5 115.8/f 125.1 130.8 PROTEINS (GRAMS PER DAY) 85.1 80.2 82.7/f 92.7 97.1 OF WHICH ANIMAL AND PULSE 25.0 22.9 24.9/f 35.9 61.3 CHILD (AGES 1-4) MORTALITY RATE 50.0 31.2 21.0 9.2 0.5 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 50.5 56.6 61.8 67.6 73.8 INFANT MORTALITY RATE (PER THOUSAND) 189.5 147.5 122.6 65.1 11.3 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 52.0 75 O/g URBAN .. 51.0 70.0/ RURAL .. 53.0 80. Oiff ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. URBAN .. .. 20.0/ RURAL .. .. POPULATION PER PHYSICIAN 2799.6 2227.6 1762.5/f 1105.4 620.7 POPULATION PER NDRSING PERSON 7492.4/d 1883.8 922.6/f 634.4 246.9 POPULATION PER HOSPITAL BED TOTAL 600.5/h 490.3 503.6/f 286.8 122.0 URBAN 34O.8/ih 313.4 311.07 192.0 140.6 RURAL 5098.5/h 5912.2 ADMISSIONS PER HOSPITAL BED .. 20.2 22.3/f 20.0 17.7 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.7/I 5.9 URBAN .. .. RURAL .. .. AVERAGE NUMBER OF PERSONS PER ROOM TOTAL 2.L4Ji 2.2 URBAN 2.0/i 1.9 .. RURAL 2.7/U .. .. ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 29.0 41.1 57.0/j .. URBAN .. 78.2 .. RURAL 2.0 18.0 ..  - 48 - ANNEX I Page 2 of 5 TABLE 3A TURKEY - SOCIAL INDICATORS DATA SHEET TURKEY REFERENCE GROUPS (WEIGHTED AVlAGES - MOST RECENT ESTIMATE)- MOST RECENT MIDDLE INCOME INDUSTRIALIZED 1960 /b 1970 /b ESTIMATE /b EUROPE MARKET ECONOMIES EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 75.0 110.0 105.0 102.4 101.7 MALE 90.0 124.0 115.0 107.1 103.9 FEMALE 58.0 94.0 96.0 99.0 103.6 SECONDARY: TOTAL 14.0 27.0 34.0 60.2 88.4 MALE 20.0 38.0 46.0 66.4 83.4 FEMALE 8.0 15.0 22.0 54.0 84.2 VOCATIONAL ENROL. (% OF SECONDARY) 17.7 13.7 17.5/f 31.6 18.2 PUPIL-TEACHER RATIO PRIMARY 45.8 37.8 29.6/f 25.8 20.3 SECONDARY 19.3 27.6 22.8 22.2 16.1 ADULT LITERACY RATE (PERCENT) 38.0 51.3 60.3/j 75.9 98.9 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 1.7 3.9 11.5/j 51.0 338.4 RADIO RECEIVERS PER THOUSAND POPULATION 49.1 87.7 97.6 157.2 1021.7 TV RECEIVERS PER THOUSAND POPULATION 0.0 1.8 70.7 123.7 403.6 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 51.3 41.0 88.5 112.3 331.2 CINEMA ANNUAL ATTENDANCE PER CAPITA 1.1 6.7 1.9 4.0 3.6 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 13782.1 15828.8 19400.5 FEMALE (PERCENT) 40.2 37.0 36.4 36.6 36.0 AGRICULTURE (PERCENT) 78.5 67.7 53.5 38.7 6.2 INDUSTRY (PERCENT) 11.5 12.1 12.8 25.9 37.8 PARTICIPATION RATE (PERCENT) TOTAL 50.1 44.8 43.2 44.5 45.4 MALE 58.7 55.7 54.3 56.3 58.9 FEMALE 41.2 33.6 31.9 32.8 32.4 ECONOMIC DEPENDENCY RATIO 0.9 1.0 1.0 0.9 0.8 INCOME DISTRIBUTION PERCENT Of PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 33.0/d 32.8/k HIGHEST 20 PERCENT OF HOUSEHOLDS 61.07- 60.67k 56.5/e *- 43.0 LOWEST 20 PERCENT OF HOUSEHOLDS 4.27iy 2.971 3.57T .. 5.5 LOWEST 40 PERCENT OF HOUSEHOLDS 10.67- 9.47E 11.57h .. 16.5 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 342.0 RURAL .. .. 270.0 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. RURAL .. .. 220.0 406.6 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. RURAL .. .. Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1978 and 1980. /c 1974; /d 1963; /e 1973; /f 1977; /. 1976; /h 1962; /i 1965; 1 1975; k 1968. May, 1982  -49 -.ANNEXJT Page 3 of 5 Rein: Although the dat.aron drov fromsure generally judged the meet arthritat ie rodreib, it shold nor ho outd that cho may no he inter- ealgoomily comrable hbcarr of the look of stoodedi.od definitio and concepts axed by differet cet ies incol tiecig the data. The dolte, rout theLem. raufa to doacribe odres of agnitude. luicate t-dt, and thra_et I certain major difference. betwenconris The reference gopn are (1) the sou country group of the subject cruotry and (2) a coutry gr-p vith nemeshas higher ovrage Ino- that the coontty grout of the sobjoctloootry (except f or "High Incom 0oil fporer` getup where "laddie scou North Africa sod fliddlr font"-i Inh.... bh.o.o.n of tcrongec ac-otroaffinitIes). Io the reference group data the uvorges ace ppoltuion erighted arithetic mon fer reth indicator and shou coly whec majority ef the c-oteles lx a group has dose for that Indientoc. Sinc the necg of -oncrtee aci the