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 oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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TURKEY

CURRENCY EQUIVALENTS

Value of US$

1959 a/ TL 2.801970 TL 11.501971 TL 14.921972 TL 14.151973 TL 14.151974 TL 13.931975 TL 14.441976 TL 16.051977 TL 18.001978 TL 24.281979 TL 31.081980 January TL 70.001981 January TL 91.001982 January TL 139.601983 January TL 191.151984 January TL 309.20

a/ Annual averages through 1979.

FISCAL YEAR

Republic of Turkey March 1 to February 28 - through 1981March 1 to December 31, 1982January 1 to December 31 - from 1983

LIST OF ABBREVIATIONS

DYB State Investment BankEEC European Economic CommunityOECD Organization for Economic Cooperation

and DevelopmentPIR Public Sector Investment Review ReportSAL Structural Adjustment LoanSDR Special Drawing Rights

SEE State Economic EnterpriseSPO State Planning OrganizationTL Turkish Lira

FOR OFFICIAL USE ONLYTURKEY

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 5Public Finances 7SEE Accounts 8Public Investment 8Assessment 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 38Social Costs of Restructuring 39Risks 40

PART V- THE PROPOSED LOAN 42

Procurement, Disbursement and Administration 43Monitoring 43

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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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 4Table 2: Balance of Payments, 1980-83 5Table 3: Merchandise Exports, 1980-83 6Table 4: Consolidated Budget Summary, 1980-83 7Table 5: SEE Accounts, 1980-83 8Table 6: Savings and Investment, 1980-83 9Table 7: Selected Economic: Indicators, 1982-89 13Table 8: Public Fixed Investment:, 1974-84 20Table 9: Sectoral Distribution of Public Fixed

Investment, 1980-85 21Table 10: Allocations for Large P'rojects, 1983-84 10Table 11: Summary of Tariff Changes in 1984 Regime 26Table 12: Trends in Real Wages, 1L977-82 40

Figure 1 The Fifth Plan (1985-89) in the StructuralAdjustment Process 14

ANNEXES

Annex I : Social and Economic Data Sheets 47Annex II v Status of Bank Group Operations in Turkey 52

Annex III : Supplementary Loan Data Sheet 54Annex IV-A : Government Letter and St:atement of

Development Policies -- 1984 56Annex IV-B : Overview of Structural Adjustment Program

and SAL V 69Annex V ; Structural Adjustment Loans I-IV 81Annex VI : Operational SEEs: Summary of Financial

Results, 1980-84 93

Map . No. 11656R

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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 standardvariable interest rate.

Description : The proposed loan would be the fifth in a series ofloans to support the Government's structuraladjustment program initiated in January 1980. Theprincipal aim of the program is to redirect theTurkish economy towards a development path placingmore reliance on r.arket forces and outward-orientation. The measures to be taken in this phasesof the program are outlined in the Government'sStatement of Development Policies - 1984, and fallinto two main categories:

(a) At the macroeconomic level, the program includesthe development of a medium-term frameworkconsistent with the ongoing structural adjustmentprogramn, continued rationalization of publicinlvestmnent, further import liberalization, andinstallation of a computerized debt managementsystem;

(b) At: the sectoral level, the program includes theimplementation of measures to address structuralissues in the financial sector and preparation ofaction plans for the agriculture and energysectors.

The loan would finance all imports with the exceptionof items financed by other sources, military orpara-military items, luxury goods and nuclear reactors.

Risks ; The main risks arise from uncertainties in theexternal environment, including adverse developmentsin the growth of trade, and internal factors whichmight impede the Government's determination to carryout the structural reforms designed to restoredomestic and external financial equilibrium,rationalize investment and lay the foundation forsustainable growth over the medium term.

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EstimatedDisbursements : The proceeds of the lcan would be disbursed in two

tranches, $250 million equivalent soon aftereffectiveness, and the remaining $126 millionequivalent after a performance review to be held inJanuary 1985.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRDTO THE EXECUTIVE DIRECTORS

ON A PROPOSED FIFTH STRUCTURAL ADJUSTMENT LOAN TOTHE REPUBLIC OF TURKEY

1. I submit the following report and recommendation on a proposed FifthStructural Adjustment Loan to the Republic of Turkey for the equivalent ofUS$376 million to support the Government's program of structural reformsdesigned to restore financial equilibrium and achieve sustainable growth. Theloan would have a term of 17 years including 4 years of grace, with interestat the standard variable rate.

PART I - THE ECONOMY

2. An economic mission visited Turkey in June 1982, and its reportentitled "Turkey: Country Economic Memorandum, Recent Economic Developmentsand Medium-Term Prospects" (No. 4287-TU) was distributed to the ExecutiveDirectors in June 1983. The report, in addition to analyzing Turkey'smedium-term prospects and overall creditworthiness, presents a synthesis ofearlier 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 inJanuary 1984 to review the economic developments of 1983, the 1984 AnnualProgram and selected structural adjustment issues. The findings of themission are reflected in this report.

3. Turkey is about as large as France and Germany combined, with apopulation of around 46 million and an estimated GNP per capita of $1370 in1982. The density of population is low (78 per square kilometer ofagricultural land), and about 45 percent live in urban centers. Populationgrowth (2.2 percent per annum) is below the median for middle-incomecountries. Despite rapid economic growth in the mid-1970s as well assubstantial emigration of workers (to Western Europe and more recently, to theMiddle East), the employment situation has deteriorated steadily with anunemployment rate currently estimated at about 19 percent. There is, howev,er,little or no absolute poverty, although income distribution is skewed. Thereare considerable regional differences in income and large rural-urbandisparities. Recent data indicate a probable worsening in incomedistribution, especially of wage and salary earners, and a sharp real declinein average earnings. Educational enrollments have expanded greatly but thelevel of adult literacy remains relatively low.

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4. Agriculture is an important sector in the economy, even though itsrelative importance is declining. It corntributes 18 percent of GDP (1983),employs about 51 percent of the labor force, and provides about a third ofmerchandise exports (excluding processed food). Turkey is one of the very fewdeveloping countries which is self-sufficient in food. As a result of themajor emphasis of past development strategy on rapid industrialization, theindustrial sector today accounts for 27 percent of GDP and nearly 64 percentof exports (mainly textiles, processed foods, and leather products), but only10 percent of the labor force. The private sector is dominant in exports andaccounts for some 85 percent of exports. Turkey has large underdevelopedenergy resources (hydropower and lignite), but little petroleum. Energyconsumptipn has grown in line with GDP, but remains below the per capitaaverage for middle-income developing countries. Crude oil imports accountedfor over 86 percent of consumption and cost about $3.2 billion in 1983,equivalent to about 56 percent of exports. The energy situation remains amajor preoccupation of the Government, and investments in energy absorb thelargest share of the public investment program.

5. During the 1970s Turkey did not make the necessary adjustments to theshocks caused by the steep rise in oil prices, stagflation in the OECDeconomies, and the consequent deterioration in the terms of external trade.Turkey maintained high rates of economic growth by raising the share ofinvestment in GDP. This was financed initially by workers' remittances and,following the quadrupling of oil prices, increasingly by short-termborrowing. The rapid growth came to an abrupt halt in 1977 as the massiveexternal debt burden led to a sharp deterioration in creditworthiness, severeshortages of imports, and disruptions in industrial production with a rise inunemployment. By the end of 1979, domest;ic inflation had also become an issueof critical importance. It was not until January 1980 that the Governmentlaunched a policy of structural adjustment placing greater reliance on marketforces and on outward orientation.

6. The implementation of the adjustment ;program was carried out by amilitary regime which assumed power in September 1980 following a period ofsustained unrest. Subsequently a Consultative Assembly was set up to draft anew constitution, which was overwhelmingly endorsed in a nationwide referendumin November 1982. New election and party laws were then promulgated, andparliamentary elections completed in November 1983. A new Government formedby the Motherland Party assumed office in. Decemnber 1983. In the municipalelections held in March 1984 the Motherland Party obtained a renewed mandate,despite being opposed by five parties comtpared with the two which opposed itin 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 onewith an outward orientation, by stabilizing the economy while laying thefoundation for sustainable growth over the medium term, The program includesthe following main features-.

(i) a realistic and flexible exchange rate;

(ii) incentives to encourage producers to export;

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(iii) tight monetary conditions to restrain domestic demand and controlinflation;

(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 theirburden on public finances and improve their efficiency; and

(ix) progressive liberalizattion of imports including the eliminationof quantitative restrictions and the rationalization of thetariff structure.

8. From the outset it was clear that the structural adjustment processwould be a longer term effort., as it represented a fundamental change inattitudes, institutions and po)licies. Until the end of 1983 the Government'sapproach had been to proceed on a year-by-year basis, setting targets in theannual programs in line with t:he overall objectives. However, beginning in1984, the Government intends to develop its own mediumr-term framework. Theformulation of the Fifth Five-Year Development Plan (1985-89) during thecourse of this year will enable the Government to chart the further course ofthe structural adjustment process according to a consistent and betterquantified set of medium-term objectives.

9. Judging by the progress made between 1980 and 1983, the Turkisheconomy has shown an impressive response to the structural adjustmentprogram. Until 1982, actual performance met or exceeded the Government's owntargets. The reform program was strictly adhered to, and most fiscal andmonetary targets in the stabilization program were met. Major structuralreforms in the tax system, new import and export regimes, moves towardseconomic pricing by SEEs, improvement in public investment, the liberalizationof interest rates, and the adoption of a daily fluctuating exchange rate, allcontributed to substantial short-term progress with favorable longer-termimplications. After two consecutive years of decline, real GNP grew in 1981and 1982 by 4.1 percent and 4.6 percent respectively. The growth was dueprimarily to significant improvements in the foreign balance since thestabilization program allowed for only slight increases in domestic demand.The situation was reversed in 1983 when the growth rate slowed down to anestimated 3.2 percent (Table I.) and total domestic demand increased by4.3 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.

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Table 1. TURKEY - NATIONAL ACCOUNTS, 1980-83

1980 Level 1980 1981 1982 1983At 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 4.3Public 544.1 12.3 8.8 0.8 2.1 1.3Private 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 2.9Public 482.4 10.9 -3.7 9.4 2.2 1.7Private 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 ItemsAgriculture 925.0 22.7 1.7 0.1 6.4 -0.3Industry 1026.7 25.2 -5.9 7.2 4.6 7.6Services 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 pointsto 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. 1981witnessed a 7.2 percent growth in industrial value added, followed by4.6 percent in 1982 and 7.6 percent in 1983. Agriculture, by contrast, wasunfavorably affected by weather conditions in 1981 and 1983. Only in 1982 didfavorable rainfall patterns contribute to bumper crops and a significant6.4 percent growth in value added. On the expenditure side, the rate ofgrowth of public investment at constant prices has been contained at anaverage of 2.4 percent per annum during 1980-8:3, while the rate of growth ofprivate investment in real terms has improved systematically from(-)17.3 percent in 1980 to 4.8 percent in 1983. Private manufacturinginvestment, on which much of the export-oriented development depends,similarly seems to be recovering from a real growth rate of (-)14.1 percent in1980 to a more encouraging 1.0 percent in 1983.

11. On the inflation front, the Government was able to reduce the annualinflation rate, as measured by the wholesale price index, from 107.2 percentin 1980 to 31.4 percent in 1983. Although progress was systematic until 1982when the rate of price increase reached a low of 25.2 percent, 1983 witnesseda resurgence of inflationary pressures. Prices; were fuelled by an expansionof Central Bank credits to the private sector during the second half of 1983to reduce the difficulties of some banks and enterprises, and a lowering of

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nominal deposit interest rates during the year in anticipation of a reductionin the rate of inflation that did not occur. The new Government has placedthe highest priority on bringing about a substantial deceleration of the rateof 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 percentof 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. Exportvolume, however, recorded an increase of about 14 percent, reflecting thecontinued competitiveness of Turkish goods in European and Middle Easternmarkets. But for a drop of nearly 12 percent in export prices andconsequently a 6.1 percent decline in the terms of trade, the net resultswould have been more positive. Nevertheless, on balance, the performance ofmerchandise exports has been quite impressive over the 1980-83 period, risingin dollar terms by 61.6 percent in 1981, 22.2 percent in 1982 and decliningonly 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 8086Imports 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 2209Amortization on M&LT debt a/ -436 -560 -956 -1514Public M&LT capital (net) a/ 1915 1678 1548 695

Other capital b/ 1615 612 186 999Change 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.

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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 towardsproducing 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 1983Value % 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 andsea 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.

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14. By contrast, the lower than anticipated growth in merchandise importswas mostly due to factors exogenous to Turkey. In value terms such importswere up by 12.9 percent in 1981, down by 1.0 percent in 1982 and up again by4.4 percent in 1983. The relative stability of merchandise imports in 1982-83reflects price decreases in both oil and non-oil imports. On average theprice of imported oil decreased by 9.6 percent in 1982 and 10.6 percent in1983. On the other hand, the recession in the Western economies during mostof the period 1980-83, and the slow growth of EEC countries in 1983,contributed to lower than expected receipts of workers' remittances. This wasespecially true in 1983 when remittances fell by nearly 29 percent. Overall,the positive elements in the trade balance during the period tended tocompensate for the stagnation in the services accounts, except in 1983 whenthe adverse price effects for Turkish exports compounded the adverse impact ofthe 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 paymentsareas, has been consistent throughout the period. The net result has been aretrenchment of the public sector and success in bringing expenditures more inline with resources. Thus Government expenditures, which stood at24.0 percent of GNP in 1980, fell to 19.4 percent in 1983 (Table 4). Thebudget deficit, which stood at 4.6 percent of GNP in 1980, decreased to1.4 percent in 1981, 1,2 percent in 1982 and finally 0.5 percent of GNP in1983. 1983 was the first year in which the actual results were better thanthe program target. Transfers to the SEEs as a percentage of GNP also showedsteady improvement, from 4.8 percent in 1980 to 2.5 percent in 1983.Budgetary revenues, on the other hand, have been consistently below programfigures, with the result that in order to maintain a non-inflationary fiscalpolicy, 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 2217.0Expenditures 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 19.4SEE transfers 2.4 4.8 3.4 3.3 2,9 2.2 2.9 2.5Budget 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, theten-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.

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16. SEE Accounts. The Government succeeded in improving the profit toGNP ratio of the SEEs from (-)0.5 percent in 1980 to 0.8 percent in 1982. In1983 the ratio declined slightly t:o 0.4 percent, partly as a result of delaysin announcing price adjustments. This was ccmpensated, in terms of overallfinancial performance, by a decrease in the ratio of SEE financingrequirements 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 1983Program Actual Program Actual Program Actual Program Est. a/

Sales revenue 1223 1146 1981 1767 2601 2650 3386 3403Total expenditures 1197 1169 2135 1759 2554 2583 3318 3351

Profit/lossbefore taxes 26 -23 -154 8 47 67 68 52

Total investment 205 459 433 616 540 684 706 809Fixed investment 168 281 :316 406 472 533 611 678Change in stocks 37 178 [17 210 68 151 95 131

Financingrequirement 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 0.4Financingrequirement 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 1980-83period. The improvements in the SEE accounts, besides reflecting a moreflexible price adjustment policy, are directly related to the Government'sefforts to expose the SEEs more tc competition, to streamline theirorganizational structure as well as their links to supervisory governmentagencies, to encourage operational efficiency through the strengthening ofmanagerial autonomy, and finally to bring about better management of human andfinancial resources. The aim of the Government continues to be increasedprofitability and decreasing dependence on budgetary support for the SEEs'investment programs.

