Turkey - Fifth Structural Adjustment Loan Project

Document of The World Bank FOR OFFIC][AL USE ONLY Report No. P-3783-TU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A FIFTH STRUCTURAL ADJUSTMENT LOAN IN AN AMOUNT EQUIVALENT TO US$376 MILLION TO THE REPUBLIC OF TURKEY May 24, 1984 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TURKEY CURRENCY EQUIVALENTS Value of US$ 1959 a/ 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 January TL 70.00 1981 January TL 91.00 1982 January TL 139.60 1983 January TL 191.15 1984 January TL 309.20 a/ Annual averages through 1979. 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 DYB State Investment Bank EEC European Economic Community 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 TL Turkish Lira  FOR OFFICIAL USE ONLY TURKEY FIFTH STRUCTURAL ADJUSTMENT LOAN TABLE OF CONTENTS Page No. PART I - THE ECONOMY 1 PART II - THE STRUCTURAL ADJUSTMENT PROCESS: 1980-83 2 Balance of Payments 5 Public Finances 7 SEE Accounts 8 Public Investment 8 Assessment 9 PART III - THE MEDIUM-TERM FRAMEWORK AND SAL V PROGRAM 10 The Medium-Term Framework 10 - The Basic Strategy 10 - Key Targets of the Plan 11 - The Bank's Medium-Term Projections 12 - The Revised 1984 Program 16 Policy Actions at the Macroeconomic Level 18 - Public Investment 18 - Reform of State Economic Enterprises 23 - Import Liberalization 25 - Export Incentives 27 - External Debt 29 Policy Actions at the Sectoral Level 30 - Financial Sector 30 - Agriculture 33 - Energy 34 PART IV - OVERVIEW, PROSPECTS AND ISSUES 35 Overview 35 - Evaluation of the Structural Adjustment Program 35 - Role of the Bank 37 - Bank/IMF Cooperation 38 Creditworthiness 38 Social Costs of Restructuring 39 Risks 40 PART V- THE PROPOSED LOAN 42 Procurement, Disbursement and Administration 43 Monitoring 43 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -- ii - TABLE OF CONTENIS (Cont'd) Page No,. PART VI - BANK GROUP OPERATIONS IN TURKEY 44 PART VII - LEGAL INSTRUMENTS AND AUTHORITY7 46 PART VIII - RECOMMENDATION 46 TEXT TABLES Table I: National Accounts, 1980-83 4 Table 2: Balance of Payments, 1980-83 5 Table 3: Merchandise Exports, 1980-83 6 Table 4: Consolidated Budget Summary, 1980-83 7 Table 5: SEE Accounts, 1980-83 8 Table 6: Savings and Investment, 1980-83 9 Table 7: Selected Economic: Indicators, 1982-89 13 Table 8: Public Fixed Investment:, 1974-84 20 Table 9: Sectoral Distribution of Public Fixed Investment, 1980-85 21 Table 10: Allocations for Large P'rojects, 1983-84 10 Table 11: Summary of Tariff Changes in 1984 Regime 26 Table 12: Trends in Real Wages, 1L977-82 40 Figure 1 The Fifth Plan (1985-89) in the Structural Adjustment Process 14 ANNEXES Annex I : Social and Economic Data Sheets 47 Annex II v Status of Bank Group Operations in Turkey 52 Annex III : Supplementary Loan Data Sheet 54 Annex IV-A : Government Letter and St:atement of Development Policies -- 1984 56 Annex IV-B : Overview of Structural Adjustment Program and SAL V 69 Annex V ; Structural Adjustment Loans I-IV 81 Annex VI : Operational SEEs: Summary of Financial Results, 1980-84 93 Map . No. 11656R  - iii - TURKEY FIFTH STRUCTURAL ADJUSTNENT LOAN Loan Summary Borrower : Republic of Turkey Loan Amount US$376 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 fifth 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 r.arket forces and outward- orientation. The measures to be taken in this phases of the program are outlined in the Government's Statement of Development Policies - 1984, and fall into two main categories: (a) At the macroeconomic level, the program includes the development of a medium-term framework consistent with the ongoing structural adjustment programn, continued rationalization of public inlvestmnent, further import liberalization, and installation of a computerized debt management system; (b) At: the sectoral level, the program includes the implementation of measures to address structural issues in the financial sector and preparation of action plans for the agriculture and energy sectors. The loan would finance all imports with the exception of items financed by 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 structural reforms designed to restore domestic and external financial equilibrium, rationalize investment and lay the foundation for sustainable growth over the medium term.  - iv - Estimated Disbursements : The proceeds of the lcan would be disbursed in two tranches, $250 million equivalent soon after effectiveness, and the remaining $126 million equivalent after a performance review to be held in January 1985.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED FIFTH STRUCTURAL ADJUSTMENT LOAN TO THE REPUBLIC OF TURKEY 1. I submit the following report and recommendation on a proposed Fifth Structural Adjustment Loan to the Republic of Turkey for the equivalent of US$376 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 mission visited Turkey in June 1982, and its report entitled "Turkey: Country Economic Memorandum, Recent Economic Developments and Medium-Term Prospects" (No. 4287-TU) was distributed to the Executive Directors in June 1983. The report, in addition to analyzing Turkey's medium-term prospects and overall creditworthiness, presents a synthesis of earlier special economic reports on aspects of Turkey's adjustment process. The report of the mission to review the financial system, entitled: "Turkey. Special Economic Report - Policies for the Financial Sector" (No. 4459-TU), was distributed in September 1983. An economic mission visited Turkey in January 1984 to review the economic developments of 1983, the 1984 Annual Program and selected structural adjustment issues. The findings of the mission are reflected in this report. 3. Turkey is about as large as France and Germany combined, with a population of around 46 million and an estimated GNP per capita of $1370 in 1982. The density of population is low (78 per square kilometer of agricultural land), and about 45 percent live in urban centers. Population growth (2.2 percent per annum) is below the median for middle-income countries. Despite rapid economic growth in the mid-1970s as well as substantial emigration of workers (to Western Europe and more recently, to the Middle East), the employment situation has deteriorated steadily with an unemployment rate currently estimated at about 19 percent. There is, howev,er, little or no absolute poverty, although income distribution is skewed. There are considerable regional differences in income and large rural-urban disparities. Recent data indicate a probable worsening in income distribution, especially of wage and salary earners, and a sharp real decline in average earnings. Educational enrollments have expanded greatly but the level of adult literacy remains relatively low.  - 2 - 4. Agriculture is an important sector in the economy, even though its relative importance is declining. It corntributes 18 percent of GDP (1983), employs about 51 percent of the labor force, and provides about a third of merchandise exports (excluding processed food). Turkey is one of the very few developing countries which is self-sufficient in food. As a result of the major emphasis of past development strategy on rapid industrialization, the industrial sector today accounts for 27 percent of GDP and nearly 64 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 85 percent of exports. Turkey has large underdeveloped energy resources (hydropower and lignite), but little petroleum. Energy consumptipn has grown in line with GDP, but remains below the per capita average for middle-income developing countries. Crude oil imports accounted for over 86 percent of consumption and cost about $3.2 billion in 1983, equivalent to about 56 percent of exports. The energy situation remains a major preoccupation of the Government, and investments in energy absorb the largest share of the public investment program. 