nictr depteds x the avoilbillty of duta .ed is nort onifere. cootire et be roeroined in rloejtig orrgeof one indicuter to anoher. The. -evtg.o art only ssofol in comparing the rotc of one indicocer at a time reon the coatlep o.d refeeoct grnnpu. AREA (thousad sqim.) -nsnlspr ifo-ita1 Od -. coral, orhn, and .rura - Populatiun (local. Total - Tota aurfoce area .. pwioSg land aeo rod inland watero; 1979 doss. urban, ad Icarol) divided by their ropodive nouher of hospital bode AgrfcaItcnc1 - Etu-tlui of -rclurlae nued rempocerily ec perensotly ovilahJe to public red privete genera andsoiled hospital asd r- or, crop. psftares. mactt rod kitche gordon oc so tIe follow; 1979 dana. hbil tariat cener. EroPitals ate establiobmots petnaxetly tlaf.fd by at lean t one physician. fEtoblihments providieg prinolpolly conic.- GNP PiEA CAPITA (US$) - SNP p-r capita entct..enx curet acArkt prices * cl1- dia1 ar are. nct iclodod. total heapitals. howeve., iolude health culated by som conerion method an World Dank Alla (1978-00 hosts); 1960. ned -rdic1 centers out permanetly -rf fed by a phyniclat (bat bya 1970. and 1900 dots. mdi.nl monisstc, ur, midoife, to.) shioh offee it-patient - f- dti-, and pre-ide a limited rouge of medical facilities. Foe acerb- tNERf CONStMPTISON PEt CAPITA - A-osl -osoptios of .acnin1 mergy co tical paps obso heepitale include WHO. prinoipat/genral h.spitols. asd lignite petrolea. soloe1 gas and hydre-. on ared geotherma nb-od r',ca1 henpitalo. burl1 or total hoopittal sod medical end maternity tetchiy) is kilogrom of cool equivalent pet capit.; 1960. 1970. end 1979 centre Sp-illi.od hospitnln ore isldod only ondor torl.l dota. Adeinni'- per Iospita1 Bd - Toral enter of odeinoion so or diachorges from -nptcaln dirided by the cosh-r of b.do. POPULATION AND VITAL STATISTICS Totel1 Pe..olatie.. Mid-Tear (thounade) - Ar of Joly 1; 1960. 1970. sod 1980 0001500G 0 dora~~~~". Avern Sine of -eoonhld leprsecs per -eorbod) - oral, urb.s. and cora- irhas .peplosion (percent of tdol) - folio of orbs. to cotal popalotien; A hostheld conooo gopo riridun who share living qIte_ dif ferot dinitlto- of cAne. ocr map ffiet ... praility of deco td corirb mat, main. A boarder or lodger aty re- moptx he -locldod lo see. currig ;1960, t970, aed 1980 data. the housoold fee stintiapoon. Ppltion Projection.ve.entro eraoos err room-lca, urban, and tuto1 - overgeon Poltins So rest 2100 - CiO.tt. population projeocios are ba..rd enton he9br c 7 preur per rate to all urbae, an roeal occpied convetional local popolotion by ago and nec and thele nartlity and fertIlity rotes. dweIllgs, respectively. D.elliogsnncldadtorn. p-ptctsro e ond Projection parmterst for aortnlity rtote -oprlat of three level ansm-atccpied poet.. s150 lft enpectaooy at bicth icroeostg girl c-try'u per -apiraint Access toElecrt, ic iy (Percet of detlinge) - total. urhuc, nod ...ol - lee, ad fom1l lift enpoccaso utbilislog at 77.5 yearn. The paco- Corveorlorl duetig l enttotlctry in liviog quarteso sterer f- fertil ity rare aloe have three Scoots -soini decline ie of totat. urban, ard ror1 dwellleg. renp-tively. friiyacrding ce Incom level and past f sll pluening profornc.. foh oatr i l o asgned one of these. oio -btioutionn ef meetsliry EDUCATION andbforctiti-ty t,reode for:projection porpours. Adjustd forollment folios Stoclo..ory pep.latieu-lIt..o.taio...ty pnpul.tioe there in -c grwh st.c. Primary nohbel - tetl, male and foml-loo-no.. local, molt nd femal the birth race is eqo1 to the dratb rote, and also rho go structure re- -e-oleet of all agen at cho prisoty leve as percectogen of rselv mien cotc.This i. achieved only sfrrr fetilicy .rare dottier to pelmay school-age population.; norea11y includen children oged b-1l she replatemet level of -nit cet repr.odation role, who .:oah gentratiu yer.t hat adjusted fnr diffelrot 1ecgths of primary ed.actle; for of -ntoreplaces itself --atly. The tloimsor population siteea caIciestrh ctoersaI education enrollate may roced 100 percent estiansed eo. thost o.i f rhe pro,jttd Cheatterincice of rho .popatiec airo.