17. Public Investment. Restraining the high rate of growth in publicinvestment is a major objective of the structural adjustment program. In realterms, public sector investment declined by 3.7 percent in 1980, and then roseby 9.4 percent, 2.2 percent and 1.7 percent in 1981, 1982 and 1983respectively. Private real investment, by contrast, declined by 17.3 percent

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in 1980, declined again by 8.8 percent in 1981, and then rose by 5.4 percentin 1982 and 4.8 percent in 1983.. The aggregate figures show that theGovernment has been able to continue to rationalize its investment program andto lower on balance the public sector's dependence on external resources(Table 6). Further details relating to the size, sectoral allocations andcomposition 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 1983Program Actual Program Actual Program Actual Program Estimated

Public sectorInvestment 10.19 15.49 13.48 14.63 12.18 12.60 12.35 11.35Savings 6.21 5.17 10.21 8.50 9.10 8.32 8.27 7.42Gap -3.98 -10.32 -3.27 -6.13 -3.08 -4.28 -4.08 -3.93

Private sectorInvestment 9.57 10.24 8.58 9.75 9.72 8.94 9.19 8.47Savings 10.31 15.06 6.67 12.37 10.86 11.88 12.39 9.25Gap 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 losemomentum in the second half of 1.983, which may be explained by theGovernment's preoccupation with the elections and its reluctance to take someimportant decisions. But overall there is little doubt that Turkey made someimpressive gains during the period 1980-83 as a whole. It is clear from thedata presented in the preceding pages that the stabilization program isyielding results, that export growth has been placed on a firm basis and thata substantial measure of monetary and fiscal discipline has been introduced inthe management of the economy. There were factors exogenous to Turkey, suchas adverse price developments on the external front and a downswing inagricultural production due to poor weather, which contributed to some of thenegative macroeconomic results. The new Government has moved swiftly to dealwith the loss of momentum. In Part III which follows it becomes clear how theGovernment's resolve is being transcribed into a rigorous medium-termframework for pursuing the structural adjustment process.

19. From the outset it was recognized that the structural adjustmentprocess in Turkey would be a longer term effort, as it represented afundamental change in economic incentives and in the institutions to deviseand implement them. Significant progress has been achieved in the past fouryears, but the task of restructuring is by no means over. The objective ofthe present Government is to broaden and deepen the structural adjustmentprocess, building on the progress already achieved, and carrying through tothe sectoral and sub-sectoral level the approach that has worked successfullyin the area of macroeconomic policy. The proposed Fifth SAL should be viewedas part of this longer adjustment process.

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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 StructuralAdjustment Loan, propounds a medium-term framework which is compatible withthe objectives of the structural adjustment program. The policy actionscontained 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, theSAL V program encompasses a number of decisions already taken, some inprocess, and others that will need to be addressed during the course of theprogram spanning 1984 and early 19S85. The main actions are also summarized inmatrix form (Annex IV-B).

The Medium-Term Framework

21. The draft Fifth Five-Year Development Plan (1985-89), which willserve as the Government's medium-term framework, is expected to be completedby mid-1984 for submission to the Grand National Assembly. The Government hasdecided to change the nature of its planning process, moving from thetraditional, more centralized framework to one which is indicative in nature.This is in line with the Government's view that it must rely increasingly onan efficient private sector as the engine of growth. The Government is alsokeenly aware of the need to strengthen the links between the macroeconomicstrategy and the concomitant sectoral and subsectoral strategies. To thisend, it intends to make greater use of Joint planning committees as forums toachieve intra public sector and public/private sector consensus.

22. The Basic Strategy. The Goverr,ment 'has reiterated in the Statementof Development Policies that the basic theme of the Plan will continue to bean outward oriented development strategy increasingly guided by marketforces. The Plan will define the respective roles of the public and privatesectors and will indicate through its quantitative targets what the

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expectations are for each. The public sector will be expected to provide theinfrastructure required to allow the private sector to achieve its potential,while the private sector will be encouraged to develop along the lines ofTurkey's comparative advantage.

23. The central theme of Turkey's structural adjustment program is one ofreliance on sustained export growth over the medium term. The Plan will givea clear signal to the private sector that the public sector investment programis supportive in nature and consequently that its size will not lead to apre-empting of resources for the private sector. The Government recognizesthat a strong revival of private investment is predicated on the control ofinflation, since its main policy objective in setting interest rates is toprovide a real rate of return on savings. Thus at least the first year of thePlan will reflect in its targets a continuation of stabilization as inflationis reduced to a level which will make interest rates attractive enough toencourage the growth of private investment. The Government clearly recognizesthat the adjustment process will involve shorter-term hardships, but that byproviding a sounder economic base the Plan will contribute significantly toimprovements in the standards of living of the population over the mediumterm. The Fifth Plan is seen in, Turkey as a transition plan, a bridge betweenstabilization and the return to Turkey's normal growth path.

24. Key Targets of the Plan. The Government has announced its intentionof preparing a Plan that does nct conflict with the aims of the continuingstructural adjustment process as well as its achievements to date. It ispremature to present too many precise figures since these will have to awaitapproval of the Plan by the Grand National Assembly. Nevertheless, theGovernment has indicated its line of thinking on some of the key targets forthe period covered by the Plan (1985-89),

(i) the average annual real rate of growth of merchandise exports isprojected to be in the 8-11 percent range; given the low basefrom which the export drive started, and the Government'scommitment to the maintenance of a competitive exchange ratetogether with a carefully designed set of trade incentives, thistarget is in the Government's view both realistic and attainable;

(ii) the size of the public investment program will be regulated bythe Government's ability to generate resources and therefore theratio of public sector borrowing requirements to GNP will declinefrom the expected level of about 3.5 percent in 1984;

(iii) the Governments sintention is to restore an approximate balancebetween public and private fixed investment in the medium term;given the public/private balance of about 60/40 in 1983, thisimplies a growth rate for private fixed investment which is morethan double that of public fixed investment over the Plan period;

(iv) the share of public fixed investment to be allocated to thepriority sectors--energy, 1/ agriculture, transport andcommunications--wi].l be maintained on average at least at the

1/ Including electricity, petroleum exploration and refining, coal andlignite mining, and pipeline!s.

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level attained in 1983; within t:hese sectors, projects identified

as of high priority will receive the bulk of the allocations andthe Government will progressively withdraw from new investmentsin manufacturing that can more efficiently be carried on by theprivate sector;

(v) under the above assuimptions, ancl with reasonable expectationsregarding external capital flows, the Government's target averageannual growth rate for the Plan period will be about 6 percent;and

(vi) the Government will not allow a situation in which the targetedgrowth rate of GNP will need to be supported by annual grossexternal capital requirements which would push the debt serviceratio 1/ significantly above the! 25 percent average envisaged forthe 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 growthstrategy commensurate with its ability to generate resources. The Governmenthas emphasized that it would adjust its annual targets through its AnnualPrograms should the projected resources fail to materialize during the courseof the Plan, to avoid jeopardizing the gains to date from the structuraladjustment process.

26. The Bank's Medium-Term Projections. The development of a medium-termframework by the Turkish Governmenit is an issue that goes back to SAL III.Both the Bank and the Government agreed then that the structural adjustmentprocess had to be placed within the boundaries of a medium-term framework, andthat the best mechanism for doing so would be through the Fifth Five-YearDevelopment Plan, which was originally scheduled to cover 1984-1988. Thedrafting and adoption of the Government's Fifth Plan was expected to becompleted in 1983. The previous Government drafted a Five-Year Plan, but thenpostponed its presentation to the National Assembly by one year to enable thenew Government to prepare its own medium-term program.

27. Concurrently, the Bank produced its own medium-term projections inthe 1983 Country Economic Memorandum (CEM). 2/ These projections werediscussed in detail with Turkish Government officials during and after thepreparation of the CEM. Further discussions were held in January 1984 duringthe Program Review Mission and again in March during the SAL V appraisal. Thedialogue on the question of Turkey's medium-term framework has thus been acontinuous one culminating in the Government's overall view of the medium termas set out in the Statement of Development Policies - 1984. While lessoptimistic 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-factorservices 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 theresurgence of inflation, the current view from Turkey, in its broad aspects,is corroborated by the Bank's own updating of its medium-term projectionsbased on developments in the second half of 1982 and 1983.

28. The Bank's projections for the mediumrterm take as their startingpoint the Government's own targets for the key macroeconomic variables. lheBank attempted to disaggregate the Government's overall targets for the Planand to check whether these were in line with domestic and foreign resources.The Bank's projections indicate the need for a continuation of thestabilization program well into 1986, an average annual GDP growth of5.8 percent in 1985-89 and a manageable balance of payments. Two centralassumptions underpin these projections, namely export sustainability andfiscal discipline. Table 7 below presents the Bank's projections of the keyeconomic variables for the Fifth Plan period (1985-1989). Figure 1illustrates the trends in selected indicators since 1980 and places the 1984program 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 RateUJnits 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 5.8Consumption " 3861 4028 4181 4359 5410 3.9 4.3 3.8 5.3Fixed 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 9.0Imports of Goods " 8843 9235 9750 11108 21658 -0.1 12.0 5.6 7.8Trade Balance -3097 3507 -2700 -2995 -5226

Workers' Remittances " 2187 1554 1620 1750 2436

Current Account Balance Current $ m -1131 -1991 -1138 -1220 -2636

RatiosFixed Investment/GDP Z 19.2 19.0 18.9 19.0 20.1Savings/GDP 2 17.5 17.0 17.7 18.1 19.3Exports of Goods/GDP % 9.9 10.9 12.3 12.7 14.3Current Account Deficit/GDP a/ 2 -2.0 -3.4 -1.8 -1.7 -2.1Debt Service Ratio b/ % 19.1 28.0 24.5 25.3 23.4Public 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.

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Fig. 1: TURKEYTHE FIFTH PLAN (1985-89) IN THE STRUCTURAL ADJUSTMENT PROCESS

GROWTH i INFLATION

100- 90-

80-

7- - 70-

, I 60-a,1 5- I i o 5 0 -

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 _-o0TJ1981 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 BORROWINGCL ~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 exportgrowth will be achieved and that in the base year of the Plan merchandiseexports will stand at $7.1 billion. 1/ Merchandise exports are projected togrow at an average of 9 percent per annum in real terms, i.e. slightly on theconservative side of the Government's 8-11 percent target range. Merchandiseimports, on the other hand, are assumed to grow moderately in real termsthrough 1986 and then pick up to an average 8-9 percent in the terminal yearsof the Plan, to match the projected growth rate of merchandise exports. Onthese assumptions, the current account balance shows a decreasing deficitthrough 1985 as stabilization policies act to curtail import growth whileencouraging exports. As higher growth rates set in during the middle of thePlan period, the trend reverses and the current account deficit rises againthrough the end of the Plan. The terminal year 1989 shows a deficit ofapproximately $2.6 billion as compared to a 1985 figure of $1.2 billion. Theprojected capital account should remain manageable throughout the projectionperiod even in the face of some sharp increases in the amortization andinterest payments in 1985-1986, arising from the debts rescheduled during the1978-1982 period and the imposed constraint on foreign exchange reserves beingequivalent to at least two months' imports. The debt service ratio shouldaverage 24.5 percent for the Plan period with a maximum of 25.3 percent in1986. Gross capital inflows required to support Turkey in 1985-1989, on theseassumptions, average about $4.8 billion per year. This inflow is consistentwith a decreasing debt service ratio from 1986 onwards.

30. The projections indicate a GDP growth of 5.8 percent per annum onaverage throughout the Plan period, with a low of 5.0 percent in the initialyear of the Plan and a high of 6.6 percent for the final year. Theachievement of these growth rates will depend on the growth of the productivesectors, namely agriculture and manufacturing. This in turn will depend to alarge extent on the Government's determination to constrain the growth of thepublic sector in line with public resources and to create a more favorableinvestment climate for the private sector through its anti-inflationarypolicies and its restructuring efforts.

31. The scenario assumes progressive improvements in the public/privatefixed investment ratio throughout the Plan period, from the initial 60:40ratio in 1984 to a terminal year ratio of 53:47. This translates into anexpected real growth per annuin in public fixed investment of about4.8 percent. The comparable ifigure for private fixed investment is about10.0 percent, or a little more than twice the growth rate for publicinvestment.

32. The medium-term scenario described here is of course, only one ofmany possibilities and is used specifically in this report to illustrateTurkey's potential in the light of the Government's own targets. The Bankprojections are consistent with the more conservative of the Government'stargets and they are reasonable given Turkey's record of structuraladjustment, the favorable responses from the international financial commlunityto 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 termsover the level achieved during the corresponding period in 1983.

- 16 -

export market possibilities. 1/ A scenario compatible with the upper rangesof the Government's key targets would need to 'be supported by substantiallyhigher export growth rates and is difficult to envisage at this time, giventhe transitional (stabilization-cum-growth) nature of the upcoming Plan.

33. There are certain risks associated with the Fifth Plan targets. Onthe downside, with Turkey's export performance heavily dependent on exogenousfactors such as the world economic outlook and movements in internationalprices, a slower rate of growth of merchandise exports, say 6-7 percent perannum over the Plan period, would lead to a more difficult (but stillmanageable) balance of payments situation, morie external borrowing, a lowerGDP growth (averaging about 4.5 percent per annum) and a higher debt serviceratio (26-27 percent per annum). In such a situation the Government wouldhave little chance of absorbing the unemployed and improving tangibly theaverage standard of living. However, given thes Government's emphasis onexport promotion and the determined efforts to counter the bias towardsproducing for the domestic market, the more baLanced perspective is the oneset out in the medium-term scenario presented above.

34. The Government intends to review with the Bank the Fifth Five-YearDevelopment Plan before the release of the second tranche of the proposedloan. Completion of the preparation of a Plan compatible with the aims of thestructural 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 previousGovernment, but it needed revision to take account of the reform measuresintroduced by the new Government soon after the latter took office. The mainstructural measures in the new Government's program are:

(i) a reorganization of the Government's administrative machinery

which, inter alia, concentrates authority over economic affairsin 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 returnon savings while largely freeing lending rates set by thecommercial banks;

(vi) a reduction in the financial transactions tax and the withholdingtax on interest payments; and

(vii) a reaffirmation that with some exceptions, SEEs will be free toset 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 continuedat least through 1984 and prolbably into 1985 and 1986. GDP is targeted togrow 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 ofthe agricultural sector with a growth target of 2.8 percent (versus(&)0.3 percent in 1983), and from a continuation of the good performance forvalue added in industry (6.3 percent in 1984 versus 7.6 percent in 1983). Theprogram calls for a target average inflation rate of about 29 percent. Theyear-on-year rate, which was running at about 40 percent in December 1983, isexpected to be less than 25 percent by the end of 1984. Given the actualdevelopments in the first quarter of 1984, it appears likely that thesetargets may turn out to be somewhat optimistic. This further highlights tlheneed to pursue tight demand management policies throughout the year in orderto 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 ofGNP) in 1983, largely in response to a narrowing in the trade deficit and anincrease in workers' remittances. These results assume a growth ofapproximately 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, bothpredicated on the continuing improvement in the industrial economies. Importgrowth is expected to be moderate as in 1983 and is projected at 5.6 percentafter allowing for an increase in non-oil imports as a result of the recenttrade liberalization measures.