5. During the 1970s Turkey did not make the necessary adjustments to the shocks caused by the steep rise in oil prices, stagflation in the OECD economies, and the consequent deterioration in the terms of external trade. Turkey maintained high rates of economic growth by raising the share of investment in GDP. This was financed initially by workers' remittances and, following the quadrupling of oil prices, increasingly by short-term borrowing. The rapid growth came to an abrupt halt in 1977 as the massive external debt burden led to a sharp deterioration in creditworthiness, severe shortages of imports, and disruptions in industrial production with a rise in unemployment. By the end of 1979, domest;ic inflation had also become an issue of critical importance. It was not until January 1980 that the Government launched a policy of structural adjustment placing greater reliance on market forces and on outward orientation. 6. The implementation of the adjustment ;program was carried out by a military regime which assumed power in September 1980 following a period of sustained unrest. Subsequently a Consultative Assembly was set up to draft a new constitution, which was overwhelmingly endorsed in a nationwide referendum in November 1982. New election and party laws were then promulgated, and parliamentary elections completed in November 1983. A new Government formed by the Motherland Party assumed office in. Decemnber 1983. In the municipal elections held in March 1984 the Motherland Party obtained a renewed mandate, despite being opposed by five parties comtpared with the two which opposed it in the parliamentary elections. PART II - THE STRUCTURAL ADJUSTMENT PROCESS, 1980 - 1983 7. The Government's program for restructuiring the economy seeks to replace an industrialization strategy based on import substitution with one with an outward orientation, by stabilizing 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;  - 3 - (iii) tight monetary conditions to restrain domestic demand and control inflation; (iv) improved external debt: management; (v) deregulation of iLnterest rates to encourage private savings; (vi) improved institut:ional efficiency in key sectors; (vii) rationalization of the public investment program; (viii) reform of the State Economic Enterprises (SEEs) to reduce their burden on public finances and improve their efficiency; and (ix) progressive liberalizattion of imports including the elimination of quantitative restrictions and the rationalization of the tariff structure. 8. From the outset it was clear that the structural adjustment process would be a longer term effort., as it represented a fundamental change in attitudes, institutions and po)licies. Until the end of 1983 the Government's approach had been to proceed on a year-by-year basis, setting targets in the annual programs in line with t:he overall objectives. However, beginning in 1984, the Government intends to develop its own mediumr-term framework. The formulation of the Fifth Five-Year Development Plan (1985-89) during the course of this year will enable the Government to chart the further course of the structural adjustment process according to a consistent and better quantified set of medium-term objectives. 9. Judging by the progress made between 1980 and 1983, the Turkish economy has shown an impressive response to the structural adjustment program. Until 1982, actual performance met or exceeded the Government's own targets. The reform program was strictly adhered to, and most fiscal and monetary targets in the stabilization program were met. Major structural reforms in the tax system, new import and export regimes, moves towards economic pricing by SEEs, improvement in 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 4.1 percent and 4.6 percent respectively. The growth was due primarily to significant improvements in the foreign balance since the stabilization program allowed for only slight increases in domestic demand. The situation was reversed in 1983 when the growth rate slowed down to an estimated 3.2 percent (Table I.) and total domestic demand increased by 4.3 percent with a negative contribution of coming from the foreign balance. Nevertheless, the three year average growth was significantly better than that achieved in the period before the launching of the SAL process.  -4 Table 1. TURKEY - NATIONAL ACCOUNTS, 1980-83 1980 Level 1980 1981 1982 1983 At Current In ----Actual-------- Est. Prices Percent Real Change From Previous Year (TL billions) of GNP (%) Consumption 3538.0 79.8 -3.4 0.6 3.9 4.3 Public 544.1 12.3 8.8 0.8 2.1 1.3 Private 2993.9 67.5 -5.1 0.6 4.2 4.7 Fixed Capital Investment 861.5 19.4 -10.0 1.7 3.5 2.9 Public 482.4 10.9 -3.7 9.4 2.2 1.7 Private 379.1 B.5 -17.3 -8.8 5.4 4.8 Stockbuilding 279.8 5.3 (3.9) (0.7) (-1.0) (0.3) Total domestic demand 4679.3 105.5 -1.2 1.6 2.8 4.3 Foreign Balance 244.1 5.5 (-0.2) (-2.5) (-1.7) (1.2) GNP 4435.2 100.0 -1.1 4.1 4.6 3.2 Memorandum Items Agriculture 925.0 22.7 1.7 0.1 6.4 -0.3 Industry 1026.7 25.2 -5.9 7.2 4.6 7.6 Services 2128.8 52.1 -0.2 4.8 3.3 3.7 GDP at Factor Cost 4080.5 10().0 -1.0 4.2 4.3 3.8 Note: Figures in parentheses are the contribution in percentage points to the growth in GNP. Source: State Planning Organization. 10. Growth in the productive sectors was uneven during the period, although industrial growth on the average improved markedly over 1980. 1981 witnessed a 7.2 percent growth in industrial value added, followed by 4.6 percent in 1982 and 7.6 percent in 1983. Agriculture, by contrast, was unfavorably affected by weather conditions in 1981 and 1983. Only in 1982 did favorable rainfall patterns contribute to bumper crops and a significant 6.4 percent growth in value added. On the expenditure side, the rate of growth of public investment at constant prices has been contained at an average of 2.4 percent per annum during 1980-8:3, while the rate of growth of private investment in real terms has improved systematically from (-)17.3 percent in 1980 to 4.8 percent in 1983. Private manufacturing investment, on which much of the export-oriented development depends, similarly seems to be recovering from a real growth rate of (-)14.1 percent in 1980 to a more encouraging 1.0 percent in 1983. 11. On the inflation front, the Government was able to reduce the annual inflation rate, as measured by the wholesale price index, from 107.2 percent in 1980 to 31.4 percent in 1983. Although progress was systematic until 1982 when the rate of price increase reached a low of 25.2 percent, 1983 witnessed a resurgence of inflationary pressures. Prices; were fuelled by an expansion of Central Bank credits to the private sector during the second half of 1983 to reduce the difficulties of some banks and enterprises, and a lowering of  - 5- nominal deposit interest rates during the year in anticipation of a reduction in the rate of inflation that did not occur. The new Government has placed the highest priority on bringing about a substantial deceleration of the rate of inflation as quickly as possible. 