-crn popils arc beto or shove the offloi1 school age. in rho pear 2000, and the rate of deohineef fertility rate tc replace- Incerdo,y schooli- cocI, mal and f emote - Co-yacod an abov; secon.dary mint level. ed, cotiocrrqoresn last. f oa year of atpproved poimory ilootracIe; Tear stationary populatinu in reached - The yeor when sutonti y population prov~ides frontl, vocationaL, or teether cruiing lescrootton f or pupil. stt will be renhbd. -s"a1y of 12 to 17 pears of age; -cornponderce coorses ore geerrly ,Perlatin gently eo:lo,ded. Per us. to. -Mid-year poya1atiso per sqoere kIloeter (SOS hectocen) of Ouc-ei,,al enolrt(percent of secndry. -Vocational ientitati..c rotala; 19600 1970 and 1979 data. inclu;dreronhica,1 indancio, r chr.pcoco which operate idpeed- Per no h. aaic nrl ed - Computed on above for arialorl ad eetI .r rdepo .rcmn of neodory ins titution.. onPly;.1900. 1970 te 1979 data. P.,il-:enche ratio - primary, aed s_conday - Total stu edo -rro1d in Pe tlnin Ant Strottuer (percent - ihilde_ (S-li yearn),ong-e (15- Priesry and secondarly Inset divided by ...nbes of te..chets in the 64 years), end ctaied (61 years and tot) ra per.etcgfsof mid-year potp- 1-eep ic eol.. lotion; 1960, 1970.'and 1Sf80 doto. Adnlc LIt-reay race (pra -trt - Litrerte ado1re (ale so trod sod -ite) copulationl Grnush Rat. ( peret) - total -A-asol grewh lrare of ctotl mid-enporcentage of total edolt population ogd 15 yours and over. perpplaisfr 194)0-0 1960-70. and 1970-80. PPeplatino breeh fRe, (pecoet) - rban - A--Is genath r.t.. of arho popo- CONSUNPT ON Salle.... fI 191g-60. 1960-70. and 19 70-00. Pesnureer Cart~ (ret theaoo puplotiuc) - Pon..... cars com .prine soreor trad Dirtch R-te (par thon..nd) - A--ua live births per Ithasend of lad-yea-cr sati ls to tigh't par....s; cc- lden- blaos heose and pepuocin; 900.197. ad 1900 data, mi lay vehicle. trade Seat.ih Iota6(re chuassnd) - A-..ol deotho per thousan.d of mid-year Radi tet-l-rn (pet thoos..od cpnpiation) - All types of courivec for radio rpoplot=so 1960. 1970. ad 1900 data, br-oadcats to geoural public per thounnc.d of porolatioc; oclndon t-- Cross P Dardoctin EIe - Au orage enter of doughtern a we sf1 hoar in Iicenee denceiver is -nris- rod isyenrn when ceitai of cadin he ora I treocive portd if ahe repele.c.. persons age-sP p flft fer- seer: woni toffect; data feerecn yearn moy not brcos.pneoh1e sice tiliryoe;nely fie-ee,aerge eding i. 1960. 197g. ard 19800.es etrn blse licening. fatly Plon_isnAceoo esa c sns A- An 1a sobor Pattet TO seiver (prtose alatio)- TV roorver fmr bracs to nf herk-oercl dnorsonde nupice, of -atlotftyplsigpoga. gnrl public per thonord pepulotion; enloenonieon TV eerr Pail0 laning- lane (pecot of married wmn P'rcncoge of moried in ensosrino and in year when regiecrcior of TV elswo leffect. vmnof obild-b-niog so (15-4 peac)whon birth-centrol devises to Ne-puper-Circultion(-er thosndppuaio) -Son tho averge tic- all macied woe On ar age groop. culuetone daily geea is teret nwpo1pet"`. define d apori=dicl publ tisal devted primerily tx cecordtng gnco our. Sc is csidoced FOOD AND NUTRITION toi .daily' if it opp-rr or leant feor hat a wek. loden ef Pond Production per Capita (1969-71-100) - Idet o:f per copit e-s-I Cism.- Anunel Attendance per Coeita re Year - Erre d on the sortr o peedection of all fond eu-dities. Preductien encloden sed sod f-md and ticess sold doting the year, including odoinni- to dciv--in cicen- ia xx s yndc oo basis. Ga-dileterer- primary goodfs (s.g. sugarc.t and mobile uric.. intend of "a) which are edible sod contain uret (e.g. coffee and tteaiore icluded). A99ggrgte production of ouch oun.try in hone.d on 0.ABOR PFORCE sorioul verae prduce pIIc eightt; 1961-65. 1970. and 1000 data. Total Labor Porte1thousands - csntlyati-c peoso, including Per onpico soely fctre proto curmns aptd0r oornud acres nd oneplopd bus eacoding hoaolv-i tuet,-t. eeog qaivalot of see f-d oupplieneailoblo in. co-try per capits cv ring papalotion ef all ages. efisitio.. is -orJ.o. tourtriesa are per day.Available supplien cnmpriae domestic prodoctio.. imports lose ve o.watehle; 1960. 