38. The Government's central aim in the fiscal area is to continue toreduce 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 or0.3 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 planned29 percent increase in 1984, expenditures will be pared accordingly as inprior years. The declining ratio of public revenues to GNP remains a majorarea of concern and the Government is making improvements in the system ofassessing and collecting taxes. For the SEE accounts, the latest estimatesfollowing recent price increases indicate a profit to GNP ratio of 1.0 percentin 1984 (versus 0.4 percent in 1983) and a financing requirement to GNP ratioof 5.8 percent (versus 6.4 percent in 1983). Overall, the public sectorborrowing 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 controlinflation and support the grcowth targets set out in the revised annualprogram. Within the monetary constraints, priority will be given to creditsfor the export sector. Interest rate policies will be periodically reviewedto maintain a real rate of return on savings. Agreement has been reached with

1/ See also para. 98 below.

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the IMF on the performance criteria of the monetary program throughApril 1985, to serve as a basis for a new one-year Standby in the amount ofSDR225 million to run from April 1984. The Government is committed to aflexible exchange rate policy, whic:h it has applied consistently since 1980,because of its critical importance to the export drive and to Turkey'smedium-term outlook. In 1983 the nominal effective exchange rate wasdepreciated (on an average annual basis) by 22 percent in accordance with thispolicy, resulting in a real depreciation of about 3.5 percent. In 1984, theliberalization of foreign exchange transactions has so far resulted in a realdepreciation in excess of 6.0 percent.

40. Of particular importance to the macroieconomic outlook for 1984 willbe the course of interest rates. Lending rates remain high in real terms and,therefore, tend to hinder investments. The Government's objectives in thisarea are to:

(i) increase the role of the market in the determination of interest:rates;

(ii) reduce the differences between the interest rates on preferentialand non-preferential credits; and

(iii) encourage the availability of medium and long-term credits forthe productive sectors of the economy.

The Government is aware that only with a decrease in the inflation rate willnominal interest rates decline and thereby lead to the growth of privateinvestment on which the medium-term prospects depend.

41. The Government's revised 1984 program reaffirms the intention torestructure the economy. The reform measures are intended to widen theprocess of economic restructuring. They provide the broad outlines of amedium-term blueprint which will need to be quantified in the Plan. Eachyear, the Government will undertake an annual review of economic performancewithin the context of its medium-term projections as a basis for drafting itsnext annual program. This will ensure that the 1985 Annual Program, as wellas subsequent ones, will be compatib'e with the objectives of the Fifth Planand the aims of the structural adjustment process.

Public Investment

42. The management of public investment presents one of the difficultchallenges for the Government's struictural adjustment program. The publicinvestment program in Turkey has traditionally been characterized by weaknessin project evaluation and preparation, resulting in a poor choice of projectsand underestimation of both investment costs and construction periods. Thisled to the evolution of a public investment program whose size encroached onprivate savings and whose composition was largely unrelated to sectoralobjectives. The redefinition of the role of public investment under thestructural adjustment program inclucdes as a basic medium-term objective therestoration of an approximate balanc:e in the ratio of public to private fixedinvestment (as against the 60:40 ratio that prevailed in 1983) and the removalof physical and social bottlenecks to economic growth. In order to allow the

- 19 -

private sector to play its leading role in output, export and employmentexpansion, it is the Government's objective to focus public investment on highpriority projects in infrastructure, with manufacturing being increasinglyleft to the private sector. It is also the Government's objective that publicinvestment should increasingly be financed by public resources and, therefore,that the ratio of public sector borrowing requirements to GNP should declineover time.

43. Over the last three years considerable progress has been made towardsrationalization of the public investment program. In particular, the size ofthe program has been made more consistent with the available resources.Public investment registered an average increase of only 2.4 percent per annumduring 1980-83 as against an average annual growth rate of 18.4 percent during1972-77. This involved a much tighter control over implementation of theprogram. No extra budgetary allocations have been made available to financepublic investment since the end of 1981. Further, the number of projects hasbeen reduced from over 9000 in 1980 to about 7400 in 1984. 1/ This involvedboth the dropping of a large number of projects of unproven economic merit aswell as a decision not to include any new large projects in the program during1981-83. The sectoral composition of public investment is also now in greaterharmony with the macroeconomic objectives. An increasing share of allocationsis being directed to infrastructure, especially energy, with substantialreductions in allocations to manufacturing. However, the rationalization ofpublic investment must be viewed as a medium- to long-term process, and moreneeds to be done to concentrate public resources on the most appropriate needswhile making available a greater amount of resources to the private sector.These objectives are complementary, since the restoration of privateinvestment is dependent in large part on the availability of infrastructureand essential inputs, such as power, adequate transport facilities and basicmaterials, 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 growthof 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 ofpublic investment in total fixed irLvestment as compared to the two previousyears. This share is expected to decline in future years in line with theGovernment's policy. Public investment in 1984 is expected to grow at3.1 percent over the level achieved in 1983. Table 8 below shows the patternof public investment during the period 1980-84 as compared to the period1974-78. With the increase in public savings from 5.2 percent of GNP in 1980to 7.4 percent in 1983, the gap bet:ween public investment and public savinghas been progressively reduced, from over 10 percent of GNP in 1980 to3.9 percent of GNP in 1983 (Table 6).

1/ These numbers are somewhat mis:Leading since many "projects", especially inthe social sectors, are programs which essentially represent currentrather 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 FixedInvestment 1155.8 1264.5 1292.7 1314.4 1355.1 9.8 -3.7 9.4 2.2 1.7 3.1

(TL billions1983 prices)

Share of TotalFixed Investment 57.0 62.0 61.1 60.3 59.9

(percent)

Source: State Planning Organization.

45. Sectoral Composition: The sectoral ccmposition of public investmenthas undergone a significant change in the last four years. Most noteworthy isthe progressive increase in the allocations for energy, which represented38.7 percent of total public fixed investment in 1983 (Table 9), reflectingthe Government's efforts to increase energy production. There has also beenan increase in the allocations for agriculture and transport from the1980 levels. On the other hand, the share of manufacturing has dropped from29.7 percent in 1980 to 18.1 percent: in 1983 and is expected to declinefurther to 14.3 percent in 1984. Irn 1983 about 65 percent of the totalallocations were directed to rehabilitate and expand infrastructure(irrigation 1/, energy, transport and communications), as contrasted with 1980when only 57.1 percent of the allocations went to infrastructure. The 1984Program maintains the same emphasis. Table 9 also shows how closely thesectoral pattern of public investment in the 1933 Program compares with thepattern for 1982-85 suggested in the Public Investment Review Report (PIR) 2/,which called for increases in energy, agriculture and transport and a declinein manufacturing. The share of manufacturing in 1983 is already below therecommended 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 9.8Manufacturing 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 andcommunications 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 toprojects according to the following criteria:

(a) those having high economic rates of return and capable of beingcompleted within a short period;

(b) those which will help develop indigenous energy resources, andrehabilitate 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. Asagainst only two projects completed in the irrigation subsector in 1980, forexample, 9 projects were completed in 1982 and 19 projects in 1983, while25 projects are expected to be completed in 1984. In the power subsector, asagainst 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 of678 MW of power. In all, the Government: completed 167 projects in the keysectors (agriculture, manufacturing, energy, transport and communications) in1983 and expects to complete 249 projects in these sectors in 1984. Moreover,a number of large projects, the economic viability of which had not beenestablished, have been dropped, deferred for restudy or substantially reducedin scope in the 1984 Program. Projects in this category (27 in all) areexpected to receive less than 2 percent of the total allocations for largeprojects in 1984.

47. The 1983 investment expenditures and the 1984 Program allocationsreflect a conscious effort to spee.d up the project completion rate byfocussing funds on a more limited number of projects. In 1983, over96 percent of the funds allocated for large projects (each costing overTL 7 billion) went to the 150 projects identified as of high priority. In the1984 Program this share is still over 92 percent (Table 10).

Table 10: TURKEY - ALLOCATIONS FOR LARGE PROJECTS, 1983-84 a/

1983 EstimatedTotal 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 92.2Priority to

be confirmed 27 15.0 1132.1 20.5 10.7 2.1 7.7 1.3Others 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, thereis scope for further improvement in the Government's capacity for projectpreparation, evaluation, and selection. In addition, greater efforts arerequired to improve the planning capabilities of the executing agencies. TheGovernment is trying to build up its evaluation capability primarily in theState Planning Organization (SPO), supplemented by that in key agenciesincluding the State Investment Bank (DYB). The head of a reorganized projectevaluation unit in SPO was appointed in ;982 and the department is now inoperation. Staff from the Bank's Economic Development Institute (EDI) and DYBjointly conducted a training course on power projects in January 1983 andanother on infrastructure projects in September 1983. Proposals are underconsideration for organizing further training courses of this type in Turkeyfor Government and SEE staff as well as for instructors who could conducttraining courses in the future. Meanwhile, the regular training courses beingconducted by DYB will be strengthened.

49. The Government recognizes that the project list is still not fullysatisfactory and expects to further rationalize it over the next severalyears. The sheer size of the program, some 7400 ongoing projects costingabout $30 billion, means it can only be modified to a limited extent in anysingle 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 theopportunity of the Plan preparation to undertake a detailed review of thepublic investment program, especially the major projects, with the objectiveof speeding up the completion of high priority projects and reducing oreliminating the allocations to projects of lower priority, with parallelimprovements in planning capability and institutional performance. The reviewwill also confirm that the size of the public investment program is compatiblewith domestic and foreign resources, so that investment financing isnon-inflationary and within the debt servicing constraints. Satisfactoryprogress in carrying out and implementing the results of such a review wouldbe 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 thestructural adjustment program. During 1980-82, the Government implemented anumber of measures to improve short-term financial performance, redirect theSEEs' investment programs and finance them increasingly from non-budgetsources, and undertake legal reforms to institutionalize these changes. Thefinancial performance of SEEs registered substantial improvement as a result,with a situation of chronic deficits changing into one of growing profits. In1983, the Government passed a wide-ranging reform decree, whose purpose was tointroduce structural reforms with the overall objective of having a viable SEEsector more responsive to market forces. The ultimate goal is to place theSEEs in an economic environment where they would compete with privte sectorfirns, especially with regard to output prices, factor inputs, and credit.The President's Report on the recent Technical Assistance Project for StateEconomic Enterprises (Report No. P-3697-TU) contains a description of the mainprovisions of the reform decree. The financial position of the operationalSEEs, including projections for 1984, is presented in Annex VI to thisreport.

51, The question of State Economic Enterprise reform has to be addressedat sever21 l½vels. These include:

(i) the "environment" (economic, financial and political) in whichthe SEEs operate;

(il' the organizational structure of the SEEs and their links to theGovernment;

(iii) the operational and managerial efficiency of individual SEEs; aad

(iv) the management of human resources in the SEEs, covering the areasof motivation, monetary and non-monetary incentives, and training.

The progress achieved under these heads is discussed below.

52. Tle Government has taken several measures to make the economicenvironment of the SEEs more competitive and to grant them greater managerialautonomy while simultaneously strengthening their financial structure. Sincethe passage of the SEE reform decree in May 1983, 1/ a review of the capitalstructure of the enterprises has been initiated and capital increases have

l/ The reform decree was formally replaced by a law (Law 2929) enacted inOctober -983.

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been authorized in some cases. The outstancling debts of SEEs have beenconsolidated and arrears to the Government converted into equity. The SEEshave been encouraged to exercise their freecom to set their own prices in thelight of market conditions and they have done so in a number of cases. Majorprice changes were announced in :Late-1983 and March 1984. In future small butmore frequent changes in prices will be made. As a result of the continuousimprovement in the SEE accounts, budgetary transfers to SEEs in 1984 will bereduced to TL 330 billion, which in real terms is about 14 percent less thanin 1983, and a further reduction is planned for 1985. The total financingrequirement of the SEEs as a percentage of GNP is also expected to decline in1984. In the ultimate analysis, however, the most important development maybe the major movement on import liberalization, 1/ which by introducingforeign competition will act as a spur to increasing enterprise efficiency.The Government has stated its intention of prescribing target rates of returnfor different categories of enterprises, especially manufacturing enterprisesand utilities, to serve as a basi's for monitoring their performance.

53. As far as the organizati onal structure of the SEEs is concerned, theGovernment intends to explore opportunities for converting selected SEEactivities into joint stock ventures by offering such stock to the public. Areview of the potential for selective privatization of the assets of SEEs isproposed to be undertaken in 1984. Meanwhile, the Government has recentlyenacted a law which provides for the sale of income-sharing bonds and sharesof SEEs to the public.

54. The strengthening of management and upgrading of operationalefficiency in SEEs offers considerable scope for improvement in the shortrun. The Government considers the time opportune, therefore, to shift from abroad approach to SEE reform to a more differentiated one focussing onindividual enterprises. It is the Government's intention to bring aboutfurther improvement of operational efficiency in SEEs through managementstrengthening, introduction of modern management techniques, and bettermanpower planning and training. In addition to the pilot technical assistanceloan approved recently, several of the ongoing Bank-assisted projects includecomponents that address SEE operational efficiency issues. The Government hasalso welcomed the Bank's proposal to work wii:h the railways in identifyingareas where the Bank can be of assistance. Other sub-sectors where the Bankis planning lending operations to SEEs in the next 2-3 years include lignite,power, and pulp and paper.

55. The generally low level of personnel performance in the SEEs is adifficult problem which can be solved only gradually. Raising salaries aloneis not sufficient, and in any event budgetary constraints would rule out anylarge scale salary revision for SEE employees. Better manpower planning andtraining are critical factors, and the Bank intends to continue to emphasizetheir importance in project and sector lending. Work on the new personnelregime for SEE employees is well advanced and it is expected that it will beannounced in the near future. Once this is clone, the Bank intends to workwith the SEEs to assist them to use effectively the flexibility in personnelmanagement that the new regime is expected to provide.

1/ See para. 56 below.

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Import Liberalization

56. The objective of opening up the Turkish economy to competition from

abroad is an essential component of the Government's structural adjustmentprogram. The Government's long--term policy is that import restrictions shouldnot be used to protect domestic producers. It is keenly aware that efforts toreduce the effective level of protection and the bias towards domesticproduction are essential to restructure the economy and stimulate competitiveexports to support growth. Nevertheless, because of entrenched domesticforces dependent on protection and the persistence of international traderestrictions, the Government recognizes that the process will entailconsiderable effort at the political level. The Government's intention is toshift from a licensing system of import control to one relying on tariffs andto reduce these tariffs over the medium term.

57. The Government took a series of legal and administrative steps toliberalize the import regime during the last three years, including theabolition of the quota list in 1981, and the shifting of over 225 items fromLiberalized List II 1/ to the more liberalized lists (List I 2/ and the LevyList 3/), over the next two years. In addition, the Government allowed theduty-free importation of inputs going into exports, and provided someadditional de facto liberalization by permitting imports of items domesticalLyproduced which were indirectly needed for exports or to keep domestic pricesdown through competitive pressures. As part of the 1983 Import Regime, stepswere also taken to reduce the rates of import guarantee deposits and improveprocedures for extending the period of validity of import licenses.

58. While the import liberalization measures undertaken were incrementalup to 1983, the Government announced a major structural change in the 1984Import Regime. In effect while in the past the regime specifically definedgoods that could be freely imported and the ones whose imports required alicense, thus virtually prohibiting imports of all the goods not included inany of the lists, the new regime defines prohibited and licensed imports andipso facto liberalizes imports of all other products. In 1983, the number o:fimports requiring a license (Liberalized List II) totalled 821 items; in the1984 regime these have been reduced to 369 items. Total import authorizationsfor items on the List II amounted to $5.2 billion in 1983; if the 1984 regimehad been applied, import authorization would have been needed for only about$1.2 billion worth of these imports. When measured against total imports in1983, the liberalization of 1984 is estimated to have affected approximately60 percent of imports subject to licensing.

1/ Includes items which require an import license, issued normally if thegoods cannot be supplied locally in comparable quality and quantity, andat a reasonable price.