12. Balance of Payments. The current account deficit decreased from $3.2 billion (5.6 percent of GNP) in 1980 to $1.1 billion (2.0 percent of GN]P) in 1982 (Table 2). However, the balance of payments deteriorated in 1983, with the current account deficit climbing to about $2.0 billion (3.4 percent of GNP). Merchandise exports, which were originally programmed at $6.8 billion, only reached $5.7 billion, while workers' remittances, originally expected to reach $2.2 biLlion, fell short by $600 million. Export volume, however, recorded an increase of about 14 percent, reflecting the continued competitiveness of Turkish goods in European and Middle Eastern markets. But for a drop of nearly 12 percent in export prices and consequently a 6.1 percent decline in the terms of trade, the net results would have been more positive. Nevertheless, on balance, the performance of merchandise exports has been quite impressive over the 1980-83 period, rising in dollar terms by 61.6 percent in 1981, 22.2 percent in 1982 and declining only slightly (by 0.3 percent) in 1983. Table 2- TURKEY - BALANCE OF PAYMENTS, 1980-83 ($ millions) 1980 1981 1982 1983 Exports of goods & NFS 4171 6483 7874 8086 Imports of goods & NFS 8798 10009 9867 10321 Workers' remittances 2071 2490 2187 1554 Current account balance -3175 -2138 -1131 -1991 Direct private investment 148 129 90 141 Public M&LT capital (gross) a/ 2351 2238 2504 2209 Amortization on M&LT debt a/ -436 -560 -956 -1514 Public M&LT capital (net) a/ 1915 1678 1548 695 Other capital b/ 1615 612 186 999 Change in reserves (- increase) -503 -281 -693 156 Reserves as months of imports 2 2 3 3 a/ Includes private guaranteed and non-guaranteed debt + grants. b/ Includes errors and omissions. Source: Treasury and Central Bank.  - 5 - 13. Export growth has been led by the mainufacturing sector and has involved a distinct shift in destination from the EEC countries to the Middle East (Table 3). Industrial exports, comprised primarily of processed foods and textiles, expanded by 119 percent in 1981, 50 percent in 1982 and 7 percent in 1983, while the share of industrial exports in total exports rose from 36 percent in 1980 to 64 percent in 1983. These results were achieved by a combination of indirect (flexible exchange rate policy and import liberalization) and direct (tax rebates, preferential credits) measures to enhance the relative profitability of exports and offset the bias towards producing for the domestic market. The flexible exchange rate policy was one of the most important factors contributing to the growth of exports, together with the penetration of Turkish products in M4iddle East markets. In 1983, however, the share of exports to the Middle Elast dropped slightly from the level reached in 1982 while their value in dollar terms decreased by about 4 percent. This is directly traceable to the political developments in the region and the weakness in the international oil markets. Table 3. TURKEY - MERC:HANDISE EXPORTS, 198083 ( millions) 1980 198L 1982 1983 Value % Share Value % Share Value % Share Value % Share Exports by sector I. Agricultural products 1672 57 2219 47 2141 37 1881 33 a. Crops 1541 - 1934 1727 - 1499 - b. Livestock and sea products 131 285 414 382 II. Mining 191 7 194 4 175 3 189 3 III. Industrial products 1047 36 2290 49 3430 60 3658 64 a. Processed food 190 412 568 670 b. Textiles 440 803 1056 1299 c. Other manufacturing 417 1075 1806 1689 TOTAL 2910 100 4703 100 5746 100 5728 100 Exports by destination I. OECD countries 1680 58 2264 48 2556 44 2760 48 a. EEC countries 1242 43 1503 32 1755 30 2010 35 i. Germany 604 643 707 838 ii. Other 638 860 1048 1172 b. Other OECD countries 438 15 761 16 801 14 750 13 II. Middle East 495 17 1893 40 2540 44 2438 43 a. Iraq 135 559 - 610 321 b. Iran 85 234 791 1088 c. Libya 60 442 235 184 d. Saudi Arabia 44 187 358 365 e. Egypt 20 72 145 70 d. Others a/ 151 400 401 410 III. Other countries 735 25 546 12 650 12 530 9 TOTAL 2910 100 4703 100 5746 100 5728 100 a/ Includes Sudan, Syria, Jordan, Lebanon, Abu Dhabi, Bahrain, Qatar, Oman, Dubai and Kuwait. Source: State Planning Organization.  -7- 14. By contrast, the lower than anticipated growth in merchandise imports was mostly due to factors exogenous to Turkey. In value terms such imports were up by 12.9 percent in 1981, down by 1.0 percent in 1982 and up again by 4.4 percent in 1983. The relative stability of merchandise imports in 1982-83 reflects price decreases in both oil and non-oil imports. On average the price of imported oil decreased by 9.6 percent in 1982 and 10.6 percent in 1983. On the other hand, the recession in the Western economies during most of the period 1980-83, and the slow growth of EEC countries in 1983, contributed to lower than expected receipts of workers' remittances. This was especially true in 1983 when remittances fell by nearly 29 percent. Overall, the positive elements in the trade balance during the period tended to compensate for the stagnation in the services accounts, except in 1983 when the adverse price effects for Turkish exports compounded the adverse impact of the decrease in workers' remittances. 15. Public Finances. Progress in the management of the Consolidated Budget, by contrast to developments in the inflation and balance of payments areas, has been consistent throughout the period. The net result has been a retrenchment of the public sector and success in bringing expenditures more in line with resources. Thus Government expenditures, which stood at 24.0 percent of GNP in 1980, fell to 19.4 percent in 1983 (Table 4). The budget deficit, which stood at 4.6 percent of GNP in 1980, decreased to 1.4 percent in 1981, 1,2 percent in 1982 and finally 0.5 percent of GNP in 1983. 1983 was the first year in which the actual results were better than the program target. Transfers to the SEEs as a percentage of GNP also showed steady improvement, from 4.8 percent in 1980 to 2.5 percent in 1983. Budgetary revenues, on the other hand, have been consistently below program figures, with the result that in order to maintain a non-inflationary fiscal policy, the Government has been forced to cut back on planned expenditures. Table 4. TURKEY - CONSOLIDATED BUDGET SUMMARY, 1980-83 (TL billions) 1980 1981 1982 a/ 1983 b/ Program Actual Program Actual Program Actual Program Est. Revenues 720.0 657.3 1478.7 1388.8 1665.0 1465.4 2364.0 2217.0 Expenditures 735.1 1062.6 L495.9 1482.1 1715.0 1551.8 2505.0 2270.0 Budget balance -15.1 -205.4 -17.2 -93.3 -50.0 -86.4 -141.0 -53.0 Memorandum items (In percent of GNP) Expenditures 16.6 24.0 22.6 22.6 23.8 21.5 22.9 19.4 SEE transfers 2.4 4.8 3.4 3.3 2,9 2.2 2.9 2.5 Budget balance -0.3 -4.6 -0.3 -1.4 -0.6 -1.2 -1.3 -0.5 a! 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. b/ Provisional actuals. Source; Treasury.  - a - 16. SEE Accounts. The Government succeeded in improving the profit to GNP ratio of the SEEs from (-)0.5 percent in 1980 to 0.8 percent in 1982. In 1983 the ratio declined slightly t:o 0.4 percent, partly as a result of delays in announcing price adjustments. This was ccmpensated, in terms of overall financial performance, by a decrease in the ratio of SEE financing requirements to GNP to 6.4 percent from its 1982 level of 7.1 percent (Table 5). Table 5: TURKEY - SEE ACCOUNTS, 1980-83 (TL billions) 1980 1981 1982 1983 Program Actual Program Actual Program Actual Program Est. a/ Sales revenue 1223 1146 1981 1767 2601 2650 3386 3403 Total expenditures 1197 1169 2135 1759 2554 2583 3318 3351 Profit/loss before taxes 26 -23 -154 8 47 67 68 52 Total investment 205 459 433 616 540 684 706 809 Fixed investment 168 281 :316 406 472 533 611 678 Change in stocks 37 178 [17 210 68 151 95 131 Financing requirement b/ 179 482 687 608 493 617 638 757 Memorandum items (In percent of GNP) Profit/loss 0.5 -0.5 -2.3 0.1 0.5 0.8 0.6 0.4 Financing requirement b/ 4.0 10.9 10.5 9.3 5.6 7.1 5.8 6.4 a/ Provisional. b/ Excludes depreciation. Sourcet Treasury. This ratio has in fact shown steadly improvement throughout the 1980-83 period. The improvements in the SEE accounts, besides reflecting a more flexible price adjustment policy, are directly related to the Government's efforts to expose the SEEs more tc competition, to streamline their organizational structure as well as their links to supervisory government agencies, to encourage operational efficiency through the strengthening of managerial autonomy, and finally to bring about better management of human and financial resources. The aim of the Government continues to be increased profitability and decreasing dependence on budgetary support for the SEEs' investment programs. 