1970 ae 1900 data. exports, and changes ic scot. Net oupplies .inclde anima fond,zends. remad (percent) - Peml labor focce no per-ecat of total labor force q_niti-n need i. fond proteuslog,. ad I..... is dintribotlec. Dquira- Agr.co.ltore (percet) - Lab- force lx co-aig, oety otio urd mon ee tsiustd by PAO bone.d on phynilogitel sends for sormo anti- feb.ing as par-ensng oef total labor f--c; 196,0, 197,0 and 1900 data. vity endhalrh Ionaidelgeoomoa teprtuebodp nights, age loduntry (preccts - Lahoc forcSo. siiogt coccios. -srfatttieg ad sadicthrib n f pplcc,nd ol11nlg 10 percent for ounce or -d electricity, -tote and gas as parceocage of local lohor forve; house.hold lvl 916.17 n 19771 data. ,g 90ad10 aa Pe ait -ael7 feoci grm e I=op) - Prlotlo oestof per capIta.et'laluRt (pecceot.) - total. atle, cod fonle- Pricptln ne nupplp of fend per day. Se opl ol food la defined as above. Er- actlvityprsto r ccmpoted an total, mole, acd femalr labor forea quireaanlt for all coatteis catahlihd by USDA provide for moniro- percetaes of total, maol asd female popolatine of alo apciey allonoon of 60 iRon of total proseis per day and 2g geom of "anal urd 1967, 1970, aud 1900 dtca. Ther -c honed on110' . paric patontroses polar protei.1. of which 10 groen hbold ha animal proceic. These stad- ofletting age-se- tutr of thu pepoloctun. and locg time en..d. A ards ore lon thanthese of 75 gram of totol protein nod 23 Stem of furocie are fea tinasona . norcen. anima_ roen to aora- efo the wrld, proposed by PAO L. tho Third Efooncti Dop-nd-c forte - Rtoe of .popooio order 13 and 65 and over World Pond S-rvy; 1961465, 1970 and 197 7 data. tr the 101a1 labor ferc. Po coIcaproti oeyfe sisl rod palse -P Prteic epply of food de- rived froe animals od pubes.i green per day; 19614) 1970 end 1977 data. INCOME DISTRIBUTION Childtue 1-4) DSend Rote (pretcooad - ouldn per Iboonuod inpretn fPioeIcm blbh in abe bhi:od) - RErceivedbyr1Yishentt age grat1- .yar. to hitldrns is this ago group, fur mane dvlopiog ceo.- 5groes. richest 20prcent, prest 20 eco.ed percen 40 percen tries dotc derived fre life tables; 1960. 1970 and 1900 data, of ho...ehnlds. HEAL.TH POvUVI TARGET GOUOPS LI n fortlnyat0th (yeas - Averge outer of years of life remining The lnlig teinaten are very appto.eie at re of povrtylvot at! b!irth;-196. '19'70turd 1900 data. sf eheldghe i-trprctrd wish couriderobla aci Infant Yloenelity Rote(roe thousand) - A-nur deaths of infants urder en pea fEti.tatd Ahblt eeryIcm lvl(7$per to pibta1). -ab,,and rural- ofaeprthousad live births ; 1900 197 and 190 dts. A ite poet incmelevl in rht bemlee blw hc a inimal AWeuc Sf 0cr(ecs of ...ace) otl .ohs,ad cral1 - Ne- saritiosally edeqate diet plosssalalso-food reqoi=omist is not bnr of pople (total, nobs e na) with reasohi bl es te safe off rdoblo. utter spply (includes tnted nufane meters at t-tratd hoc eetcoinoted Rfotisaled RaLatiwe Poety Inoe ee (US$ Per .nPir.) - ra od ero -. utte sath so that frau protencd hoblsh , springs, ref icar wells) as ERol relative poerY incme level in one-third of uvrage pr cpita p-rtencse of their respective popunties. Is an rbun sin public per-esal loom of the cesocry.U Ob. leve is derived free the' carol f.ourtim er ata-dpoat Ixc..tad set mer than 00 meters fro a hoae may he leve wish adjotmt for raigher cent of living in echo. scn. considered se ekg within renasoble aceno of that bean. In corel art.. Eotirted Pnps1ation Selo Absolute Poverty Incom Leve (o tent -nbs. reaneble ston woul imply that the housewife or Sees of tbs he-m-sheld and enrol P-Pecet af popolatins (chan nod rural) wha e nnlt d ear hare to spud a dinpreprti-ste pant of the day in fething rho fomly's nice nsds..,' Acmsto hereto Dlimeel ireet eS onsltiso) -btarsi. larh, sad enrl p-.tesrgeso thoie -sp-tlve P" pe sIn.