2/ Includes items which are noncompetitive with domestic production andfreely admitted.

3/ Introduced in the 1982 Regime--includes items which can be importedwithout restriction but are subject to a flexible levy that is adjustedfrom time to time.

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59. Simultaneously with the removal of quantitative restrizLi. i : ;.z . Yi anumber of items, the Government proceeded to a reduction in tariff ices. Outof about 500 products whose tariffs were changed, more than 80 perceziz hadtheir tariff rates reduced. Since the tariff adjustments affect inpDuts andfinal products differently, there is a possibility that effective protectionmay not have decreased in some instances. Ihe structure of tariff rates forproducts whose tariffs were changed is shown. in Table 11. In designi-nig the

new tariff structure, the Government adhered to the general principle thatnominal tariffs on basic materials should be in the 0-15 percent range,tariffs on intermediate and semi--finished goods between 10 and 30 percent; andtariffs on finished products between 30 and 40 percent.

Table 11: SUMMARY OF TARIFF CHANGES IN 1984 REGIME

Number of ProductsOld Tariffs New Ta:iffs

0 - 10% 95 227

10 - 20% 1.15 1.04

20 - 30% 63 83

30 - 40% 59 29

40 - 50% 86

50% 76

Total no. of products 494 494-

60. In addition to the list of prohibit,ed imports 1/ and tihew i.ist oflicensed imports, the Government has also defined a "Fund" or levy List.Goods on this list--which may either require a license or be freelyimportable--are subject to a specific surcharge besides customs duty5 Thebulk of items included in this list are luxury consumer goods. A sii2ai.atr listexisted in the past, but the scope of the newq levy list has been broadenied andthe levies have been raised. This appears to have been done in order tosoften the impact of a sudden removal of quantitative restrictions andreduction. in tariffs on consumer goods on the balance of payments. 2/ Most ofthe proceeds realized from the levies will be transferred to a fund for theconstruction of low-cost housing. The Government has also introduced someimportant changes in the trade regime between Turkey and the countr4es with

1/ About 207 items including certain agricultural goods, drugs, etc. whoseimports were also prohibited in the past.

21 It is too early to estimate the effect of the liberalization on Consumergoods imports for 1984, but it is not expected to be substantial.

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nationalized foreign trade. Trade with these countries may be conducted onlyby Turkish public sector agencies, and by private firms whose exports in thepreceding year exceeded $50 million. The decision is aimed at improving thebargaining position of Turkey's exporters.

61. Finally, the Government has effected an important administrativereorganization of the official agencies dealing with imports. The licensedlist was previously administered by three Ministries (Commerce, Industry andTechnology, and Energy and Natural Resources), with each issuing licenses forgoods under its jurisdiction. In addition to obtaining an import license, theimporter had also to get a foreign exchange license (issued by the CentralBank through the intermediary c,f a commercial bank). Under the new system,all the authority on matters related to imports is centralized in the newlyformed Undersecretariat of Treasury and Foreign Trade under the Deputy PrimeMinister. The Undersecretariat; now issues import licenses whichsimultaneously include the right to purchase the foreign exchange, and decideson all shifts of items between the lists (including shifts to and from the"free regime"), and changes in tariff and levy rates.

62. In the Statement of Development Policies - 1984, the Government hasreaffirmed its intention to move rapidly and systematically in the directionof eliminating all import licensing and rationalizing the tariff structure.This policy is an essential component of the medium term structural adjustmentprocess because it will help to remcve the serious bias in favor of thedomestic market and against exports. At the same time, the policy is gearedto increasing the operational efficiency of both private and public sectorfirms by eliminating the buffers which protect them from market forces. TheGovernment intends to reduce quantitative restrictions on imports to anegligible level by the end of the Fifth Five-Year Plan (1989). The 1985Import Regime would therefore reflect additional movements in this directionin line with this objective.

63. With respect to the tariff structure, the Government is committed toa policy of incremental reductions in effective protection as well as to areduction of its dispersion across sectors. To achieve this aim theGovernment has set for itself a target of achieving an average nominal tariffon items subject to tariffs of 7 percent by the end of the Fifth Plan periodand expects to make satisfactory progress in this direction in the 1985 ImportRegime, using inter alia the re!sults of the Protection Study expected to becompleted in 1984. It also intends to set up an appropriate institutionalmechanism to dispose of industry appeals and to establish criteria forgranting temporary production incentives to infant industries.

64. Satisfactory progress in the elimination of quantitative restrictionsand the rationalization of the tariff structure (as specified in the aboveparagraphs) would constitute a condition of tranche release (Loan Agreement,Schedule 5).

Export Incentives

65. The promotion of export growth continues to play a central role inTurkey's development strategy. The most significant export incentive has beenthe maintenance of a realistic exchange rate, adjusted daily since May 1981

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against a trade-weighted basket of currencies. Low cost export credits,indirect tax rebates, and privileged access to foreign exchange and importshave further increased the attractiveness of exports. 1/

66. These incentives contributed to an unprecedented export growth in1981 to $4.7 billion, or 63 percent higher in dollar terms than the 1980level. The increases were concentrated in manufactured goods, which

registered a rise of nearly 120 percent. Exports in 1982 reached$5.75 billion, about 22 percent above 1981, despite a significant decline inexport prices, particularly agricultural products. In 1983 exports grew by anestimated 14 percent in volume, but their value at $5.73 billion was slightlylower than in 1982 because of a sharp downward movement in export prices.Particularly noteworthy is the fact that the rapid expansion of exportsoccurred in an inhospitable world environment. This was possible in partbecause Turkey successfully exploited the market possibilities in the MiddleEast and North Africa while maintaining a rapid rate of growth of exports tothe OECD countries. The expansion of merchandise exports is also partlyattributable to previous low capacity utilization, depressed domestic demandand the high cost of non-preferential credits (which made export credits moreattractive) associated with stabilization.

67. The new Government's policy places emphasis on the reduction ofimport protection and the maintena[nce of the competitiveness of the exchangerate, accompanied by a gradual reduction in incentives in the form of taxrebates and credits. In January 1984, the Government announced its intentionof scaling down export tax rebates in a phased manner. The interest rate onexport credits has also been increased from an average of 28.5 percent to35 percent in December 1983, and further increased to 40 percent inMarch 1984. With the objective of phasing out the direct availability ofCentral Bank credit for export purposes, the reserve requirements oncommercial bank funds from deposits used for export credits have been reducedfrom 25 percent to 20 percent.

68. Since the Government intends to use ithe exchange rate as the mainpolicy instrument to stimulate exports, the mechanics of exchange ratedetermination were modified in January 1984 to add more flexibility to thesystem. Under the new system, the official exchange rate is still determineddaily by the Central Bank on the basis of foreign currency markets anddomestic relative to foreign prices; actual transactions, however, take placeat a rate which is set by commercial banks ancd is allowed to fluctuate withina band of 6 percent (8 percent for banknotes) around the official rate. Inpractice, the above modification brought about: an effective one-stepdepreciation of the Turkish lira of about 6 percent early in 1984. Inparallel, commercial banks have been given greater freedom to perform foreignexchange operations on their own account. They are no longer required to sellto the Central Bank a prescribed percentage of foreign exchange purchased; inaddition, most foreign exchange operations have been transferred to commercialbanks. The surrender requirement on export earniings has been lowered to80 percent and that on invisible receipts has been eliminated. Retainedforeign exchange earnings may be deposited in foreign exchange accounts

1/ A fuller description of these incentives and their importance is given inthe Industrialization and Trade Strategy Report (No. 3641-TU), Chapter 2.

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or transferred to other parties without restriction. The Government views

these changes as a major first step towards the complete elimination ofexchange controls over the medium term.

69. During 1984, the Government intends to undertake a detailed review of

the entire package of export incentives. This requires an assessment of therelative importance of each incentive in order to design a framework for a

sustained export drive compatible with the expected rise in domestic demandand a fall in interest rates for non-exporters in the medium term. The reviewof export incentives will in particular examine the feasibility of;

(i) implementing a system of medium and long-term credits to supportthe exports of capital goods and engineering services;

(ii) introducing a system of export credit insurance; and

(iii) establishing a new Export Development and Promotion Center withstrong private sector participation. 1/

External Debt

70. Progress has been slow in this area since the inception of work uncderSAL I. However, the Government recognizes that the major obstacle informulating a proper debt management: policy is the inability to compile andevaluate the appropriate data rapidly and accurately. In order to facilitatedata handling, the Bank supported a program under SAL I for the Ministry ofFinance to undertake the computerization of Turkey's debt recording system.Although a system was designed with the help of a local consultant, subsequentevaluation showed that it was inadequate to handle the complexity of Turkey'sdebt structure. Following a request from the Ministry of Finance fortechnical assistance in this area, a joint project supported by the Bank andthe Fund was launched under SAIL IV. At present Phase I of this project (thedesign phase) which consists of an assessment of the system of informationflows and the development of input and output formats, is on schedule withcompletion expected by August 1984. Progress has been slow in this area inthe past, but with the new agreements included in the SAL IV program now ontrack, the Government is turning its attention to the next phase of theproject.

71. A detailed plan of aclion for Phase II has been drawn up by theGovernment. The installation and testing of the computerized debt system(Phase II) will begin in Augusit 1984 with Bank and Fund support. At that timethe Bank will finance the services of a systems analyst through its recenttechnical assistance loan to SEEs, which contains an external debt componentwith the External Debt Division of the Undersecretariat of Treasury andForeign Trade as the beneficiary. The Bank will also make available at thattime its recently developed prototype external debt computer system formodifications on site according to Turkish requirements. The installation ofthe system is scheduled to begin thereafter with completion expected by August1985. The Government has agreed to accord the highest priority to thesuccessful completion of this project including:

1/ These measures were recommended in the Bank's reports on Industrialization

and Trade Strategy (Report No. 3641-TU) and on the Financial Sector(Report No. 4459-TU).

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(i) providing the necessary institutional and legal arrangements for

implementing and maintaining a central computerized data base;

(ii) ensuring adequate staffing of theb project team as well as

continuity in the management of the project; and

(iii) allocating the necessary financial resources.

Satisfactory progress in the installation of the computerized debt managementsystem would be a condition of tranche release (Loan Agreement, Schedule 5).

Financial Sector

72. The Government recognizes that a more efficient financial sector isnecessary to increase domestic resources as well as help the revival ofprivate investment. The Government's objectives are to restore and maintain

confidence in the financial system and to expand its range, reduce the cost ofcredit, improve the efficiency of credit allocation, allow more competition inthe financial sector, strengthen the institutions which supervise thefinancial system and revitalize the capital market.

73. Important measures were taken in 1983 and in the first quarter of1984 to improve the efficiency of the financial sector in Turkey. Theinterest rate policy was changed, the charges on financial transactionsimposed by the fiscal system were sharply reduced as also were some of thedistortions in credit allocation resulting from the excessive subsidization ofsome types of selective credits, a new banking law was enacted, bankcompetition was stimulated by the authorizations granted for the entry of newforeign banks, and substantial progress was achieved in laying the basis forthe development of the capital market.

74. The Government reduced the interest rates on time deposits in Januaryand in July 1983, 1/ on the basis of its own projections of falling inflationand with the purpose of reducing the cost of bank loans to borrowers. At thesame time, the net interest rate on sight savings deposits was increased to16 percent. However, instead of declining as projected, inflation acceleratedconsiderably during the second half of 1983, with the result that the realinterest rate on deposits, measured in relation to prevailing inflationarytrends, had become negative to the extent of about 5 percent by the end of1983. Consequently, there was a significant reduction in the demand for timedeposits, which although partially explained by shifts of funds into currency,and sight deposits, caused a decline in the real value of broad money and thus

contributed to a further fuelling of inflation.,

75. One of the first decisions of the new Government was to correct thissituation by re-establishing positive real interest rates for time deposits.Interest rates on six-month and one-year time deposits were raised inDecember 1983 from 35 percent and 40 percent to 47 percent and 45 percentrespectively. The interest rate on sight savings deposits was reduced to5 percent and an interest rate of 49 percent was introduced for deposits withthree months' withdrawal notice. More recently, an interest rate of

1/ For example, in January the interest rate cn 12-month time deposits waslowered from 50 percent to 45 percent. In July it was further reduced to40 percent.

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43 percent was introduced for deposits with a withdrawal notice of one month.Under the new policy, the interest rate for deposits will be revised quarterlyin line with changes in the inflationary expectations and with the situationin the credit markets. Although it is still too early to evaluate the resultsof the new policy, there are signs that it is already producing the desiredresults. The downward trend in the demand for broad money (M2) has beenreversed, and the stock of M2 in real terms seems to be increasing.

76. The burden imposed by the financial transactions tax and thewithholding tax on the costs of financial intermediation was alsosubstantially reduced. The rate of the financial transactions tax levied cninterest earnings and other revenues of the banks (with the exception ofinterest received from some selective credits) was lowered from 15 percent to3 percent at the beginning of 1984. The rate of the withholding taxapplicable to interest payments was reduced from 25 percent to 20 percent inJanuary 1983 and further to 10 percent in February 1984.

77. All the interest rates on preferential credits have been adjustedupwards at the end of 1983, in accordance with the principle of reducing thedifferences between them and the rates for non-preferential credits. Thedifference between the interest rate (currently 40 percent) on short-termexport credits, which are by far the most important of selective credits, andthe interest rate on non-preferential credits of the same maturity, is atpresent only on the order of 8 percentage points, as opposed to almost20 percentage points at the beginning of 1983. The interest rates onagricultural and housing credits and on credits to artisans have beenincreased by 6 percentage points in December 1983. 1/ Although these interestrates still remain significantly below the rates applicable tonon-preferential credits, they exceed slightly the rate of increase in pricesprojected by the Turkish authorities from the beginning to the end of 1984.

78. A new Banking Law was enacted in June 1983 with the objective ofstrengthening the banking system. The new law covers many of therecommendations made in the Bank's report on the Financial Sector 2/,including measures to reduce the undercapitalization of banks, place limits onthe real assets and investments of banks, link the establishment of branchesto the level of banks' equity, reduce the interlocking between banks andcorporations, introduce a deposit insurance scheme, and strengthen the role ofthe Central Bank in the supervision of the banking sector.

79. In recent months there has been substantial progress in thedevelopment of the Turkish capital market. The amount of new issues of sharesand bonds more than doubled in 1983 as compared with the preceding year and itis expected that further substantial growth will be achieved in 1984. TheTreasury has started to offer bonds and bills to the public at competitiveinterest rates and five issues of such bonds and bills have already been mtade

1/ In December 1983 the interest rate on short-term agricultural credits wasraised from 20 percent to 26 percent, and on medium-term agriculturalcredits from 22 percent to 28 percent.

2/ 4459-TU, dated September 21, 1983.

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in the current year. The withholding tax on bearer securities has beenreduced from 30 to 10 percent. New regulations relating to capital marketintermediaries have been published and certificates authorizing the operationsof several intermediaries have already been granted by the Capital MarketBoard. Although more decisive progress is stiLl required in the areas ofaccounting, auditing and disclosure of informal'ion of companies which makepublic issues of securities, the authorities have published a system ofstandardized accounting which is being adopted by many firms on a voluntarybasis. The technical capabilities of the Capital Market Board are in theprocess of being developed and preparatory work: for the opening of the StockExchange is already at an advanced stage.