17. Public Investment. Restraining the high rate of growth in public investment is a major objective of the structural adjustment program. In real terms, public sector investment declined by 3.7 percent in 1980, and then rose by 9.4 percent, 2.2 percent and 1.7 percent in 1981, 1982 and 1983 respectively. Private real investment, by contrast, declined by 17.3 percent  - 9 - in 1980, declined again by 8.8 percent in 1981, and then rose by 5.4 percent in 1982 and 4.8 percent in 1983.. The aggregate figures show that the Government has been able to continue to rationalize its investment program and to lower on balance the public sector's dependence on external resources (Table 6). Further details relating to the size, sectoral allocations and composition of the program are presented in paras. 42-49 below. Table 6: TURKEY -- SAVI]NGS AND INVESTMENT, 1980-83 (Percent of GNP at current prices) 1980 1981 1982 1983 Program Actual Program Actual Program Actual Program Estimated Public sector Investment 10.19 15.49 13.48 14.63 12.18 12.60 12.35 11.35 Savings 6.21 5.17 10.21 8.50 9.10 8.32 8.27 7.42 Gap -3.98 -10.32 -3.27 -6.13 -3.08 -4.28 -4.08 -3.93 Private sector Investment 9.57 10.24 8.58 9.75 9.72 8.94 9.19 8.47 Savings 10.31 15.06 6.67 12.37 10.86 11.88 12.39 9.25 Gap 0.74 4.82 -1.91 2.62 1.14 2.94 3.20 0.78 External resources 3.24 5.50 5.18 3.51 1.94 1.34 0.88 3.15 Source: State Planning Organization. 18. Assessment. The structural adjustment process seemed to lose momentum in the second half of 1.983, which may be explained by the Government's preoccupation with the elections and its reluctance to take some important decisions. But overall there is little doubt that Turkey made some impressive gains during the period 1980-83 as a whole. It is clear from the data presented in the preceding pages that the stabilization program is yielding results, that export growth has been placed on a firm basis and that a substantial measure of monetary and fiscal discipline has been introduced in the management of the economy. There were factors exogenous to Turkey, such as adverse price developments on the external front and a downswing in agricultural production due to poor weather, which contributed to some of the negative macroeconomic results. The new Government has moved swiftly to deal with the loss of momentum. In Part III which follows it becomes clear how the Government's resolve is being transcribed into a rigorous medium-term framework for pursuing the structural adjustment process. 19. From the outset it was recognized that the structural adjustment process in Turkey would be a longer term effort, as it represented a fundamental change in economic incentives and in the institutions to devise and implement them. Significant progress has been achieved in the past four years, but the task of restructuring is by no means over. The objective of the present Government is to broaden and deepen the structural adjustment process, building on the progress already achieved, and carrying through to the sectoral and sub-sectoral level the approach that has worked successfully in the area of macroeconomic policy. The proposed Fifth SAL should be viewed as part of this longer adjustment process.  - 10 - PART III - THE MEDIUM--TERM FRAMEWORK AND SAL V PROGRAM Introduction 20. The Government's Statement of Development Policies - 1984 (Annex IV-A), which serves as the basis for its request for a Fifth Structural Adjustment Loan, propounds a medium-term framework which is compatible with the objectives of the structural adjustment program. The policy actions contained in the Statement fall inlto two main categoriest (i) Macroeconomic - Medium-Term Framework - The Revised 1984 Program - Public Investment: - SEE Reform - Import Liberalization - Export Incentives - External Debt Management (ii) Sectoral - Financial Sector - Agriculture - Energy Each of these areas is discussed more fully below. As with previous SALs, the SAL V program 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 1984 and early 19S85. The main actions are also summarized in matrix form (Annex IV-B). The Medium-Term Framework 21. The draft Fifth Five-Year Development Plan (1985-89), which will serve as the Government's medium-term framework, is expected to be completed by mid-1984 for submission to the Grand National Assembly. The Government has decided to change the nature of its planning process, moving from the traditional, more centralized framework to one which is indicative in nature. This is in line with the Government's view that it must rely increasingly on an efficient private sector as the engine of growth. The Government is also keenly aware of the need to strengthen the links between the macroeconomic strategy and the concomitant sectoral and subsectoral strategies. To this end, it intends to make greater use of Joint planning committees as forums to achieve intra public sector and public/private sector consensus. 22. The Basic Strategy. The Goverr,ment 'has reiterated in the Statement of Development Policies that the basic theme of the Plan will continue to be an outward oriented development strategy increasingly guided by market forces. The Plan will define the respective roles of the public and private sectors and will indicate through its quantitative targets what the  - 11 - expectations are for each. The public sector will be expected to provide the infrastructure required to allow the private sector to achieve its potential, while the private sector will be encouraged to develop along the lines of Turkey's comparative advantage. 23. The central theme of Turkey's structural adjustment program is one of reliance on sustained export growth over the medium term. The Plan will give a clear signal to the private sector that the public sector investment program is supportive in nature and consequently that its size will not lead to a pre-empting of resources for the private sector. The Government recognizes that a strong revival of private investment is predicated on the control of inflation, since its main policy objective in setting interest rates is to provide a real rate of return on savings. Thus at least the first year of the Plan will reflect in its targets a continuation of stabilization as inflation is reduced to a level which will make interest rates attractive enough to encourage the growth of private investment. The Government clearly recognizes that the adjustment process will involve shorter-term hardships, but that by providing a sounder economic base the Plan will contribute significantly to improvements in the standards of living of the population over the medium term. The Fifth Plan is seen in, Turkey as a transition plan, a bridge between stabilization and the return to Turkey's normal growth path. 24. Key Targets of the Plan. The Government has announced its intention of preparing a Plan that does nct conflict with the aims of the continuing structural adjustment process as well as its achievements to date. It is premature to present too many precise figures since these will have to await approval of the Plan by the Grand National Assembly. Nevertheless, the Government has indicated its line