- ce-rots disposol uy inelad the sol=la -eA dipsel. ibh or vinhwrt t-smt,t of b.ao memesn sad st.wter bp ester-horn system er tbs use of pit peeime sod sit- I.r iestaltRies Peenletios ec Physiclan - PIPa"atUs dieidsd by sinbst xl pentisig phyni- R-esomis nd Scisi Irate Diviioas tIme qaMslf tedfro a mdie1 school as mivreity inert. f-esoia Anlysis and Prjentias Depor .tmn Porraltias ee saiePea oplte divIded by neshar of prestiefg Hey 190) WessAfmi Eaot os asserers pematinl stum end mersImemtiiri  -50- ANNEX I Page 4 of 5 TURKEY - COUNTRY DATA Population: 45.5 million (1981) GNP Per Capita: US$1540 (1981) Amount Average Annual Increase (%) Share of GDP at Market Prices (%) (million US$ (at constant 1980 prices) (at zurrent prices) Indicator at current prices) 1981 1965-70 1970-75 1975-80 1965 1970 1975 1980 NATIONAL ACCOUNTS Gross domestic product /a 57,655 6.6 7.5 2.8 100.0 100.0 100.0 100.0 Agriculture 11,903 3.1 4.4 2.7 30.7 26.4 26.2 21.4 Industry /b 14,218 9.5 9.5 2.8 16.6 17.2 18.0 28.6 Services 28,130 8.2 8.0 3.7 42.9 46.5 46.0 44.3 Consumption 46,717 5.8 7.0 2.7 84.6 82.8 85.2 81.8 Gross investment 14,392 11.7 12.9 0.6 16.7 20.1 23.3 26.4 Exports of goods and NFS 6,372 7.9 7.3 4.4 6.1 5.8 6.1 7.1 Imports of goods and NFS 9,826 11.2 13.8 -3.1 7.4 8.7 14.5 15.2 Gross national savings 12,317 11.6 11.9 2.4 15.8 18.8 18.1 18.3 Average Annual Increase (%) Composition of Merchandise Trade (%) (at constant 1980 prices) (at current prices) 1972-75 1975-80 1972 1975 1980 MERCHANDISE TRADE /c Merchandise exports 4,703 -6.1 2.8 100.0 100.0 100.0 Primary 2,413 -6.3 4.0 72.6 64.1 64.0 Industrial products 2,290 -5.8 0.9 27.4 35.9 36.0 Merchandise imports 8,933 11.2 1.2 100.0 100.0 100.0 Agriculture and livestock 125 27.9 -23.8 2.2 4.3 0.7 Mining and quarrying 221 17.4 6.8 1.2 1.6 1.8 Petroleum 3,878 5.4 11.0 9.9 17.1 48.8 Machinery and equipment 1,996 14.0 -12.1 45.0 35.6 18.2 Other industrial products 2,713 9.9 4.5 41.7 41.4 30.5 1977 1978 1979 1980 1981 PRICES AND TERMS OF TRADE GDP deflator (1980 = 100) 20.2 29.0 49.4 100.0 141.9 Exchange rate 18.0 24.3 31.1 76.0 111.2 Export price index 63.8 63.0 78.2 100.0 99.3 Import price index 61.2 61.2 71.9 100.0 109.3 Terms of trade index 104.3 102.9 108.8 100.0 90.6 As Z of GDP (at current prices) 1965 1970 1975 1980 PUBLIC FINANCE Current revenue 15.0 22.6 22.0 19.8 Current expenditure 10.0 11.8 12.6 11.5 Surplus (+) or deficit (-) -2.0 -2.3 -0.4 -4.8 Investment expenditure 4.7 5.7 4.2 3.9 Transfers 5.0 7.5 5.5 9.2 Foreign financing 1.8 1.6 0.3 0.2 1965-70 1970-75 1975-80 OTHER INDICATORS GNP growth rate (M) 6.8 7.7 2.6 GNP per capita growth rate (%) 4.1 5.0 0.3 ICOR 2.9 2.9 5.7 Marginal savings rate (%) 28.2 19.5 30.8 Import elasticity 1.7 1.8 -1.3 /a At market prices; components are expressed at factor cost and will not add due to exclusion of net indirect taxes and subsidies. 7W Includes mining and quarrying, manufacturing, and electricity, gas, and water. /c In accordance with Turkish Government's specifications, which are not compatible with SITC's.  ANNEX I - 51 - Page 5 of 5 TURKYY - BALANCE OF PAYMENTS, EXTERNAL CApITAL AND DEBT /a .oillion US$ at current es Population: 45.5 million (1981) GNP Per Capita: USgl540 (1981) Actual Estimate Projecced 1970 19t7 1978 1979 1980 1981 1982 1983 1984 1985 1986 BALANCE OF PAYMENTS Net exports of goods & NFS 342 3880 1984 2442 4658 3476 -2021 -1960 -1788 -1771 -1956 Exports of goods 6 NFS 754 2556 3075 3247 4102 6416 7620 8894 10613 12523 14545 Imports of goods & NFS 1096 6436 5059 5689 8760 9892 9641 10853 12402 14293 16501 Workers' remittances 273 982 983 1694 2071 2490 2187 2350 2450 2622 2779 Net transfers 91 12 - - - - - - - - - Current account balance -58 -3572 -1741 -1771 -3207 -2089 -1035 -870 -693 -485 -602 Direct private investment 92 169 147 200 148 129 125 127 131 144 158 Public M6LT (gross) /b 271 997 1017 4321 2354 2188 2076 1690 1593 1487 1671 Amortization on MELT/6b -146 -234 -336 -414 -434 -545 -1230 -1105 -1258 -1783 -2040 Public M&LT (net) /b 125 763 681 3907 1920 1643 846 585 335 -296 -369 Other capital /c 27 2074 1061 -2410 1642 983 264 130 29 924 1151 Change in reserves (- increase) -186 566 -148 74 -503 -667 -200 28 199 -288 -339 International reserves 612 726 874 800 1303 1970 2076 2049 1850 2138 2477 Reserve as months of imports 7 1 2 2 2 2 2 2 2 2 2 Actual 1972 1977 1978 1979 1980 1981 GROSS DISBURSEMENTS Gross disbursements of M6LT loans 372 759 857 4198 Id 2279 2116 Official grants - _ - - - - 300 Concessional 261 193 228 588 812 522 Bilateral 139 100 129 406 749 499 IDA 4 19 8 3 - - Other