80. The SAL V program supports the Governnment's policies to reduce highreal interest rates through a reduction in the operating costs of the bankingsystem and by providing competition through the development of an efficientcapital market. The authorization given recently to allow two more foreignbanks to operate in Turkey, which raises to 11 the number of foreign bankspermitted to open branches in the country, is expected to contribute toincreased competition and put pressure on the existing banks to reduce theiroperating costs. Similarly, the development of the capital market, in whichthe intermediation margins are typically much lower than those of the bankingsystem, is expected to act as a stimulus to increased bank efficiency. Inaddition, the Government intends to study the introduction of fiscal measures(including the imposition of tax pernalties) designed to induce banks to reducetheir operating costs. In order to further develop the capital market, theGovernment intends as part of the SAL V program to intensify the issue oftreasury bonds to be subscribed by the public at competitive interest rates,to diversify the channels for the marketing of such bonds, to establish aprogram for the gradual adoption of a system of standardized accounts bycompanies making public issues of securities, to enact a law regulating therequirements and activities of external auditors and to open a Stock Exchangein Istanbul after publication of the regulations required for that purpose.

81. Among the further improvements in the banking system which need to beimplemented may be mentioned the development of an active inter-bank marketand the strengthening of the mechanisms for bank supervision. In order toreduce the remaining tax obstacles to the further development of theinter-bank market, the Government intends to see!k legislative authorizationfor the elimination by the end of 1984 of the financial transactions tax of3 percent which still remains on inter-bank transactions. For strengtheningthe mechanisms of bank supervision, one of the most important preliminarysteps will be the introduction of a system of standardized accounts forfinancial institutions. The Government is already working on the preparationof such a system and intends to prepare a review of progress by October 1984,with the specification of the remaining steps to be taken in order tointroduce the system in the first half of 1985.

82. In order to monitor progress in achieving the various objectives inthe financial sector, satisfactory progress towards the following goals wouldbe a condition of tranche release (Loan Agreement, Schedule 5):

(i) elimination of the financial transaction tax on inter-banktransactions;

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(ii) preparation by October 1984 of a review of a standardizedaccounting system for banks for implementation in the first halfof 1985;

(iii) issue of Treasury bonds to be subscribed by the public atcompetitive interest rates and diversification of the channelsfor the marketing of such bonds;

(iv) preparation of an action program for introducing a standardiziedaccounting system for companies making public issues of bonds orshares;

(v) enactment of a law regulating the requirements and activities ofexternal auditors;

(vi) opening of the Stock Exchange and publication of the regulationsrequired for it; and

(vii) study of fiscal measures to induce banks to reduce operatingcosts.

Agriculture

83. The attainment of thie planned overall GDP and export growth in themedium term depends crucially on the reattainment of the historical growthrate of agricultural value added of about 3 percent per annum under conditionsof markedly reduced subsidization and greater exposure to market forces. Thistarget, when compared with performance during 1980-83 (when agricultural valueadded increased by about 2 percent per annum, on average), appearsformidable. Since the possibilities for growth through expansion of thecultivable area or of livestock numbers under a system of extensive grazingwere largely exhausted by the mid--1970s, growth must now come primarily fromincreased productivity and changing the crop mix to better reflect Turkey'scomparative advantage. A number of significant reforms have been introducedsince 1980 in the areas of input-output pricing and other producer incentives,encouragement for processors and exporters, and the deregulation of foreigntrade. While the rate of growth in total public investment has been cut back,agriculture's share has increased with more emphasis on the completion of keyirrigation projects. A measure of discipline has been introduced in thefinancing of parastatals, but their operational capabilities still remainweak. What is needed now is to consolidate these actions within a longer-termframework. The preparation of the Fifth Plan offers a good opportunity forthe Government to develop such a framework.

84. The key sectoral issues are identified in the recent Bank report onthe agriculture sector. 1/ The major recommendations relate to;

(i) promotion of the greater use of market forces through the reformof trade policies as well as through further reductions in

1/ "Turkey: Agricultural Development-Alternatives for Growth with Exports"(Report No. 4204-TU).

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subsidies and price supports, inl:erest rate reforms, andincreased involvement of the private sector in the marketing ofagricultural inputs and products;;

(ii) support to institutional reform, particularly the development ofimproved research and extension services, the establishment of asectoral planning capability, thE: reform of Governmententerprises involved in agricultural marketing and input supply,and improvements in the impLementation capacity of irrigationagencies;

(iii) continued rationalization of? the public sector investmentprogram, particularly in irrigation, with greater focus on quickgestating investment; and

(iv) expanded credit supply, particularly for medium and small-scalefarmers, together with increased efficiency of creditinstitutions.

85. The Government intends to work with the Bank in formulating an actionprogram for the agriculture sector by the end of 1984 to address the aboveissues. This will provide the basis for a proposed agricultural sector policyloan.

Energy

86. For well over a decade modernization and industrialization in Turkeyhave been directly linked to a rapidly increasi.ng and widespread use of scarceand costly imported petroleum. Oil imports, which were only $200 million in1970, jumped to about $3.5 billion in each of t:he years from 1980 to 1983.Although the value of oil imports as a percentage of export earnings hasfallen from a peak of 124 percent in 1980 to about 61 percent in 1983, theenergy situation remains a major preoccupation of the Government. Recognizingthe intricate relationship between economic growth and energy supplies, theGovernment has assigned the highest priority tc, the energy sector and toprojects that will reduce the energy deficit. For example, during the period1980-83 energy investments received about 35 percent of total publicinvestment, compared to around 20 percent during the 1970s. Allocations arelikely to be maintained at least at this level during the rest of the 1980s.

87. At this level of investment: it appears that currently the resourcesavailable exceed effective implementation capacity. The key issues,therefore, are better management of project implementation and operation,increased efficiency and reduced reliance on imported energy. The Governmentis aware of the importance of strengthening the institutions concerned butrealizes that this will take time. Moreover, even under optimisticassumptions, lignite and hydropower production is likely to grow too slowly tomeet the full requirements of a dynamically growing economy.

88. Although Turkey is relatively well endowed with hydropower andlignite, the potential for developing other energy resources such ashydrocarbons is not particularly promising, although some gas discoveries havebeen made recently. Geothermal energy shows an important potential but the

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size of the reserves and the problems of their development are unknown. Thereare large bituminous shale reserves available but these appear to beuneconomic for the foreseeable future. Renewable energy resources in the formof fuelwood and agricultural waste are increasingly scarce in many parts ofthe country, and will become an acute problem in some areas. The primaryfocus in the Government's program has thus been on hydropower and lignite,although the Government has also been considering options based on nuclearpower as well as coal and gas imports.

89. It is clear that a significant energy deficit is likely to remain afeature of the Turkish economy until well into the 1990s. As part of itsongoing sector work program, t:he Bank has prepared an energy strategy paperfocussing on actions to be undertaken in the short and medium term. The paperrecommends the formulation of a cralsh program for energy development, toinclude the following principal elements:

(i) completion of ongoing, high priority power and lignite projects;

(ii) improvement in the efficiency of the existing thermal powerplants, distribution system, and mines;

(iii) a review of the feasibility of constructing new generatingplants, including combined cycle units;

(iv) expansion of existing lignite mines; and

(v) increasing the efficiency of energy use, including thestrengthening of the energy conservation program.

90. The energy strategy paper has already been forwarded to the

Government, which has welcomed the opportunity to discuss the paper'srecommendations with the Bank and to prepare an energy action plan with theassistance of the Bank by the end of 1984. Satisfactory progress in thepreparation of the action plan would be a condition of tranche release (LoanAgreement, Schedule 5).

PART IV - OVERVIEW, PROSPECTS AND ISSUES

Overview

91. Evaluation of the Structural Adjustment Progra . The structuraladjustment program in Turkey represents a systematic effort to change thebasic direction of the country's economic development. The present loancompletes the series of five loans, which the Bank had indicated would be themaximum to a country. The series has been successful in helping to support amajor effort at restructuring. The changes that are being attempted will takeseveral years to be completed. Deeply-entrenched attitudes will also changeonly slowly. Consequently, although an assessment can be made of the progressachieved so far, it is too early to attempt a definitive evaluation of thereform program in Turkey. Its success will be measured by how effectively itis pursued and instituted. The Bank plans, of course, to support further

progress through its sector and project operations.

92. This report has summarized some of the important changes that have

occurred in the economy since 1980. To recapitulate, the specificaccomplishments during this period, have included the following:

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- the rate of inflation, as measured by the wholesale price index,has dropped from an annual rate of about 107 percent in 1980 to31 percent in 1983;

- merchandise exports have risen from $2.9 billion in 1980 to$5.7 billion in 1983, with export growth being led by themanufacturing sector and involving a significant diversificationof markets. The current account deficit has fallen from$3.2 billion (5.6 percent of GNP) in 1980 to about $2.0 billion(3.4 percent of GNP) in 1983;

- there has been a marked retrenchment of the public sector.Government Consolidated Budget expenditures, which stood at24.0 percent of GNP in 1980, felL to 19.4 percent in 1983. Thebudget deficit to GNP ratio, which stood at 4.6 percent in 1980,decreased steadily to 1.4 percen1: in 1981, 1.2 percent in 1982,and 0.5 percent in 1983, while SEE transfers as a percentage ofGNP showed a decline from 4.8 percent in 1980 to 2.5 percent in1983. The financial performance of SEEs also registeredsubstantial improvement, as a situation of chronic deficitschanged to one of growing profits;

- successful efforts have been made to constrain the level of

public investment in Line with available resources, to limit thenumber of projects to a manageable level, and to ensure thatpriority projects received larger allocations in order to speedup their completion. Allocations for the energy, agriculture andtransport sectors have! been increased and the share ofmanufacturing reduced., Public sector investment in real termsincreased by 2.2 percent in 1982 and by 1.7 percent in 1983,while private investme!nt rose by 5.4 percent and 4.8 percentduring those two years. As a result, there has been asignificant improvement in the share of private fixed investmentin total investment;

- substantial progress has been made in import liberalization,through the abolition of quotas, c'he freeing of a large number ofitems from licensing, rationalization of tariffs and asimplification of administrative procedures;

- in the energy and agriculture sectors, actions have been taken toincrease institutional efficiency, adjust prices closer toeconomic levels and reduce input subsidies in a phased manner; and

- measures have been initiated to simplify the regulationssurrounding banking operations and improve the performance ofmoney and capital markets.

93. Even this brief list of accomplishments shows how far the Turkish

economy has moved in the last four years and demonstrates clearly theexistence of a strong and sustained government commitment without which nostructural adjustment program can succeed. Admittedly, there was a weakeningof the adjustment process in some respects during 1983, but some of thecontributory factors were exogenous to Turkey. It is also not unusual forgovernments to postpone important decisions whe;n elections are imminent. Thepoint to note is that such events can and do happen in all countries, and thatsome ups and downs must be allowed for in evaluiating overall progress.

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94. The pace of implementation of reforms is clearly a matter ofjudgement for each country. It; is encouraging that the new Government has

acted swiftly to deal with the adverse developments of 1983 and to push thestructural adjustment program firmly forward. The principal challenge for theGovernment now is to get the restructuring fully back on track and to carryout sectoral reforms to complement those already implemented at the macrolevel. Some difficult problems remain to be tackled, including, inparticular, depressed private investment and high unemployment, bothconcomitants of a prolonged period of stabilization which are likely to bemitigated only as inflation is brought fully under control and growth recovers.

95. Role of the Bank. While the initiative for structural adjustment hasrightly come from the Government, there is little doubt that the associationof the Bank has exerted a positive influence on the reform process. Thepolicy dialogue between the Government and the Bank has helped ensure that the

attention of the economic decision makers remains focussed on the fundamentalstructural problems facing the economy. Moreover, as the chart at Annex Vlisting the components of the individual SALs demonstrates, the pattern of aseries of loans has allowed for an orderly and evolutionary development ofpolicy, with the opportunity of periodically taking stock of the progressachieved and charting the next steps. The Bank's SALs, by providing the basisfor a systematic and coordinated approach to the resolution of the principalmacroeconomic and sectoral problems of the economy, have complemented thefocus of traditional project lending. The success of the SAL process alsounderlines the potential benefits of developing sector policy lending vehiclesfor continuing the policy dialogue at the sectoral level.

96. The successive SALs form only one part, although an important one, ofthe support that the Bank has provided to the structural adjustment program.Other components include project loans, economic and sector work leading topolicy recommendations, and technical assistance. A substantial part of thelending and economic programs is geared to the realization of the objectivesof structural adjustment, most notably in the fields of industrial policy,energy and agriculture. The Bank's economic and sector studies have inparticular helped to strengthen the Government's policy formulation. TheBank's supporting activities also include special economic studies funded bythe Bank, staff advisory assistance, for example on the External DebtManagement System and the use of planning models, and a number of technicalassistance packages within the project loan agreements. The Bank willcontinue with this comprehensive approach to structural adjustment in thecoming years, but will seek to broaden and deepen the process by concentratingincreasingly on sectoral and sub-sectoral issues.

97. The Project Completion Report dated December 17, 1981 on SAL I andthe SAL I Supplement and the related Project Performance Audit Report(Report No. 4015) of June 30, 1982 supported the Turkish outward orientedstrategy based on a flexible exchange rate policy, combined with bettercontrol over aggregate demand through monetary, fiscal, and incomes policies.Both reports highlighted the reduction of inflation and progress towardsestablishing a price structure conducive to a better supply response in1980-81. The Audit Report noted the slow progress in the areas ofrationalization of public investment, SEE reforms and resource mobilization.The subsequent SALs placed special emphasis on these issues. For example,rationalization of public investment featured prominently in SALs III and IV

- 38 -

and helped the Government to constrain the size of public investment in linewith the available resources, inc:rease allocations to high priority projectsto speed up their completion and harmonize sectoral allocations with the macroobjectives. One of the main conclitions attached to SAL III was the passage ofthe SEE reform legislation, which was Enacted in May 1983. A number ofmeasures related to domestic resource mobilization were covered in the programunder SALs II-IV. These includecl improvements in tax administration,development of an efficient Capital Market and financial sector reforms. Anaudit of SALs II and III by the Ciperations Evaluation Department is under way.

98. Bank/IMF Cooperation. The Bank's support for the structuraladjustment program in Turkey has from its inception involved a close workingrelationship with the IMF. In June 1980, the IMF entered into a three-yearStandby Arrangement with the Government of Turkey for a total ofSDR 1250 million (about $1.6 billion). The Bank's SAL lencing during the sameperiod amounted to about $1.2 billion. The principal conditions of theStandby were the maintenance of external competitiveness through a flexibleexchange rate policy, ceilings on Central Bank credit to control aggregatedemand, and limitations on budget transfers t:o SEEs. Other conditions relatedto the timely fulfillment of reserve requirenients of banks, limits on thecontracting of new nonconcessional public or publicly-guaranteed externaldebt, and a performance criterion on trade and payment restrictions.Following completion of the three-year arrangement, a new one-year Standby inan amount of SDR225 million was approved in Junie 1983. Upon the election ofthe new Government, Turkey requested cancellation of the existing Standby andits replacement with a new one-year arrangement in an amount equivalent toSDR 225 million. This proposal was approved in early April 1984 by the Fund'sExecutive Board and immediately went into effect. Conditions of the newStandby are broadly similar to the previous ones and reflect the Government'sdetermination to bring the inflation trend back in line with expectations.

99. The Bank and the Fund are in agreement with the basic position thatstabilization of the economy is an essential prerequisite for a return to asustainable growth path. The Bank, takes the view that the period of austeritynecessary to bring inflation under control, redress the public finances, andimprove the balance of payments should be used to lay the groundwork for amajor restructuring of the Turkish economy. Thus, the Fund's attention to thecountry's monetary and fiscal balance, the maintenance of externalcompetitiveness, and SEE financial performance has complemented the Bank'sstructural adjustment efforts in the areas of SEE reform, importliberalization, export promotion, rationalization of public investment, andthe development of a medium-term framework.