of thinking on some of the key targets for the period covered by the Plan (1985-89), (i) the average annual real rate of growth of merchandise exports is projected to be in the 8-11 percent range; given the low base from which the export drive started, and the Government's commitment to the maintenance of a competitive exchange rate together with a carefully designed set of trade incentives, this target is in the Government's view both realistic and attainable; (ii) the size of the public investment program will be regulated by the Government's ability to generate resources and therefore the ratio of public sector borrowing requirements to GNP will decline from the expected level of about 3.5 percent in 1984; (iii) the Governments sintention is to restore an approximate balance between public and private fixed investment in the medium term; given the public/private balance of about 60/40 in 1983, this implies a growth rate for private fixed investment which is more than double that of public fixed investment over the Plan period; (iv) the share of public fixed investment to be allocated to the priority sectors--energy, 1/ agriculture, transport and communications--wi].l be maintained on average at least at the 1/ Including electricity, petroleum exploration and refining, coal and lignite mining, and pipeline!s.  - 12 - level attained in 1983; within t:hese sectors, projects identified as of high priority will receive the bulk of the allocations and the Government will progressively withdraw from new investments in manufacturing that can more efficiently be carried on by the private sector; (v) under the above assuimptions, ancl with reasonable expectations regarding external capital flows, the Government's target average annual growth rate for the Plan period will be about 6 percent; and (vi) the Government will not allow a situation in which the targeted growth rate of GNP will need to be supported by annual gross external capital requirements which would push the debt service ratio 1/ significantly above the! 25 percent average envisaged for the medium term. 25. To summarize, the Governmnent intends to prepare a Plan that will be consistent with the fight against inflation but which envisages a growth strategy commensurate with its ability to generate resources. The Government has emphasized that it would adjust its annual targets through its Annual Programs should the projected resources fail to materialize during the course of the Plan, to avoid jeopardizing the gains to date from the structural adjustment process. 26. The Bank's Medium-Term Projections. The development of a medium-term framework by the Turkish Governmenit is an issue that goes back to SAL III. Both the Bank and the Government agreed then that the structural adjustment process had to be placed within the boundaries of a medium-term framework, and that the best mechanism for doing so would be through the Fifth Five-Year Development Plan, which was originally scheduled to cover 1984-1988. The drafting and adoption of the Government's Fifth Plan was expected to be completed in 1983. The previous Government drafted a Five-Year Plan, but then postponed its presentation to the National Assembly by one year to enable the new Government to prepare its own medium-term program. 27. Concurrently, the Bank produced its own medium-term projections in the 1983 Country Economic Memorandum (CEM). 2/ These projections were discussed in detail with Turkish Government officials during and after the preparation of the CEM. Further discussions were held in January 1984 during the Program Review Mission and again in March during the SAL V appraisal. The dialogue on the question of Turkey's medium-term framework has thus been a continuous one culminating in the Government's overall view of the medium term as set out in the Statement of Development Policies - 1984. While less optimistic than the views expressed in the Bank's CEM, for reasons that go 1/ Total debt service as a proportion of exports of goods and non-factor services plus workers' remittances. 2/ Turkey: Recent Economic Developments and Mediumr-Term Prospects (No. 4287-TU), June 1983.  - 13 - back to the loss of momentum in export growth in 1983 as well as the resurgence of inflation, the current view from Turkey, in its broad aspects, is corroborated by the Bank's own updating of its medium-term projections based on developments in the second half of 1982 and 1983. 28. The Bank's projections for the mediumrterm take as their starting point the Government's own targets for the key macroeconomic variables. lhe Bank attempted to disaggregate the Government's overall targets for the Plan and to check whether these were in line with domestic and foreign resources. The Bank's projections indicate the need for a continuation of the stabilization program well into 1986, an average annual GDP growth of 5.8 percent in 1985-89 and a manageable balance of payments. Two central assumptions underpin these projections, namely export sustainability and fiscal discipline. Table 7 below presents the Bank's projections of the key economic variables for the Fifth Plan period (1985-1989). Figure 1 illustrates the trends in selected indicators since 1980 and places the 1984 program in the context of the Bank's medium-term projections. Table 7: TURKEY -- SELECTED ECONOMIC INDICATORS, 1982-89 Average Annual 1982 1983 1984 1985 1989 Real Growth Rate Real Growth Rate UJnits Actual Est. Est. Projected 1982 1983 1984 1985-89 (M) (X) GDP 1980 TL b 4742 4916 5147 5398 6812 5.0 3.7 4.7 5.8 Consumption " 3861 4028 4181 4359 5410 3.9 4.3 3.8 5.3 Fixed Investment " 909 935 971 1026 1369 3.5 2.9 3.9 7.1 Exports of Goods Current $ m 5746 5728 7050 8113 16432 24.0 13.9 18.9 9.0 Imports of Goods " 8843 9235 9750 11108 21658 -0.1 12.0 5.6 7.8 Trade Balance -3097 3507 -2700 -2995 -5226 Workers' Remittances " 2187 1554 1620 1750 2436 Current Account Balance Current $ m -1131 -1991 -1138 -1220 -2636 Ratios Fixed Investment/GDP Z 19.2 19.0 18.9 19.0 20.1 Savings/GDP 2 17.5 17.0 17.7 18.1 19.3 Exports of Goods/GDP % 9.9 10.9 12.3 12.7 14.3 Current Account Deficit/GDP a/ 2 -2.0 -3.4 -1.8 -1.7 -2.1 Debt Service Ratio b/ % 19.1 28.0 24.5 25.3 23.4 Public Fixed Investment/ % 61.1 60.3 59.9 57.6 52.6 Total Fixed Investment Memo Item; Gross Capital Inflow Current $ m 2593 3159 2735 2682 6815 a/ Based on constant TL. _/ Total Debt Service (excluding short-term)/Exports of Goods and NFS plus Workers' Remittances. Source; State Planning Organization for actuals and IBRD Projections.  - 14 - Fig. 1: TURKEY THE FIFTH PLAN (1985-89) IN THE STRUCTURAL ADJUSTMENT PROCESS GROWTH i INFLATION 100- 90- 80- 7- - 70- , I 60- a,1 5- I i o50- i4- _ _ w40 _ _ . 0 - I30-1 2 i 20-4 Z - I 10-1 0 - rr -r 0 rr -5 1981 1983 1985 1987 1989 1981 1983 1985 1987 1989 -1 -10- DEBT SERVICE RATIO BUDGET BALANCE AS % OF GNP 34] 30- 2 - 25- z 020 I _-o0 TJ1981 1983' 1985 1987 1989 15- ~~~~~~~~~~21 1983 io I u -2- 1981 0 -i 4- 1981 1983 1985 1987 1989 SEE FROFIT/LOSS AS % OF GNP PUBLIC SECTOR BORROWING CL ~AS %OF GNP Z 1C-- 0 0 19 3 1985 1987 Prga r9- IR roeto I ! I@\Bm (BaseYearofPion (TerrninalYearol`PlJ Source: Tre 8sury, Central Bank & s 1te anning Organization for 1980-84 13RD Projections for 1989. Wold ank-26251  - 15 - 29. These projections assume that the revised 1984 program for export growth will be achieved and that in the base year of the Plan merchandise exports will stand at $7.1 billion. 