multilateral 118 74 91 179 63 23 Non-conce. sional 111 566 629 3610 /d 1466 1294 Official export credits 1 47 133 250 288 355 IBRD 25 146 165 277 313 454 Other moltilateral 27 5 35 15 150 162 Provate /d 58 368 296 3068 /d 715 323 EXTERNAL DEBT Debt outstanding and disbursed 2450 4293 6322 10942 13415 13804 Official 2273 36.57 5489 7i89 8281 8906 IBRD 92 512 648 890 1158 1546 IDA 99 181 188 190 189 188 Other 2082 2964 4653 6109 6934 7172 Private 177 636 833 3753 /e 5134 4898 Debt outstanding including undisbursed 3560 7128 9879 14620 16807 17093 )EST SERVICE rotal debt service /e 224 363 428 627 1001 1168 Payments 161 196 264 403 405 510 Interest 63 167 164 224 596 658 Total debt service as % eaports of goods + NFS : workers resitta-ces 11.8 10.3 10.6 12.7 16.2 13.1 Total debt service as % GNP 1.3 0.8 0.9 0.9 1.7 2,0 Average interest rate on new loans (%) 4.4 7.7 6.9 11.3 6.5 7.9 Official 4.5 7.7 5.6 3.5 5.5 5.3 Private 6.8 7.8 8.2 13.6 10.6 15.4 Average maturity of new loans (years) 22.1 11.6 13.3 11.1 17.4 15.0 Official 26.0 12.7 15.2 25.1 16.6 16.3 Private 11.0 9.2 7.6 7.1 6.4 4.5 BANK GROUP EXPOSURE (%) IBRD DOD/total DOD 3.7 11.9 10.2 8.1 8.6 11.2 IBRD disbursements/total gross disbursements 6.7 19.1 18.4 6.5 13.7 25.0 0IBRD debt service/total debt service /e 5.1 17.2 19.2 16.8 13.3 14.0 IDA DOD/total DOD 3.9 4.2 3.0 1.7 1.4 1.4 IDA disbursements/total gross disbursements 1.1 2.5 0.9 0.1 - - IDA debt service/total debt service /e 0.4 0.6 0.5 0.4 0.3 0.2 Ae % of Debt Outstanding at End of Most Recent Year (1981) TERMS STRUCTURE Macurity structure of debt outstanding (%) Maturities due within 5 years 37.4 Maturities due within 10 years 76.4 Interest structure of debt outstanding (%) Interest due within first year 6.5 /a All entries on external debt are defined as in the Bank's Debtor Reporting Systen (only public and private guaranteed debt). /b Includes private guaranteed and non-guaranteed debt, debt relief, and grants. /c Onclodes errors and emissions, and for projected years it includes net tMF, short-term, and unidentified capital inflows. 7T Includes j2,638 million of consolidated short-teem debt. /e Takes account of debt relief due to debt rescheduling, and excludes interest on short-teem debt and private non-guaranteed.  - 52 - ANNEX II Page 1 of 9 STATUS OF BANK GROUP OPERATIONS IN TURKEY STATEMENT OF BANK LOANS AND IDA CREDITS (As of March 31, 1983) Loan Amount ($ millions) Number Year Borrower Purpose Bank IDA Undisbursed Thirty-three loans and fourteen credits fully disbursed 1493.0 177.4 883-TU 1973 Republic of Turkey Ceyhan Aslantas 44.0 8.5 1023-TU 1974 TEK/TKI Elbistan Power 148.0 6.8 1130-TU 1975 Republic of Turkey Rural Development 75.0 18.7 1248-TU 1976 Agriculture Bank of Turkey (TCZB) Agriculture Credit 54.3 26.8 1258-TU 1976 State Pulp and Paper Industry (SEKA) Newsprint 70.0 1.6 1265-TU 1976 Republic of Turkey Livestock III 21.5 6.1 1310-TU 1976 Republic of Turkey Tourism 26.0 15.1 1379-TU 1977 DYB Industry 70.0 7.0 1585-TU 1978 Republic of Turkey Northern Forestry 86.0 50.8 1586-TU 1978 Republic of Turkey Livestock IV 24.0 18.2 1606-TU 1978 Republic of Turkey Erdemir Steel Stage II 95.0 34.2 1741-TU 1979 Republic of Turkey Ports Rehabilitation 75.0 37.0 1742-TU 1979 Republic of Turkey Grain Storage 85.0 81.5 1748-TU 1979 TSKB Industry 60.0 16.6 1754-TU 1979 TSKB Private Sector Textiles 65.0 39.5 1755-TU 1979 SYKB Private Sector Textiles 15.0 10.8 S-15-TU 1979 Republic of Turkey Ankara Air Pollution Control 6.0 5.1 1844-TU 1980 Republic of Turkey Karakaya Hydropower 120.0 95.7 1847-TU 1980 Republic of Turkey Sumerbank Cotton Textiles 83.0 75.2 1862-TU 1980 Republic of Turkey Livestock V 51.0 47.2 1916-TU 1980 Republic of Turkey Petroleum Exploration 25.0 23.0 1917-TU 1980 Republic of Turkey Oil Recovery 62.0 47.1 1952-TU 1981 Republic of Turkey Labor Intensive Industry 40.0 36.2 1967-TU 1981 Republic of Turkey Second Fruit and Vegetables 40.0 39.5 1985-TU 1981 Republic of Turkey Fertilizer Industry Rehabilitation 110.0 100.3 1998-TU 1981 Republic of Turkey State Industrial Enterprise Finance 70.0 65.2 2093-TU 1982 TSKB Export-Oriented Industries 100.0 99.8 2094-TU 1982 Republic of Turkey Erzurum Rural Development 40.0 38.2 2131-TU 1982 Republic of Turkey Second Fertilizer Rehabilitation 44.1 44.1 2137-TU 1982 Republic of Turkey Highway 71.1 69.8 2158-TU 1982 Republic of Turkey Third Structural Adjustment 304.5 104.5 2159-TU 1982 TSKI Istanbul Sewerage 88.1 86.4 Total 3761.6 177.4 1356.5 of which has been repaid 386.2 8.1 Total now outstanding 3375.4 169.3 Amount sold 3.6 of which has been repaid 3.6 - 0 - - 0 - Total now held by Bank and IDA /a 3375.4 169.3 Total undisbursed 1356.5 - 0 - 1356.5 la Prior to exchange adjustments.  