Creditworthiness

100. At the end of 1978, Turkey had $7.5 billion in short-term debt and$6.8 billion in medium- and long-term debt. Service payment obligations(mostly on short-term debt) were $5.1 billion (including arrears), or nearlythree times the value of merchandise exports in 1977. Between 1978 and 1980,Turkey rescheduled some $9.2 billion of outstanding obligations through aseries of rescheduling arrangements concluded with official and commercialcreditors. Approximately $6.0 billion of short-term debt, including$2.6 billion in convertible Turkish lira deposits and bankers credits and$1.2 billion of non-guaranteed suppliers credits, were consolidated intomedium-term loans or partially converted into Turkish lira obligations.

-- 39 -

101. In the period following the resolution of the debt crisis, inflowswere mostly from official sources -- the major creditors being the OECDcountries, the World Bank and the IMF. Of the total debt outstanding of about$20 billion at end-1982, 82 percent constituted medium- and long-term debt.Short-term debt as a percentage of total debt outstanding fell from 51 percentin 1978 to about 10.5 percent in 1982. Based on the growth scenario outlinedearlier, the debt outstanding and disbursed as a percentage of GDP isprojected to fall from about 40.0 percent in 1983 to about 32.0 percent in1989.

102. Debt service obligations are likely to be high over the comingyears. The debt service ratio increased from 15.3 percent in 1981 to28 percent in 1983 as a result of a Large repayment of previously rescheduleddebt under the earlier OECD agreements. On the assumption that the averageannual gross capital inflows during the period 1985-89 will be on tne order of$4.8 billion, the projections beyond 1984 show a debt service ratio of25.3 percent in 1985 and 23.4 percent in 1989. The debt burden should remainmanageable provided current policies are successfully implemented, the exportdrive is sustained and Turkey continues to receive further support frominternational commercial and official sources. There are some recentencouraging signs of Turkey's ability to enter the commercial market formedium-term loans. In July 1983 the Central Bank of Turkey received a$200 million five-year syndicated loan for balance of payments needs. Morerecently, a similar agreement was signed in March 1984 with a consortium of36 foreign banks for a $300 million six-year syndicated loan. In addition, aconsortium of Swiss and German banks signed a SwF 980 million credit in March1984 for the financing of hydraulic and electrical equipment for the AtaturkDam.

Social Costs of Restructuring

103. The structural adjustment program in Turkey, as in other countries,

has entailed some transitional costs, primarily in terms of depressed domesticdemand, increased unemployment and lower real wages, some distortion in incomedistribution and cuts in social expenditures. However, the costs ofadjustment should be seen in the perspective of Turkey's economic situationwhen the program was initiated. The country then had been on a totallyunsustainable growth path that would have had much more serious consequencesin the course of time for all income groups. The current economic situationin Turkey dictates giving the highest priority to export promotion and thecontrol of inflation, in order to lay the basis for sustained growth. In sucha situation it is difficult to meaningfully address social issues. Theseissues can only be solved over the longer haul as part of the restructuringprocess. As the Government has stressed in its Statement of DevelopmentPolicies - 1984, social issues can be resolved more easily and rapidly in aneconomy which develops under stable conditions. There are political risks inall instances of structural adjustment since it is usually associated with aninitial slowdown or even decline in growth rates. In the case of Turkey, theslowdown has been modest compared to other countries.

104. The available data on unemployment, while not fully reliable,

indicate a deterioration in the employment situation, with unemploymentincreasing from about 15 percent in 1980 to about 19 percent at present. Overthe medium-term, the unemployment problem will only be reduced if there issubstantial economic growth resulting from increased private investment and

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exports. Success in structural adjustment hinges upon the maintenance of thepolicy of real positive interest rates, encouragement of exports which aremostly from labor-intensive activities, and a reduction in the share of publicinvestments, all of which should reduce the bias in favor of highcapital-intensive investments and promote employment.

105. There is little doubt that there has been a significant erosion inreal wages since 1977 although it is difficult to quantify since there arewidely varying data series. One series, compiled by the Social InsuranceInstitute on the basis of the average daily wages reported to it and presentedin Table 12 below, suggests that real wages declined by over 35 percent in theperiod 1980-82, in contrast to the period 1973-77 when real wages increased byabout 29 percent.

Table 12: TRENDS IN REAL WAGES, 1977-82(1977 = 100)

1977 100.01978 87.6 (- 12.4) 1/1979 76.0 (- 13.3)1980 56.7 (- 25.4)1981 52.5 (- 7.4)1982 50.4 (- 4.0)

1/ Brackets denote annual increases/decreases in percent.

Sourcet Social Insurance Institute.

106. The Government expects to mitigate the erosion in real income byreducing and controlling inflation. But it will clearly take time before anymajor improvement is evident. In the slhort-run, the Government's statedpolicy is to maintain as a minimum the real income of civil servants, workersand pensioners. This is expected to be brought about by general salaryincreases and through tax reductions as well as the proposed scheme for taxrebates for certain categories of personal expenditures.

107. The Government's program also includes some additional measures toalleviate social hardships. The most noteworthy is the passage of the PublicHousing Fund Law in February 1984 to address the acute housing shortage inTurkey. It is a major departure irom previous housing legislation in that therevenues for the Fund are to be derived from non-budgetary sources, mainlyearmarked taxes on monopoly and petroleum products as well as import levies onluxury items. This Fund will be administered by the Housing Council in thePrime Minister's office.

Risks

108. In 1984, Turkey is at a stage of transition between stabilization andthe beginning of sustainable growth. The Government has put in place many ofthe policies designed to bring about a fundamental change in the economy

- 41 -

towards outward orientation and reliance upon market mechanisms. Thisstrategy hinges on appropriate actions in three main policy areas; trade,investment and resource mobilization. However, the actions in these areashave to be balanced against two other considerations, namely their likelyimpact on inflation and employment.

109. During the next phase, the Government's structural adjustment programfaces the following main risks:

(i) the expected improvement in the current account of the balance ofpayments may not materialize;

(ii) Turkey may not get adequate support from the internationalfinancial community;

(iii) private investment may remain sluggish; and

(iv) the cost of stabilization in the form of increased unemploymentand non-increasing real wages may lead to pressure on theGovernment to weaken stabilization policies earlier than expecteld.

These risks are discussed at greater length below.

110. Balance of Payments. The medium-term prospects outlined in thisreport are derived on the assumption of export sustainability and moderategrowth in consumer goods imports following the liberalization efforts.Factors which threaten the sustainability of future export growth include aslow recovery of OECD economies, a quick revival of domestic demand, theinstability of the new export markets in light of the recent decline in oilprices and continuing political difficulties, the sluggishness of privateinvestment in manufacturing and the possible weakening of export incentives,including some relaxation in the exchange rate policy. An additional riskwhich threatens the balance of payments is the possibility of higher thandesirable growth in consumer and luxury goods imports as a result of therecent import liberalization measures which allow the import of luxury goods,although subject to fairly substantial levies. These risks are notinconsequential since the recovery of the Turkish economy and its ability toservice a sizeable level of debt depends heavily on the successful expansionof 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 asa mechanism of adjustment, if it is to avoid a repetition of the problems ofthe late 1970s.

ill. Support From the International Financial Community. Turkey's

prospects for future commercial borrowing appear good in light of the recentsuccesses in securing medium-term syndicated loans. However, it is unlikelythat the level and composition of concessional medium and long-term financingrealized in 1980 will be repeated. Hence Turkey will need a significantamount of foreign commercial bank credit, in addition to the diversificationof its bilateral aid arrangements especially with the Middle Easterncountries. There are, however, uncertainties involved since the paymentdifficulties affecting developing countries in general may adversely affectthe syndicated loan market.

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112. Recovery of Private Investment. Another major risk concerns theresponse of private investment to the adjustment process. An inevitableconsequence of stabilization policies is the low level of private investmentin manufacturing and the threat to the solvenicy of some of the commercialbanks and private firms. Depressed domiestic demand, the inadequacy of theTurkish financial sector, high real interest rates for non-preferential

borrowing, and the lack of equity funds are the major medium-term issuesfacing the recovery. For the immediate future, the existence of underutilizedcapacity in many industries still offers the best prospect for expansion ofproduction without further investment. But in the medium-term, the currentlevel of private investment will have to be raised. The current steps torestructure the financial sector assume grealt importance in this respect. Inaddition, the stabilization process should lay the groundwork for aprogressive increase in private investment by Lowering and stabilizinginflation. The revival of private investment is, in the final analysis,dependent on the confidence of local entrepreneurs in the Government'sdetermination to pursue the objectives of structural adjustment.

113. Trade-Off Between Growth and Stabilization. Turkey's developmentstrategy hinges on export growth and fiscal and monetary discipline as thebasis for sustained growth. Under these concitions, the growth rate isexpected to be modest in 1985 and 1986, with prospects only of marginalimprovements in employment creation and real wages. A major risk facing theGovernment is the temptation to resort to a high growth strategy to alleviatethese problems by abandoning stabilization policies earlier than desirable andwithout laying an adequate foundat-ion for sustainable growth.

114. On balance, while these risks are serious, they do not appearinsurmountable. Although sustained efforts will be necessary to attain theexport targets, they are, nevertheless, feasible provided that the Governmentcontinues with its policies regarding the exchange rate, export incentives andimport liberalization. Similarly, while Turkey's liquidity position is likelyto remain tight in 1984-86, on balance the external resources being madeavailable to the economy provide suffici.ent room for Turkey to implement itsmedium-term adjustment program effectively. A strong revival of privateinvestment in the medium-term is feasible provided inflation is brought undercontrol, public investment does not encroach on private resources and thefinancial sector performs its role of efficiently mobilizing and allocatingresources. While there could be pressures to abandon stabilization policiesto promote growth for the alleviation of social hardship, the Government'sclear political mandate reduces this risk considerably.

PART V - THE PROPOSED LOAN

115. Tne proposed loan is the fifth in a series of loans supporting theGovernment's structural adjustment program initiated in January of 1980. Themain developments of the program have been described in this report. A letterfrom the Deputy Prime Minister dated May 1, 1984 sets out the majorrefinements in the program and the new policy actions envisaged for 1984 andearly 1985. The letter and its updating Statement of Development Policies --1984 are attached as Annex IV-A. Preliminary discussions on the possiblecontent of the SAL V package were held with the Government in January 1984,and the proposed loan was appraised in March ]984. Negotiations were held inWashington on May 16, 1984. The Government delegation was headed by Mr. TuncBilget, Chief Counselor for Financial and Economic Affairs, Embassy of theRepublic of Turkey.

- 43 -

116. Tne proposed loan of $376 million (including the capitalizedfront-end fee) would finance about 4 percent of Turkey's total merchandiseimports and about 13 percent of the gross capital inflows over thedisbursement period (mid-1984 to mid-1985). The loan is designed to continueBank support for the structural adjustment program through 1984 and early1985, and has been determined partly in light of the overall size of theBank's lending program for Turkey.

117. The proposed loan would finance all goods to be imported into Turkeyexcept for goods financed by other sources and a specific list of excludeditems such as military or para-military items and luxury goods such astobacco, precious stones and jewelry, gold, and nuclear reactors and parts.Counterpart funds would be deposited in a special account with the CentralBank; as under previous SALs, the Government would continue to use these tohelp finance expenditures included in its development programs. While theBank has not sought to influence the Government in its allocation of funds,the Government has indicated that it would expect to continue to allocate thefunds to high priority development projects.

Procurement, Disbursement and Administration

118. The satisfactory administrative arrangements made for SALs I-IV wouldbe continued, with the Undersecretariat for Treasury and Foreign Trade and theCentral Bank bearing the main responsibility for administering the proposedloan. Procurement and disbursement performance under the SALs has beenentirely satisfactory. To simplify cdisbursement, only invoices with a minimumvalue of $50,000 equivalent would be eligible for disbursement (LoanAgreement, Section 2.10(b)). The loan would be disbursed against only foreignexpenditures, with retroactive f:inancing permitted up to $37.6 million ofexpenditures made after June 1, 1984 (Loan Agreement, Schedule 1,para. 2(c)). The retroactive financing is to ensure a smooth flow ofcommitments and payments during the transition period between the fourth andfifth loans. In order to ensure that: Turkey will have ready access to foreignexchange, a Special Account wouLd be established in the Central Bank of Turkeyto which the World Bank would make an initial revolving deposit of up to$40 million. The establishment of the Special Account would be a condition ofloan effectiveness (Loan Agreement, Section 5.01). The Special Account wouldbe replenished against withdrawal applications at monthly intervals or asappropriate when the undisburse<i balance of the Account falls below$20 million. Imports would be rnade directly by actual users, with importscosting $10 million or more procured through international competitive biddingin accordance with the Bank's Guidelines for Procurement. Certain commonlytraded commodities may be purchased through price quotations from organizedinternational commodity markets. All contracts of lesser value would beawarded through normal trade channels on the basis of normal procurementprocedures of the public and private sector firms concerned. The procuremenl:procedures of public sector firms provide for substantial internationalbidding or shopping and are satisfactory. Firms in Turkey have adequatechoice of international suppliers to ensure reasonable availability and price.

Monitoring

119. Monitoring of performance under the SALs involves essentially twocomplementary and inter-related activities: a more general monitoring of theprogress on implementing the program and the monitoring of specific progress

- 44 -

as a condition of tranche release. The spec:ific conditions proposed forrelease of the second tranche of $126 million include (Loan Agreement,Schedule 1, para. 3 and Schedule 5);

(a) Completion of the preparation of a Fifth Five-Year DevelopmentPlan compatible with the aims of the structural adjustmentprogram (para. 34);

(b) Satisfactory progress in carrying out and implementing theresults of a review of the public investment program (para. 49);

(c) Satisfactory progress in the elimination of quantitativerestrictions on imports and the rationalization of the tariffstructure (para. 64);

(d) Satisfactory progress based on the agreed plan of action for theinstallation of a computerized debt management system (para. 71);

(e) Satisfactory progress on financial sector reforms (para. 82); and

(f) Satisfactory progress in the preparation of an energy action plan(para. 90).

PART VI - BANK GROUP OPERATIONS IN TURKEY

120. Through March 31, 1984 the Bank and IDA have lent $4,628.2 million 1/to Turkey, through 77 projects. Agriculture accounts for 18 percent of fundslent, industry and DFCs for 28 percent, power for 16 percent, structuraladjustment and program loans for 29 percent, and urban development,transportation, education, tourism and technical assistance for the remaining9 percent. As of March 31, 1984, IFC commitments to Turkey totalled about$240 million, of which about $74 million were still held by IFC. Annex IIprovides a summary statement of Bank loans, I;DA credits and IFC investments asof March 31, 1984.

121. The execution of Bank-financed projects in the public sector has beenslow, due in part to weak management, limited coordination amongst ministries,staffing problems, and the serious external and domestic financial crises from1977 to 1979. There has been notable improvement since September 1980.Nevertheless, problems persist in many cases, reflecting difficulties instaffing the public sector at current salaries, over-centralized bureaucraticstructures and continuing constraints on the availability of local funds. Thehigh interest rates for working capital combined with depressed domesticdemand and reluctance of investors to take the foreign exchange risk haveaffected the implementation of private sector projects and led to slowcommitments under DFC lending. As of December 31, 1983, disbursements for allsectors combined average 44 percent of appraisal estimates (excludingstructural adjustment loans) as compared to 54 percent for Tunisia and42 percent for Morocco.

1/ Net of cancellations.