1/ Merchandise exports are projected to grow at an average of 9 percent per annum in real terms, i.e. slightly on the conservative side of the Government's 8-11 percent target range. Merchandise imports, on the other hand, are assumed to grow moderately in real terms through 1986 and then pick up to an average 8-9 percent in the terminal years of the Plan, to match the projected growth rate of merchandise exports. On these assumptions, the current account balance shows a decreasing deficit through 1985 as stabilization policies act to curtail import growth while encouraging exports. As higher growth rates set in during the middle of the Plan period, the trend reverses and the current account deficit rises again through the end of the Plan. The terminal year 1989 shows a deficit of approximately $2.6 billion as compared to a 1985 figure of $1.2 billion. The projected capital account should remain manageable throughout the projection period even in the face of some sharp increases in the amortization and interest payments in 1985-1986, arising from the debts rescheduled during the 1978-1982 period and the imposed constraint on foreign exchange reserves being equivalent to at least two months' imports. The debt service ratio should average 24.5 percent for the Plan period with a maximum of 25.3 percent in 1986. Gross capital inflows required to support Turkey in 1985-1989, on these assumptions, average about $4.8 billion per year. This inflow is consistent with a decreasing debt service ratio from 1986 onwards. 30. The projections indicate a GDP growth of 5.8 percent per annum on average throughout the Plan period, with a low of 5.0 percent in the initial year of the Plan and a high of 6.6 percent for the final year. The 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 constrain the growth of the public sector in line with public resources and to create a more favorable investment climate for the private sector through its anti-inflationary policies and its restructuring efforts. 31. The scenario assumes progressive improvements in the public/private fixed investment ratio throughout the Plan period, from the initial 60:40 ratio in 1984 to a terminal year ratio of 53:47. This translates into an expected real growth per annuin in public fixed investment of about 4.8 percent. The comparable ifigure for private fixed investment is about 10.0 percent, or a little more than twice the growth rate for public investment. 32. The medium-term scenario described here is of course, only one of many possibilities and is used specifically in this report to illustrate Turkey's potential in the light of the Government's own targets. The Bank projections are consistent with the more conservative of the Government's targets and they are reasonable given Turkey's record of structural adjustment, the favorable responses from the international financial commlunity to the new Government 's program ancd the present view of future resources and 1/ Merchandise exports during the first three months of 1984 totalled $1,855 million, representing an increase of 36.5 percent in dollar terms over the level achieved during the corresponding period in 1983.  - 16 - export market possibilities. 1/ A scenario compatible with the upper ranges of the Government's key targets would need to 'be supported by substantially higher export growth rates and is difficult to envisage at this time, given the transitional (stabilization-cum-growth) nature of the upcoming Plan. 33. There are certain risks associated with the Fifth Plan targets. On the downside, with Turkey's export performance heavily dependent on exogenous factors such as the world economic outlook and movements in international prices, a slower rate of growth of merchandise exports, say 6-7 percent per annum over the Plan period, would lead to a more difficult (but still manageable) balance of payments situation, morie external borrowing, a lower GDP growth (averaging about 4.5 percent per annum) and a higher debt service ratio (26-27 percent per annum). In such a situation the Government would have little chance of absorbing the unemployed and improving tangibly the average standard of living. However, given thes Government's emphasis on export promotion and the determined efforts to counter the bias towards producing for the domestic market, the more baLanced perspective is the one set out in the medium-term scenario presented above. 34. The Government intends to review with the Bank the Fifth Five-Year Development Plan before the release of the second tranche of the proposed loan. Completion of the preparation of a Plan compatible with the aims of the structural adjustment program, in terms of botlh its strategy and its targets, would constitute a condition of tranche release (Loan Agreement, Schedule 5). The Revised 1984 Program 35. An official 1984 Annual Program was prepared by the previous Government, but it needed revision to take account of the reform measures introduced by the new Government soon after the latter took office. The main structural measures in the new Government's program are: (i) a reorganization of the Government's administrative machinery which, inter alia, concentrates authority over economic affairs in the Prime Minister's office; (ii) a substantial import liberalization; (iii) a rationalization of export incentives; (iv) a liberalization of the foreign exchange regime; (v) an interest rate policy designed to provide a real rate of return on savings while largely freeing lending rates set by the commercial banks; (vi) a reduction in the financial transactions tax and the withholding tax on interest payments; and (vii) a reaffirmation that with some exceptions, SEEs will be free to set their own prices. 1/ See para. 102 below.  - 17 - 36. The Government has placed inflation control and export growth at the center of its 1984 program. Stabilization measures will need to be continued at least through 1984 and prolbably into 1985 and 1986. GDP is targeted to grow at 4.7 percent in 1984, representing an improvement over the 1983 levesl. The impetus for this growth is expected to come from a better performance of the agricultural sector with a growth target of 2.8 percent (versus (&)0.3 percent in 1983), and from a continuation of the good performance for value added in industry (6.3 percent in 1984 versus 7.6 percent in 1983). The program calls for a target average inflation rate of about 29 percent. The year-on-year rate, which was running at about 40 percent in December 1983, is expected to be less than 25 percent by the end of 1984. Given the actual developments in the first quarter of 1984, it appears likely that these targets may turn out to be somewhat optimistic. This further highlights tlhe need to pursue tight demand management policies throughout the year in order to combat inflation in an orderly and progressive manner. 1/ 37. Significant improvement in the balance of payments is expected in 1984, with the current account deficit projected to decrease to about $1.1 billion (2.4 percent of GNP) compared with $2.0 billion (3.4 percent of GNP) in 1983, largely in response to a narrowing in the trade deficit and an increase in workers' remittances. These results assume a growth of approximately 25 percent in the value of exports (from $5.7 billion to $7.1 billion) and a moderate 4.2 percent growth in workers' remittances, both predicated on the continuing improvement in the industrial economies. Import growth is expected to be moderate as in 1983 and is projected at 5.6 percent after allowing for an increase in non-oil imports as a result of the recent trade liberalization measures. 