ANNEX II -53 - Page 2 of 9 STATUS OF BANK GROUP OPERATIONS IN TURKEY STATEMENT OF IFC INVESTMENTS (As of March 31, 1983) Fiscal Amount ($ Millions) Year Obligor Type of Business Loan Equity Total 1964 TSKB DFC - 0.92 0.92 1966 SIFAS I Nylon Yarn 0.90 0.47 1.37 1967 TSKB II DFC - 0.34 0.34 1969 TSKB III DFC - 0.41 0.41 1969 SIFAS II Nylon Yarn 1.50 0.43 1.93 1970 Viking I Pulp and Paper 2.50 0.67 3.17 1970 ACS Glass 10.00 1.58 11.58 1971 NASAS Aluminum 7.00 1.37 8.37 1971 SIFAS III Nylon Yarn 0.75 - 0.75 1971 Viking II Pulp and Paper - 0.12 0.12 1972 SIFAS IV Nylon Yarn - 0.52 0.52 1972 TSKB IV DFC - 0.43 0.43 1973 TSKB V DFC 10.00 - 10.00 1973 Akdeniz Tourism 0.33 0.27 0.60 1974 Borusan Steel Pipes 3.60 0.43 4.03 1974 AKSA Textiles 10.00 - 10.00 1975 Kartaltepe Textiles 1.30 - 1.30 1975 Sasa Nylon Yarn 15.00 - 15.00 1975 Aslan Cement 10.60 - 10.60 1975 DOKTAS Steel 7.50 1.37 8.87 1975 TSKB DFC 25.00 1.23 26.23 1976 NASAS Aluminum 1.58 - 1.58 1976 TSKB DFC 25.00 - 25.00 1976 Asil Celik Steel 12.00 2.20 14.20 1977 Borusan Steel Pipes - 0.06 0.06 1978 DOKTAS Steel - 0.09 0.09 1979 Ege Mosan Engines for Mopeds 2.15 - 2.15 1979 ISAS Motor Vehicles & AccessDries 8.85 0.45 9.30 1979 Asil Celik Steel - 1.80 1.80 1979 Trakya Cam Glass 33.15 2.84 35.99 1980 TSKB DFC - 1.09 1.09 1980/82 ISAS Motor Vehicles & Accessories - 1.20 1.20 1980 MENSA Textiles and Fibers 4.0 4.0 1981 Kirklareli Cam Sanayii A.S. Glass Tableware 13.09 - 13.09 1982 M.A.N. Motors Motor Vehicles & Accessorries 9.07 - 9.07 1982 TSKB DFC - 0.35 0.35 Total Gross Commitmerits 214.87 20.64 235.51 Less Cancellations, Terminations, Exchange Adjustments, Repayments and Sales 144.80 8.30 153.10 Total Commitments now held by IFC 70.07 12.34 82.41 Total Undisbursed 10.41 0.07 10.48  - 54 - ANNEX II Page 3 of 9 C. STATUS OF PROJECTS IN EXECUTION AS OF MARCH 31, 1983 1/ Ln. and Cr. Nos. 883/360 - Ceyhan Aslantas Multipu;rpose Projet: US$44 million loan and US$30 million credit of March 22, 1973. Effective Date: March 20, 1974. Closing Date: December 31,1983. The project is expected to be substantially completed by the current Closing Date of December 31, 1983. As of March 31, 19839 about $35.5 million has been disbursed of this $44 million loan. Ln. No. 1023 - Elbistan Lignite Mine and Power ProjectO US$148 million loan of June 28, 1974. Effective Date: June 1, 1976. Closing Date: June 30, 1983. Progress has been made on the power component in line with the measures recommended in February 1982. The civil works contracts have been renegotiated and additional contractors brought in. TEK has delegated site management to STEAG, a German project management firm. The main contractor, Foster Wheeler (FW), has revised the work plan taking into account the use of erection personnel being made available by the main equipment suppliers. The revised work plan concentrates maximum effort in completing Unit No. 1 by end 1984. Units No. 2, No.3 and No. 4 would follow at one year intervals. With the arrangements made through the US EXIM Bank, and the proposed reallocation of an additional US$6.8 million from the IBRD loan, financing for the FW contract through end 1983 is assured. Social infrastructure and salary problems persist. The contract for operation and training for the mining component expires in July 1983. Decision on renewal has not been taken. The contract for mine consulting is continuing. TKI has not negotiated frame contracts for mine equipment maintenance. Maintenance of mine equipment is inadequate. TKI's ability to mine lignite