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122. Bank lending is aimed at sulpporting Turkey's medium-term objectivesof restructuring the Turkish economy by placing more reliance on market forcesand adopting a more outward-oriented strategy. These objectives also includeincreasing domestic savings and reorienting a restrained public investmentprogram to reflect the Government's priorities of completing ongoing projectisfaster and emphasizing quick-yielding new investments with positive balance ofpayments impact. The main vehicle for the Bank's operational discussions withthe Government has been the structural adjustment lending (SAL) program. FourSALs have so far been approved, and the proposed loan would be the fifth. Thesuccess of the SAL program has highlighted the need to develop sector policylending vehicles for continuing the 'policy dialogue at the sectoral level.

123. Agriculture, industry, energy and transportation will continue to bethe key sectors for Bank lending with the accent being placed on improving t]hemanagement of projects. In agriculture, the emphasis will be on irrigation,credit, and reform of the extension and research services. In industry(including DFCs), it will be on the promotion of exports, employment, andincreasing operational efficiency. Energy projects under preparation willfocus on power generation based on domestic hydro and lignite resources, aswell as enhanced oil recovery and oil and gas exploration. Lending for thetransport sector will focus on developing the infrastructure necessaryto facilitate exports and improve the efficiency of operations. Projects forindustrial training, urban development and public utilities may supplementthese efforts.

124. The close macroeconomic and sector dialogue established with theGovernment in recent years is expected to be pursued. The economic and sectorwork undertaken recently includes studies of the agricultural and financialsectors. Topics likely to be covered in the future include a review of thenext five-year development plan, including a review of major public sectorprojects, a study focussing on the impact of structural adjustment, a reviewof transport investments and studies of the engineering and agro-industries.

125. This is the sixth loan to Turkey to be presented to the ExecutiveDirectors this fiscal year. Other projects being processed include a proposedagricultural sector loan, supplementary loans for the Karakaya and Elbistanprojects, a natural gas pipeline and lignite mining.

126. The Bank Group's share of the estimated total external debt was about11 percent in 1982, and is expected to grow to about 16 percent by 1985; itsshare of total debt service payments is projected to increase from about12 percent in 1982 to about 15 percent in 1985.

127. IFC has invested in synthetic yarns, textiles, pulp and paper, glass,aluminum, cement, iron and steel products, heavy diesel engines, motor bicycleengines, piston rings, food processing and tourism. It has also invested inthe Industrial Development Bank of Turkey (TSKB) and provided guarantees foroverseas contracting firms. In addition, IFC is currently providing technicalassistance to the Government with respect to the development of the capitalmarket and a regulatory framework for leasing.

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PART VII - LEGAL INSTRUMENTS AND AUTHORITY

128. The draft Loan Agreement between the Republic of Turkey and the Bankand the Report of the Committee provided for in Article III, Section 4(iii) ofthe Articles of Agreement are being distributed to the Executive Directorsseparately. Features of special interest are described in paras. 34, 49, 64,71, 82, 90, 118 and 119 and listed in Section III of Annex III of thisReport. Establishment of a Special Account for the proposed revolving fundwould be a special condition of loan effectiveness (Loan Agreement,Section 5.01).

129. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank.

PART VIII - RECOMMENDATION

130. I recommend that the Executive Direct:ors approve the proposed loan.

A. W. Clausen

President

Attachments

May 24, 1984Washington, D.C.

47 Annex IPage 1 of 5

T A B L E 3A

TURKEY - SOCIAL INDICATORS DATA SHEETREFERENCE GROUPS (WEIGHTED AVEMAGES) /a

MOST (MOST RECENT ESTIMATE) /b

'b 'b RECENT /b MIDDLE INCOME INDUSTRIAL1)60= 197C' ESTIMATE' EUROPE MARKET ECONOMIES

AREA (THOUSAND SQ. D)TOTAL 780.6 780.6 780.6AGRICULTURAL 372.3 381.8 381.8

GNP PER CAPITA (US0) 300.0 550.0 1540.0 2453.6 111 2.7

ENERGY CONSUMPTION PER CAPITA(KILOGRAMS OF COAL EQUIVALENT) 253.0 512.0 779.0 1580.8 7500.6

POPUIATION AND VITAL STATISTICSPOPULATION,MID-YEAR (THOUSANDS) 27509.0 35321.0 45529.0URBAN POPULATION (X OF TOTAL) 29.7 38.4 46.7 47.8 78.2

POPULATION PROJECTIONSPOPULATION IN YEAR 2000 (MILL) 68.3STATIONARY POPULATION (MILL) 119.4YEAR STATIONARY POP. REACHED 2110

POPULATION DENSITYPER SQ. R4. 35.2 45.2 56.9 82.0 139.0PER SQ. KM. AGRI. LAND 73.9 92.5 116.4 157.2 514.2

POPULATION AGE STRUCTURE (X)0-14 YRS 4L.2 41.0 38.6 31.9 22.4

15-64 YRS 55.2 54.3 57.0 60.9 66.065 AND ABOVE 3.5 4.7 4.4 7.2 11.6

POPULATION GROWTH RATE (X)TOTAL 2.8 2.5 2.3 1.6 0.8URBAN 5.1 5.1 4.1 3.4 1.4

CRUDE BIRTH RATE (PER THOUS) 43.1 37.9 33.2 25.0 13.8CRUDE DEATH RATE (PER THOUS) 15.8 12.2 9.2 9.1 8.9GROSS REPRODUCTION RATE 3.1 2.7 2.2 1.7 0.9

FANILY PLANNINGACCEPTORS, ANNUAL (THOUS) .. 65.6 6

6.6/c

USERS (X OF MAMRIED WOMEN) 5.3/d 3.0 38.07e.

FOOD AND NUTRITIONINDEX OF FOOD PROD. PER CAPITA(1969-71-100) 96.0 100.0 111.0 108.4 112.4

PER CAPITA SUPPLY OFCALORIES (X OF REQUIREMENTS) 115.0 111.0 122.0 129.6 134.4PROTEINS (GRAMS PER DAY) 85.0 80.0 86.0 92.3 99.0OF WHICH ANIMAL AND PULSE 25.0 23.0 25.0/f 34.6 61.4

CHILD (AGES 1-4) DEATH RATE 50.0 31.2 19.8 10.4 0.4

HEALTHLIFE EXPECT. AT BIRTH (YEARS) 50.5 56.6 62.4 67.2 74.9INFANT nORT. RATE (PER THOUS) 189.5 147.5 119.2 71.4 10.7

ACCESS TO SAFE WATER (ZPOP)TOTAL .. 52.0 75 **URBAN .. 51.0 70.O0..RURAL .. 53.0 8g.o7j ..

ACCESS 'TO EXCRETA DISPOSAL(X OF POPULATION)

TOTAL .. ..

URBAN .. .. 20.0/

RURAL .. ..

POPULATION PER PHYSICIAN 2800.0 2230.0 1630.0 1094.8 553.6PoP. PER NURSING PERSON 16313.0/h 1880.0 1130.0 762.5 182.9POP. PER HOSPITAL BED

TOTAL 600.0 490.0 500.0/f 334.0 119.8URBAN 340.0/h 310.0 300.071 216.0 143.2RURAL 5100.07W 5910.0 6240.072

ADMISSIONS PER HOSPITAL BED .. 20.2 22.3/f 20.0 17.7

HOUSINGAVERAGE SIZE OF HOUSEHOLD

TOTAL 5.7/i 5.9URBAN .. ..

RURAL .. ..

AVERAGE NO. OF PERSONS/ROOMTOTAL 2.4/i 2.2URBAN 2z07T 1.9RURAL 2.77 ...

ACCESS TO ELECT. (X OF DWELLINGS)TOTAL 29.0 41.1 57.0..URBAN .. 78.2

RURAL 2.0 18.0______________________________________._____________________________ _________- - -_ - - - - - - - - - - - - - -_- - - - - - - - - - - - - - - - - - - -_

- 48 - Annex IPage 2 of 5

T A B L E 3k

TURKEY - SOCIAL INDICATORS DATA SHEETTURKEY REFERENCE GROUPS (WEIGHTED AVERAGES) /a

MOST (MOST RECENT ESTIMATE) lb/b lb RECENT MIDDLE INCOME INDUSTRIAL

1 9 6 0 - 197l- bSTIMATE- EUROPE MARKET ECONOMIES

EDUCATIONADJL'STED ENROLLMENT RATIOS

PRIMARY: TOTAL 75.0 110.0 101.0 102.2 101.5MALE 90.0 124.0 110.0 107.2 103.3FEMALE 58.0 95.0 93.0 97.9 103.3

SECONDARY: TOTAL 14.0 27.0 37.0 56.5 89.2MALE 20.0 38.0 49.0 63.4 84.5FEMALE 8.0 15.0 24.0 48.9 86.0

VOCATIONAL (Z OF SECONDARY) 17.7 13.7 22.3 22.4 18.3

PUPIL-TEACHER RATIOPRIMARY 46.0 38.0 27.0 24.7 20.2SECONDARY 19.0 28.0 23.0 22.1 14.4

ADULT LITERACY RATE (%) 38.0 51,3 60.0 69.7 98.9

CONSUMPT IONPASSENGER CARS/THOUSAND POP 1.7 3.9 1 52.9 356.5RADIO RECEIVERS/THOUSAND POP 49.1 87.7 96.4 165.5 1085.4TV RECEIVERS/THOUSAND POP 0.0 1.8 75.3 124.2 449.5NEWSPAPER ("DAILY GENERAL

INTEREST") CIRCULATIONPER THOUSAND POPULATION 51.3 40.6 89.1 96.3 331.3

CINEMA ANNUAL ATTENDANCE/CAPITA 1.1 7.0 1.9

/e 2.9 3.5

LABOR FORCETOTAL LABOR FORCE (THOUS) 13782.0 15829.0 19737.0

FEMALE (PERCENT) 40.2 37.0 36.4 34.5 36.1AGRICULTURE (PERCENT) 78.5 67.7 53.5 40.7 6.2INDUSTRY (PERCENT) 10.5 12.1 12.8 23.4 37.8

PARTICIPATION RATE (PERCENT)TOTAL 50.1 44.8 43.4 42.0 45.5MALE 58.7 55.7 54.4 55.2 59.0FEMALE 41.2 33.6 32.0 29.1 32.5

ECONOMIC DEPENDENCY RATIO 0.9 1.0 1.0 0.9 0.8

INCQIE DISTRIBUTIONPERCEN'T OF PRIVATE INCOMERECEIVED BY

HIGHEST 5% OF HOUSEHOLDS 33.0/d 32.8/kHIGHEST 20Z OF HOUSEHOLDS 61.07' 60.67V .. .. 43.1LOWEST 20Z OF HOUSEHOLDS 4.27d 2.97ik .. .. 5.5LOWEST 40% OF HOI!SEHOLDS 1O. 67T 9.47 * -7k 16.5

POVERTY TARGET GROUPSESTIMATED ABSOLUTE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. .. 34

2.O/eRURAL .. .. 270.0/e

ESTIMATED RELATIVE POVERTY INCOMELEVEL (USS PER CAPITA)

URBAN

RURAL .. .. 220.0/e 409.0

ESTIMATED POP. R1,LOW ABSOLUTEPOVERTY INCOME LEVEL (Z)

URBAN ..RURAL ..

NOT AVAILABLENOT APPLICABLE

N O T E S

/a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among theindicators depends on availability of data and is not uniform.

/b Unless otherwise noted, "Data for 1960" refer to any year between 1959 and 1961; "Data for 1970" between 1969 and1971; and data for "Most Recent Estimate" between 1979 and 1981.

/c 1974; /d 1963; /e 1978; /f 1977; /g 1976; /h 1962; /i 1965; /j 1975; /k 1968.

May 1983

Annex I49 - ~~~~Page 3 of 5

tOP INrrICNS Or SOCIAL 1051CAEOR5

otace; Althoagh tot 4at. Are d-oc fr- -ous go-salt Jolga at. soar aetbottati'. and raltabt, it htoold ALso ha Oatd that thay say not ha tntsr .a_oalycomparble baaoa of tt look of atoadoddaf.tott soI oopaaad b o octoatOet olrigtha data h.it.t. * nooonteta., aafo1l t

decibe orlor of a ittuds, iodotst Itr-d., sod ctshstat- oera .mao dffsne aeotcstia

fTah. fro Stoopa or. (1) tha ea.- toootY 8roa Of tht tabot ... o.try s:.d (2) A 0. ootry sroop nith Aha-t bifabf a-.ra. ioo. than nha oootry gacp .1 tha-Ibyson ooatry (soospt for Hight Iot.-"01 .ors goop t.tor fltddi boom tMl sb Afrios sod Kiddle -tsar toots hI arsob... of saot r.rootcooffotots. , to i rfrs top o. th, nrga r cpopolao e-ightod rlith.tt --an for esbtdlao ahd han .nly aso majority of thoottstn

grop ba data o. httdotr to tha.aeq f oorttnt- -aa tha todioato dapends an tha -isttbhltty of doto ad to oat ontfo-, -aaoto -to haLarls o ra-ta ... snSraa of one oodtato to ooothar. ITtas a--rg- ar oaly aaefol In o.-parg rha _a_ of one tidira.tr Ata.taa aeo4 tha ootty mod

SEA (aboosood eo.Aa.) oIlttIlooofPhstatan1- Popoatoo dlvifad by oatb- of pa o-t. Total soof-o 0050 ospfstog land Ott aod Linad satan.; 965. jbidiqiTiTf roa 0 mdloal sohbool at iot-rsay Lan.

I01 n 10O data. PoPOLotton son *-aitt F.rao- - POPoLattoo 4titdd by oaber of orcototiOf447tl-"ftimate of-anootra r. Ioe--poao onpotatly saltiand fssal podoata stat,aatan or.,pra-talan- as

'P"crop ..pasto... market anditnrhagadnso to 11. folloc; lOt0S. -oat M-alori..t970 an 10fo data .- t. - ooeta. onaa!, anroa - Popo.latt (ltonl.

and tona dM1d. by abat, ts.artoanoha of hopItal hudaGN -CPIA NPy pan oapitaa -talana an Al trent askth pntoona. moiloble t. p.blit and pttnsts g _saad Ipotltied hasytna n

adby - 7onaao -enbd .. Wotld tank tolt. (I00f oas;nbablat.tata oeotsra. tassnla ate -t.boabtthan.tpasastaly InaEf

IURK O!S ONPt ItR CAPITA I Mno1 aPParet -- oa,Ptto of oComsnoa eadtol. tearer. not Peasostly stsffsd by A ptyatota- (boo , -yomeAtlprtmary sargy (col and lootas. patolsoan, ntural oI ond bydro 1--, oln aataat, ur modafe, Ot.) ttb off. ta -pantan ... c..odt1on and

and,athanso alctrltiLty) to Atogas ofoo qla t Pet oPta; Prod tta og o oba ott. or st_ttatotp_ poo19065. 1070, sod 1900 dma.. arboa opittals to_los aHO. ptlnctpst/o..ara1 topyttata, andnol

hampilot., loca or tota hepiatsl sod adioal and maternty canata.--OPUoTtION AeND VITAtL STATISTICS Spaotoltaa boapLtala at anotd. noly ad-t total.