38. The Government's central aim in the fiscal area is to continue to reduce the ratio of public sector borrowing requirements to GNP. To this end, the Budget Balance for 1984 is targeted to show a surplus of TL 45 billion or 0.3 percent of GNP, thereby continuing the trend of the last few years. Expenditures, estimated at TL 2,825 billion or 18.0 percent of GNP, will be more than matched by revenues. If revenues fail to register the planned 29 percent increase in 1984, expenditures will be pared accordingly as in prior years. The declining ratio of public revenues to GNP remains a major area of concern and the Government is making improvements in the system of assessing and collecting taxes. For the SEE accounts, the latest estimates following recent price increases indicate a profit to GNP ratio of 1.0 percent in 1984 (versus 0.4 percent in 1983) and a financing requirement to GNP ratio of 5.8 percent (versus 6.4 percent in 1983). Overall, the public sector borrowing requirements are estimated to decline to 3.5 percent of GNP in 1984 (versus 4.8 percent in 1983). 39. The aim of monetary and credit policy in 1984 will be to control inflation and support the grcowth targets set out in the revised annual program. Within the monetary constraints, priority will be given to credits for the export sector. Interest rate policies will be periodically reviewed to maintain a real rate of return on savings. Agreement has been reached with 1/ See also para. 98 below.  - 18 - the IMF on the performance criteria of the monetary program through April 1985, to serve as a basis for a new one-year Standby in the amount of SDR225 million to run from April 1984. The Government is committed to a flexible exchange rate policy, whic:h it has applied consistently since 1980, because of its critical importance to the export drive and to Turkey's medium-term outlook. In 1983 the nominal effective exchange rate was depreciated (on an average annual basis) by 22 percent in accordance with this policy, resulting in a real depreciation of about 3.5 percent. In 1984, the liberalization of foreign exchange transactions has so far resulted in a real depreciation in excess of 6.0 percent. 40. Of particular importance to the macroieconomic outlook for 1984 will be the course of interest rates. Lending rates remain high in real terms and, therefore, tend to hinder investments. The Government's objectives in this area are to: (i) increase the role of the market in the determination of interest: rates; (ii) reduce the differences between the interest rates on preferential and non-preferential credits; and (iii) encourage the availability of medium and long-term credits for the productive sectors of the economy. The Government is aware that only with a decrease in the inflation rate will nominal interest rates decline and thereby lead to the growth of private investment on which the medium-term prospects depend. 41. The Government's revised 1984 program reaffirms the intention to restructure the economy. The reform measures are intended to widen the process of economic restructuring. They provide the broad outlines of a medium-term blueprint which will need to be quantified in the Plan. Each year, the Government will undertake an annual review of economic performance within the context of its medium-term projections as a basis for drafting its next annual program. This will ensure that the 1985 Annual Program, as well as subsequent ones, will be compatib'e with the objectives of the Fifth Plan and the aims of the structural adjustment process. Public Investment 42. The management of public investment presents one of the difficult challenges for the Government's struictural adjustment program. The public investment program in Turkey has traditionally been characterized by weakness in project evaluation and preparation, resulting in a poor choice of projects and underestimation of both investment costs and construction periods. This led to the evolution of a public investment program whose size encroached on private savings and whose composition was largely unrelated to sectoral objectives. The redefinition of the role of public investment under the structural adjustment program inclucdes as a basic medium-term objective the restoration of an approximate balanc:e in the ratio of public to private fixed investment (as against the 60:40 ratio that prevailed in 1983) and the removal of physical and social bottlenecks to economic growth. In order to allow the  - 19 - private sector to play its leading role in output, export and employment expansion, it is the Government's objective to focus public investment on high priority projects in infrastructure, with manufacturing being increasingly left to the private sector. It is also 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. 43. Over the last three years considerable progress has been made towards rationalization of the public investment program. In particular, the size of the program has been made more consistent with the available resources. Public investment registered an average increase of only 2.4 percent per annum during 1980-83 as against an average annual growth rate of 18.4 percent during 1972-77. This involved a much tighter control over implementation of the program. No extra budgetary allocations have been made available to finance public investment since the end of 1981. Further, the number of projects has been reduced from over 9000 in 1980 to about 7400 in 1984. 1/ This involved both the dropping of a large number of projects of unproven economic merit as well as a decision not to include any new large projects in the program during 1981-83. The sectoral composition of public investment is also now in greater harmony with the macroeconomic objectives. An increasing share of allocations is being directed to infrastructure, especially energy, with substantial reductions in allocations to manufacturing. However, the rationalization of public investment must be viewed as a medium- to long-term process, and more needs to be done to concentrate public resources on the most appropriate needs while making available a greater amount of resources to the private sector. These objectives are complementary, since the restoration of private investment is dependent in large part on the availability of infrastructure and essential inputs, such as power, adequate transport facilities and basic materials, that can only be provided by the public sector. 44. Size: Public fixed investment in 1983 is estimated at TL 1314.4 billion at current prices. In real terms, this represents a growth of 1.7 percent from the level in 1982, and is a major achievement in expenditure control. The 1983 estimates also show a reduction in the share of public investment in total fixed irLvestment as compared to the two previous years. This share is expected to decline in future years in line with the Government's policy. Public investment in 1984 is expected to grow at 3.1 percent over the level achieved in 1983. Table 8 below shows the pattern of public investment during the period 1980-84 as compared to the period 1974-78. With the increase in public savings from 5.2 percent of GNP in 1980 to 7.4 percent in 1983, the gap bet:ween public investment and public saving has been progressively reduced, from over 10 percent of GNP in 1980 to 3.9 percent of GNP in 1983 (Table 6). 1/ These numbers are somewhat mis:Leading since many "projects", especially in the social sectors, are programs which essentially represent current rather than investment expendil:ures.  - 20 - Table 8: TURKEY - PUBLIC FIXED INVESTMENT, 1974-84 Growth Rate (%) Actual Est. Program Ann. Avg. 1980 1981 1982 1983 1984 1974-78 1980 1981 1982 1983 1984 Public Fixed Investment 1155.8 1264.5 1292.7 1314.4 1355.1 9.8 -3.7 9.4 2.2 1.7 3.1 (TL billions 1983 prices) Share of Total Fixed Investment 57.0 62.0 61.1 60.3 59.9 (percent) Source: State Planning Organization. 