Statement by Jan Piercy at the meeting of December 21, 2000

87172 co~~ ~ December 20, 2000 05:58:27 PM Statement by Jan Piercy Date of Meeting: December 21,2000 Turkey: Country Assistance Strate~:y. Financial Sector Adjustment Loan and Privatization Social Support Project Overview 1. We would like to commend staff for a thorough and well conceived CAS. This document presents a candid assessment of the challenges facing the economy of Turkey, which have intensified during the financial crisis of these past few weeks. We welcome the Bank's swift response to this crisis and encourage them to maintain the close engagement that has culminated in the CAS and the two loans that we are reviewing today. I would also like to thank staff for the extremely helpful Board and bilateral briefings on the evolving situation and the CAS and projects. Macro Framework 2. We strongly support the objectives of the ambitious disinflation and structural reform program that Turkey's government embarked on one year ago. Despite the liquidity crisis of the last few weeks, the program has been very successful in many aspects, bringing inflation to its lowest level in 14 years. We are impressed by the determination of the Turkish authorities to pursue the disinflation program in the face of the recent difficulties. 3. However, the design of Turkey's ambitious program and its current economic situation mean that, in order to realize Turkey's considerable potential and avoid serious risks, the program must be implemented in full and on time. In particular, the crawling peg mechanism and the fragility of the banking sector leave Turkey very vulnerable to shifts in confidence, or even small external shocks. Developing imbalances, such as inflation overshoots and a larger-than-expected current account deficit, require prompt remedial action. These have been some of the hard lessons of the recent turmoil in financial markets. Delays in privatization and banking sector reform, coupled with a larger-than-expected current account deficit, turned market sentiment against Turkey, so that, when a few banks suffered from the rise in interest rates, a full-blown liquidity crunch developed. 4. In the context of the strong and immediate implementation of the necessary policy steps announced recently by government with the cooperation of the World Bank and International 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 the consent of the Executive Director concerned.  2 Monetary Fund, we support the proposal for the World Bank to lend to Turkey in a High Case scenario. Macroeconomic stabilization and structural reform are two parts of a necessary mutually reinforcing policy package in Turkey - the program will not be sustainable without both parts. The High Case justification therefore necessarily rests on full and timely implementation of both components. Key issues going forward on the macroeconomic side include: containing the current account deficit; managing the transition to a more flexible exchange rate mechanism at the appropriate time; maintaining Net Domestic Assets within the parameters of the program; and adjusting fiscal policy as necessary for any excess domestic demand. Key issues going forward on structural reform include: quickly resolving the banks under the administration of the Banking Regulation and Supervision Agency; promptly implementing the privatization of Turk Telekom, Turkish Airlines, and the state banks; and minimizing the transition costs of adjustment on the most vulnerable in Turkey. We strongly urge the Turkish authorities to implement - and communicate clearly to the Turkish public and market participants- the strengthened policy measures effectively and promptly, keeping in mind the heightened risks to the program posed by recent events. CAS Structure 5. We commend staff for the well-integrated focus of this CAS. The triggers are refreshingly concrete. The selectivity of the proposed lending program as illustrated in Box 8 is welcome. We concur that this coordination between donors is critical to the success of this program to avoid duplication of efforts and to capitalize on the Bank's comparative advantage. The listing of international partners in the far right-hand column of Annex B9 is helpful as well. 6. We particularly welcome the candid discussion of governance challenges in Turkey and the Bank's plans (Box 7), to support the Government's public sector reform and anti-corruption initiatives. We are encouraged by the CAS emphasis on due-diligence diagnostics-- notably plans for a Public Expenditure and Institutional Review, Country Financial Accountability Assessment, and Country Procurement Assessment Review in FYO 1. We also welcome plans for a WBI Governance Workshop in FY02, as well as the authorities' request for Bank support for an anti-corruption initiative. 7. A broad range of participatory consultations informed the preparation of this CAS, as described in Box 6. In the same vein, we especially commend the Turkish authorities' plans to make this CAS publicly available. Such transparency is welcome, and we hope that it will be emulated by other borrowers. Social Sector 8. We commend the authorities' concerted efforts to expand access to primary education, as evidenced by the rapid rise in girls' enrollment rates. We recognize the link between the Bank's support, through analytical work, and the emergence of the Government's commitment to reform. As such, we encourage the Bank to maintain that close dialogue with the authorities. 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 the consent of the Executive Director concerned.  3 9. In contrast, we regret that relative lack of progress in addressing problems in the health care system in Turkey, which continues to be poorly managed as well as underutilized, and suffers from misallocation of public funds, further diminishing its performance. Although the Government has decided to maintain the level of expenditures on health as a percentage of GNP in the upcoming budget, the volume of spending is not nearly as important as its effectiveness. We strongly welcome plans for a health sector review in FYOl/02. The final sentence of Box 2 voices concern about the "capability of Turkey's state-run system to respond to new emerging disease patterns". Can staff explain what new disease patterns are emerging, and the Bank's plans to help address them? Private Sector Strategy and IFC 10. The Private Sector Strategy (Annex A1) provides a coherent framework for the Bank Group's efforts in the upcoming lending program. We welcome the complementarity of supporting legal and regulatory reforms as essential prerequisites to creating an environment conducive to private investment. The historically low level of foreign direct investment in Turkey indicates the importance of these efforts. 11. The CAS provides a good description of the IFC's engagement in support of the Bank Group's program for Turkey,. We like the way that it is incorporated throughout the CAS- the complementarity in the WBG's workin Turkey is clearly spelled out, including the description of MIGA and FIAS work to support foreign investment flows. We urge continued efforts to help attract additional private investors and boost market confidence in Turkey's commitment to reform, in a manner coherent with the CAS. Other Issues 12. We commend the CAS focus on reform of the agriculture sector, which holds great importance for the welfare of the population as well as the success of the overall economy. We urge the Turkish authorities and the World Bank to design reform carefully, to ensure that the most vulnerable parts of the rural economy, such as sharecroppers and wage laborers, are not adversely affected. This care will support the objective of reducing economic vulnerability and avoiding increased incentives to migrate to urban areas. 13. Annex B9 refers to a proposed Cultural Heritage Project. In our view, the Bank's comparative advantage and resources are not best applied to an operation in this sector. FSAL 14. We support the proposed FSAL. Strengthening Turkey's banking sector is critical to addressing the country's vulnerability to internal and external shocks. A healthy banking system supports Turkey's disinflation program and provides the foundation for macroeconomic growth. The prior actions for this loan, which included creation of the Banking Regulation and 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 the consent of the Executive Director concerned.  4 Supervision Agency (BRSA), improvement of prudential banking regulations, and legislation allowing for partial privatization of state banks, signify that the Government of Turkey is making a good effort towards strengthening the financial sector. 15. Many critical steps are still to come. Speedy and successful resolution of the insolvent banks is a very important task, one upon which the very stability of the banking sector depends. Launching the commercialization and privatization of the state banks, strengthening banking supervision and reform of the banking law are all significant components to this program. We strongly urge the Turkish government to maintain their reform commitment and timetable in this important sector. 16. We support the proposed reforms and share staffs concern over maintaining the pace of reform in the Turkish financial sector. We urge staff to keep the Board apprised of plans for any additional assistance directed to the financial sector. Privatization and Social Support Project 17. We fully support the Privatization and Social Support project. This program should help to maintain support for the government's privatization program, especially now that it has been accelerated. It would have been useful to include a discussion of core labor standards in this document, since it focuses on employment and social safety net issues. 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 the consent of the Executive Director concerned.