in sufficient quantities to adequately supply the power station (17.6 million tons per year) will be assessed in connection with the appraisal of a supplemental loan tentatively scheduled for September 1983. Ln. No. 1130 - Corum-Cankiri Rural Development: US$75 million loan of June 23, 1975. Effective Date: January 22, 1976. Closing Date: June 30, 1984. Satisfactory progress is being maintained except for delayed payment to contractors by DSI. The Bank has agreed to the Government's request for reallocation of proceeds so as to provide additional funds for short-term credit, which is expected to be sufficient to cover needs until a proposed second agricultural credit project, now scheduled for Board consideration in June 1983, becomes effective. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  - 55 - ANNEX II Page 4 of 9 Ln. No. 1248 - Agricultural Credit and Agro-Lndustries: US$54.3 million loan of May 5, 1976. Effective Date: May 11, 1977. Closing Date. June 30, 1984. The supervised credit and ferryship components are fully disbursed and the stu-i_ of TCZB organization and operations has been completed. Due to reluctance of sub-borrowers to assume foreign exchange risk and availability of other sources of credit without this risk, only 11 percent of the agro-industries component has been disbursed. The Government is considering proposals for dealing with this issue. Ln. No. 1258 - Balikesir Newsprint: US$70 million loan of May 21, 1976. Effective Date: October 15, L976. Closing Date: December 31, 1982. Although the Closing Date has not been extended, accounts are being kept open pending settlement of final payments. As of March 31, 1983, $68.4 million, or 98 percent of the total loan amount, has been disbursed. A project completion report is under preparation. Ln. No. 1265 - Livestock III: USt21.5 million loan of May 26, 1976. Effective Date: February 25, 1977. Closing Date: March 31, 1984. The Closing Date has been extended to March 31, 1984 to allow for utilization of the remaining $6.8 million of undisbursed loan funds. Project implementation has been satisfactory. However, the increased availability of locally bred offspring of imported cattle at considerably cheaper prices than for comparable directly imported cattle, has caused a serious reduction in the demand for sub-loans. The Bank is currently considering a request from the Government for restructuring all three ongoing livestock projects to include financing for the foreign exchange component: of loans for sheep and beef fattening in addition to dairying; locally bred improved cattle and sheep, as well as imported ones; and farm machinery and equipment, livestock housing, pasture and forage production, feeds and other inputs in addition to livestock. Ln. No. 1310 - South Antalya Tourism Infrast:ructure: US$26 million loan of July 9, 1976. Effective Date: March 1, 1978. Closing Date; December 31, 1983. Project implementation is about two years behind schedule due to initial difficulties relating to land acquisition and project organization. At present most project works are either completed or under advanced implementation. The Closing Date has been *extended for the first time by one year to December 31, 1983. As of March 31, 1983, $10.8 million, or 42 percent of the total loan amount, has been disbursed. Ln. No. 1379 - DYB (State Investment Bank of Turkey): US$70 million loan of March 23, 1977. Effective Date: July 21, 1977. Closing Date: December, 31, 1982. The Closing Date for this loan has not been extended, but the accounts are being kept open for settlement of final payments. As of March 31, 1983, the undisbursed balance of this loan is $7.0 million.  - 56 - ANNEX II Page 5 of 9 Ln. No, 1585 - Northern Forestry: US$86.0 million loan of June 5, 1978. Effective Date: October 30, 1978. Closing Date: March 31, 1986. Overall physical achievements are about 60 percent of targets. Local funding, which is almost totally dependent on timber sales, has been inadequate due to a depression in the construction industry. Although equipment procurement is still behind schedule, proposals for foreign equipme