45. Sectoral Composition: The sectoral ccmposition of public investment has undergone a significant change in the last four years. Most noteworthy is the progressive increase in the allocations for energy, which represented 38.7 percent of total public fixed investment in 1983 (Table 9), reflecting the Government's efforts to increase energy production. There has also been an increase in the allocations 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 18.1 percent: in 1983 and is expected to decline further to 14.3 percent in 1984. Irn 1983 about 65 percent of the total allocations were directed to rehabilitate and expand infrastructure (irrigation 1/, energy, transport and communications), as contrasted with 1980 when only 57.1 percent of the allocations went to infrastructure. The 1984 Program maintains the same emphasis. Table 9 also shows how closely the sectoral pattern of public investment in the 1933 Program compares with the pattern for 1982-85 suggested in the Public Investment Review Report (PIR) 2/, which called for increases in energy, agriculture and transport and a decline in manufacturing. The share of manufacturing in 1983 is already below the recommended level. 1/ Irrigation constitutes about 66 percent of total investment in agriculture. 2/ Report No. 3472-TU, December 1981.  - 21 - Table 9: SECTORAL DISTRIBUTION OF PUBLIC FIXED INVESTMENT, 1980-85 Actual _ Est. Program Average Suggested Average a! 1980 1981 1982 1983 1984 1982-84 1982-85 Agriculture 7.0 9.9 9.7 9.4 11.1 10.1 12.5 Mining 7.6 9.6 8.1 6.6 9.7 8.1 9.8 Manufacturing b/ 29.7 24.8 21.6 18.1 14.3 18.0 19.7 Electricity c/ 24.7 23.6 26.6 30.4 23.7 26.9 22.8 Transport and communications 17.7 17.2 19.1 20.4 20.3 19.9 19.1 Other sectors 13.3 14.9 14.9 15.1 20.9 17.0 16.1 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Memorandum item Energy d/ 35.2 35.2 30.7 38.7 34.4 36.6 34.2 a/ A suggested distribution in the PIR Report (3472-TU; see Table 1.4, 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 46. Project Composition: The Government has assigned priority to projects according to the following criteria: (a) those having high economic rates of return and capable of being completed within a short period; (b) those which will help develop indigenous energy resources, and rehabilitate or extend the infrastructure; and (c) those which help overcome output and export bottlenecks. The 1982-84 Investment Programs reflect the application of these criteria. As against only two projects completed in the irrigation subsector in 1980, for example, 9 projects were completed in 1982 and 19 projects in 1983, while 25 projects are expected to be completed in 1984. In the power subsector, as against no project completed in 1980, 5 projects were completed in 1982,  - 22 - 4 projects in 1983, and 3 major projects are expected to be completed in 1984, including the Oymapinar and Aslantas projects that will generate a total of 678 MW of power. In all, the Government: completed 167 projects in the key sectors (agriculture, manufacturing, energy, transport and communications) in 1983 and expects to complete 249 projects in these sectors in 1984. Moreover, 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 1984 Program. Projects in this category (27 in all) are expected to receive less than 2 percent of the total allocations for large projects in 1984. 47. The 1983 investment expenditures and the 1984 Program allocations reflect a conscious effort to spee.d up the project completion rate by focussing funds on a more limited number of projects. In 1983, over 96 percent of the funds allocated for large projects (each costing over TL 7 billion) went to the 150 projects identified as of high priority. In the 1984 Program this share is still over 92 percent (Table 10). Table 10: TURKEY - ALLOCATIONS FOR LARGE PROJECTS, 1983-84 a/ 1983 Estimated Total Cost Expenditure 1984 Allocation as 21 Amount as % Amount as x Amount as % No. of Total TL Bil of Total TL Bil of Total TL Bil of Total Large projects a/ 180 100.0 5514.3 100.0 518.5 100.0 604.2 100.0 of which: Priority 150 83.3 3325.6 60.3 499.8 96.4 557.2 92.2 Priority to be confirmed 27 15.0 1132.1 20.5 10.7 2.1 7.7 1.3 Others 3 1.7 1056.6 19.2 8.0 1.5 39.3 6.5 a/ Projects costing over TL 7 billion each. Source: State Planning Organization 48. Although there has been some progress in the last three years, there is scope for further improvement in the Government's capacity for project preparation, evaluation, and selection. In addition, greater efforts are required to improve the planning capabilities of the executing agencies. The Government is trying to build up its evaluation capability primarily in the State Planning Organization (SPO), supplemented by that in key agencies including the State Investment Bank (DYB). The head of a reorganized project evaluation unit in SPO was appointed in ;982 and the department is now in operation. Staff from the Bank's Economic Development Institute (EDI) and DYB jointly conducted a training course on power projects in January 1983 and another on infrastructure projects in September 1983. Proposals are under consideration for organizing further training courses of this type in Turkey for Government and SEE staff as well as for instructors who could conduct training courses in the future. Meanwhile, the regular training courses being conducted by DYB will be strengthened. 49. The Government recognizes that the project list is still not fully satisfactory and expects to further rationalize it over the next several years. The sheer size of the program, some 7400 ongoing projects costing about $30 billion, means it can only be modified to a limited extent in any single year. Despite a major effort to trim the program for 1983 and 1984,  - 23 - considerable work remains to be done. The Government intends to take the opportunity of the Plan preparation to undertake a detailed review of the public investment program, especially the major projects, with the objective of speeding up the completion of high priority projects and reducing or eliminating the allocations to projects of lower priority, with parallel improvements in planning capability and institutional performance. The review will also confirm that the size of the public investment program is compatible with domestic and foreign resources, so that investment financing is non-inflationary and within the debt servicing constraints. Satisfactory progress in carrying out and implementing the results of such a review would be a condition of tranche release (Loan Agreement, Schedule 5). Reform of State Economic Enterprises 50. Reform of the State Economic Enterprises has been a major goal of the structural adjustment program. During 1980-82, the Government implemented a number of 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. The financial performance of SEEs registered substantial improvement as a result, with a situation of chronic deficits changing into one of growing profits. In 1983, the Government passed a wide-ranging reform decree, whose purpose was to introduce structural reforms with the overall objective of having a viable SEE sector more responsive to market forces. The ultimate goal is to place the SEEs in an economic environment where they would compete with privte sector firns, especially with regard to output prices, factor inputs, and credit. The President's Report on the recent Technical Assistance Project for State Economic Enterprises (Report No. P-3697-TU) contains a description of the main provisions of the reform decree. The financial position of the operational SEEs, including projections for 1984, is presented in Annex VI to this report. 51, The question of State Economic Enterprise reform has to be addressed at sever21 l