Tooa Pnototoa m-Year Tabousoda) - As of July I; 19bD, toys, nod tOOt Admiastoot sot to tal sod - Total niabhe of adatato.. to o dtstbortadata.s.. bsiaafndeld by thbe onete of bed..

ltto ptolnaa loroatIo tot) - atio of ortmo to tota popolattot;diffaranadinf.ntt-o.ft otba. lta.-ft of fat .- sPanabtliton of otatoHOUSttNG-Og ooote;1960, 1070, sod100 dat. borteOt.lof toaod(aen o uaed total, orb .ad taot

tattoo to oc 555 torrentpopola.too projentio arI atd001ffad thetr -1n eas A boader or loder may or may Oat ha t_1oded toby q- and tea tod abet.. statymofrtittly th. houahald for tat.talsa l purpaeaa.

rate, yojaa Vo par.eatsl for ortolLtay tatsoplt.e of ato.. Ananoo osha of ptto: pn om ttl.oha. n tta neag at

naytt toos lne ndfaa llotepetfy aktotgatI, dalng,rapot-l.Sal5g -aootd oopansad I Lenc.t. sayato.Th pa-1ser for fertlt- tt ot banaitt, LOnSMo adooptp re

slaite b hrb oe aaoa n b ftloayth rl ota n alojtio a P.,oss tSof t.tl OO.dI- -1IS . P.t.

atroot-arar im.totc..etaat. ThM. L. sobto...d only oftar fartillayraa kdjootd tarollset NAtatodeolton to tha rtlaoaCoa 1-1o of unit oat rpoduot1on oa ot oaoabal-tta,ml and faE l-Ios tta..l.ad.e.l._h enrsta ofem replscea.. Irtf enty.The atotoroy" enltofltfaat tba ptts-ry lnI t aonoe f tsp-Ltta

payolatoo eaa a..aaatmtad 0 tba boat. of ate projeoao Icco- pttmarl cho-aepapolatia-a tonall tI1-da otildre. ARM b-1lt.ito of itt popultLon to b year 2000, aod tha rate f dol fyear. bat adJsted for dtff-rao tentta of poteory edono;fo

po iata ala. ntll ha rece.Snodr ool oa,sleadfsl - C--.pad asabna;o..coodaeyyoto1attoo haaaDnooto e..a tlsa o years o opprore yrtoI- tnarootLooa;

! -!_ ;ptqlki .L.1 k.- Mid-y-o populactin paIqor o -osa 1100 bcoe f phna,,gnea-iocooot,c aa`a att -ogto troa"ofarLoth1.a tool 19, toy.ald9f dato. puI. talyof1 tot er f ago; cortaspondore cot..an

Po s.h. .atol .a lan:d -Cmpotad t o-sa foE orto LIr M tod-onroly actdad.oly; too, tos9 nd1ffdaa nVomatotat ,oroIt.ent (aerat of eacandaty) -Vcttona to t.ooooa

rooolontoo faa Saootora (nerconot- Chtldr- (0-14 pan.) kaotg-ags (15- t Ilda aanb .Ioa, ndoorol, rotrport bo prt oeadtot yean), m. r.tttd (65 aats ad one.) a. P-rcatof. of d-yea annoyora dnparts... o.f Iacndr Onolotto

paalottoo; 10 -I17, a 1018 data. Potpll-aaott-r ra.-.aty n seodary Tota atdeterl1led InPorolaauo Otott t pte .... o t-octat - M-uAl gran tas f tonal aid- Irer n aodaop boat IdtntM dbyhobr a ece. t aor

year pOpolotino for 1055-05, tot96-7s, and toys-t1. -aap l'doo .enelef0solmaioc Ir_o tat rota -_orha - toooo 9r-ti raa- of oobtta Idol ttnnc rt tecea -d.oaa .m t. (bt. ao read and orta.) aa

Pap.nos o 9IIt 0N7iCost.A patoango ftoaIsoapapotttu aged 15 y.m.a .. oan

Cool bath taa(e tooa_d A roe_ lenb pa oth..and of ald-ps- Poaoa oe(eraoan onolatto- IPasgtct rmns uopaonlanOo; tO6D, t97l, and l9Ot daa.tOt. aaat ls ae e ttprn. aocldea smbolsots, h-a-e mod

Ito.. So,l rodttto to -A_onge obha of d.nohttar aIo-toIil teat to iltttoay osIclo.ISit iY41 404411.p-radLfateprtosptaaat-ecft. Jdi. R teoter E ant ttaaaodruato -All typsa of rectniata :for tditt

Efsttl'tcyrts .ul asya nraa otgI 00 00 n b-oacaaato moalpoblto par atho...d of popa1Latta; norldsantoot. ILotnad re -tyn. Ln oanttsadIoya.o-edattao fti.s

Faatl Ptaotoa -AcceTon.Ana ttoana Ateat noab-t of -otptora eta, -o to effect data for reaa peo- may no be camporatLa stan -of brll-cont-l anta oaM optso ntoa al lntn couoatsatcltate:'d ltotgplofro... TV taeoo ea hnsdonanlant'On) -Tr Et-r a broadcas tnPasOln Plaoa.. - a eacn fmare m - -. f-lh~ Pecotg o totdgeea oLtc par .. tboen payt..t.tn;-onlodte anttcoae 1= raot

aaof chtld-tb-rtg tIe 115-_ yaoIrn) Iab as It .... -cont Ee.asat -ootote and to Yea.- ofte regtotst on ofTatnat fet.aIlt srrd _-Oe On aee age groupN.-fooa Ctcot-Ltto tear thouand popou1atton - Oboes tIhI ao-ta

tOOl MDc aTRToIton ,A lo o af doily 5en... tneefnopMt,d.ftoad Ioapttiodt-lo

anneal prod Ionton of al -ad moIle rd ucIn oloda. st-d sod to ha "datly" tf ta oppa..- at least Lfoot. taa as A.kfee ad tooA aodr ertas Ca-dittmte 0lnon prtsary gooda (o.:.Som talfatdaoetCttaersa -aolt utro

eagarcts lotead f swa) otitct ate diblt and c--ral -oten.- (s..g atchn udlro st -as, .oldiq; aditaoo to drlne-~In onemaanoafs no and oaaorse lolded. sNggrSgat prodootor of aoc. hno-ty ta orbIts -I',..

basd an naIona .... ra pood-s pric. togtatte tot1-65, toys, aol 1981data. LASBOR ORCt

ftarcta soI fclns eraof onlonIat- Cospoad too. !5rl ot tar0olPth(stosan) - tE-amtcaly sottos pa--o, tonlodLq, an.sesryqta toEf at food sPtl l_ onatale to n-tay Per., tapr ae .. Piot.plae- ta enloto buentsa solst, ., -Inrag

day. Anatilable aoppliee cosprtL doatett p-edoatno., tepota Iae. paoatno ll ag.n. tafotto t n-rto- oaa"trs Are oatanpotta, and cbaogee 0 It sta t. la spl E.. rocodn anteot feed an-de, toPat,tt; 105, 10 9 ad L~ data

qaoitto anal to fond proo-aaog, an .ls.. ta dtaonttbotion. to-al rosont) - F-Al. Labor foroe a. poca..taga of ltota labor fot-,RAqotree-t- ne. atoae by PIll basa o phy.tlol eds for tarsal AR-t W..t - Labor foos to fesog,9 f.r.atoy, hunntig -04acal-tnty an bontc Isdaoangttroeoltpaat,bdY natobta, ft.btog a. pa--.st5 of soaa1 Ib-r fome; tool0, 1905 and tOOt lots.oga and a... dietrtbottcn of Popttto and aLJLosogoSperoot for soar bda-tr (arrat) - Labor foc to-- atot,ooarcO ,aafcot

an oushal l.netf; toot-65, t970 and 10ff data, and eaatot t-r and g 5. paoetage of octa labor force; t96l,hr taoIst tomb of orateto loon. tar laY) - Protein coten of pot capita t970 aod tOOt data.

oat epytyof fod pa day. Oat auppty of fond Ls daonad se atne P-tntctaotota.(ana -.. .total ma'a sod f.male- ItiacipAttos.R.oar.sots f or all :oantet. .saabltshad by atDA pro-tde for eOtst aottyaaoot.ptan a. fo-al, elo, and fasa1a labor otsa

I Elsresoft grs f total prctslo pat day aol 20 Or... of anam and Pa.cenaf a ofOtaot eal and fes-le popaloston of alt ags sgatneypobos pltotat, aS ehtb 15 gfa-A atold ha anImal prototio. Thorn tot i97s, and 1001dana. Thoa are ... aed oa ILO's paattpanttonoes

t.tadarde r ba thanab- s o,f 75tosa of toto1 p-noto anRd El atmtfleotgwea.sroar foaepplno,ad towt ILe oeoaoslpr_aLo a. Eaaaa. IfrOtIld, propoand by tAO to h. a atut.a rmantalsoos

ThIrdiSoold toed Soroy; 19601,l lO9 a. t... .. o ta,toot Seaadao ... att- - Rtar. of popoltalon ooa 15 and 01 Aol ons tPar., tap en upyfII. aIml an rota - Pntaio soPpty of fond h. tonal lmbo, fon...

daind t:in aotaal and ots to -rP..,e day; L96I-65, 1070 aol 1077data. IttlOE DISThttfIosN

Itild asas 16) Soat tas Ipa ota-gdl - tol.leac. yen thousan to 'stnns o lroa,Icstobt noebI L mod. tl -. tacetoa by rfthtest 5

oo0oatae. data .lainad SEl Itt. table.; 1060, 1907 and 1981 data. ha-oaald..

StAlYt ~~~~~~~~~~~~~~~~~~~~POVfRTY TARGET GtOUPSUftoatoaoatSoa neora1 - larag Mater of Yscts of 10f. ras-ogo oTha eall-isot se l-te r -Y0 oppreat..n sa aof pon-ty tL-ala, and

atbtrth; 100,t1070 and 1001) dt.a" . e .... ha 'ot tprO. Ltth.. ioadstale aotoInfoo irotvtn erootnl- nellat ftfoone n Etsottu d Abaoloat "oanY Into.. 1Ana lUSt er cta P l-arosdttl-

foarof os pr Aouaod Lios bittos tOOl, 1907 and 10981 dat,asloapnro noeles aohntr. tanethalosofYio Id stoa.ACcess of Sofa -oanerco of -urltton) - total, rbao an-d ararl - soati Atoa adqt. dtos plus a.ootat1 non-too qlseosdt o

Omber of .peola ltoal.urOt an otl clo'rnI,,bt .c...e to asafodbsataoapplp (octadta treated aufaca atana o ot artoosld hoaftaatlOla Poarotooe anl(5tea cptad orb. anan rtl .. -

otesanotd a.tt coot an that ft.. ptotat.dl borstole., sprlga, and total roato IoanyOom.lol.t"oo-abtal of sorg Per capItasatoyols .prettuona o bLtraean pyowllatoa. ha so Parn- tooIta of tha coanary. Orbat tona La dlirtodft to.nb tota

arbt. arap blatc foootoi or stsdpaet located tot enIt sthe 200 satare lcnel atht od3aataot far high.r ta of lictig to orba. rAsafrs hoo- sap ha conIdered aA batg athbto ranaoblI s....a of that fEoti-to Porolstos. Ba4ooAbeobasa Ponatc Inc.tAneL te trana - arbo-h-ose I. rorot I .r.ae ooanal -ooc. -nId tiply rh., tha hoou.sf. at and, rura - fatness oIIpaato ora andtoal ab rs'bebsostero of sth boushold do oct bone to papo a dt,pr-prc _eao par of Poor.

At Icy.to faotnoa. fial' etrsnsL Wss t acat icol -ea Ist of erlanton ) tota.1 oteb. and

rool sebt f oo _a(OOm, oot,an rar-l) eandbyeartdtap, ast asPac-ntag- of. othirreapa-i- papolastons. naEns dIsposalmay intotha ateoalecton and dcpas ttt or aottcoa -tro..ano f ftooomto ad taoaal Ntat Dtitatotean otteto ad baasaa y saner-ban. petoe nr abs on of pit Eoon1c Analyate and Projactoona Daparts.atpttrteaaolatilor tMtlttn.ny 1001

ANNEX I

- 50 - Page 4 of 5

TURKEY - COUNlRY DATA

Popu-ation: 46.5 million (1982)GNP Per Cap tL4 USS1370 (1982)

Amount Average Annual Ircrease (X) Share of CDP Market Prices (U)(million US$ (at constant 1980 prices) (at current prices)

Indicacor at current prices)

1982 1965-70 1970-75 1975-80 1980-83 e 1 1965 1970 1975 lq80 1983 c/ d/

NATIONAL. ACCOUNTS

Gross doseatic product a/ 51,171 6.6 7.5 2.8 4.3 100.0 100.0 100.0 100.0 100.0Agriculture 10,325 3.1 4.4 2.7 2.0 30.7 26.4 26.2 21.4 20.0Indastry b/ 13,478 9.5 9.5 2.8 6.5 16.6 17.2 18.0 28.6 27.0Services 29,213 8.2 8.0 3.7 3.8 42.9 46.5 46.0 44.3 48.5

Consumption 43,962 5.8 7.0 2. 7 3.0 84.6 82.8 85.2 81.8 81.9

Gross investment 10,914 11.7 12.9 0.6 -3.5 16.7 20.1 23.3 26.4 20.9Exports of goods and NFS 7,874 7.9 7.3 4.4 30.6 6.1 5.8 6.1 7.1 14.5Imports of goods and NFS 9,867 11.2 13.8 -3.1 8.0 7.4 8.7 14,5 15.2 17.3

Gross national savings 9,759 11.6 I.1.9 2.4. 2.4 15.8 18.8 18.1 18.3 18.5

Average Annual Incr-ease (U Composition of Merchandise Trade (0)

(At csnotant 1980 prices) (at current prices)

1983 1972-75 1975-80 1980-83 1972 1975 1980 1983

MERCHANDISE TRADE d/

Merphandiss exports 5,728 -6.1 2.8 - 33.5 100.0 100.0 100.0 100.0Primary 2,070 -6.3 4.0 17.5 72.6 64.1 64.0 36.1Ind.strial products 3,658 -5.8 0.9 45.5 27.4 35.9 36.0 63.9

Merchandise imports 9,235 11.2 1.2 7.6 100.0 100.0 100.0 100.0Agric.Iture and livestock 138 27.9 -23.8 52.2 2.2 4.3 0.7 1.5Mining and quarrying 199 17.4 6.8 22.0 1.2 1.6 1.8 2.2Petroleum 3,665 5.4 11.0 -2.1 9.9 17.1 48.8 39.7Machinery and equipment 2,445 14.0 -12.1 23.6 45.0 35.6 18.2 26.4Other industrial products 2,788 9.9 4.5 8.6 41.7 41.4 30.5 30.2

1978 1979 1980 1981 1982 1983 */

PRICES AND TERMS OF TRADE

GDP deflator (1980 - 100) 29.0 49.4 100.0 144.1 181.5 237.8Exchange rate 24.3 11.1 76.0 111.2 162.6 225.5

Export price index 63.0 78.2 100.0 95.8 94.3 87.0Import price index 61.2 71.9 100.0 100.6 99.6 93.2Terms of trade index 102.9 108.8 100.0 95.2 94.7 93.3

As 0 of GDP(Ut current prices)

1965 1970 19'5 1980 1983 e/

PUYLIC FINANCE

Current revenue 15.0 22.6 22.0 19.8 19.8Current expenditure 10.0 11.8 1-.6 11.5 9.5Surplus (.1 or deficit () -2.0 -2.3 . -0.4 -4.8 -0.5Investment expenditure 4.7 5.7 4.2 3.9 4.7Trsnsiers 5.0 7.5 5.5 9.2 6.1Foreign financing 1.8 1.6 0.3 0.2 -0.9

1965-70 1970-75 1975-80 1980-83 s/

OTER. INDICATORS

GNP growth rate (X 6.8 7.7 2.6 4.3CII per capita growth rate (X) 4.1 5.0 0.3 -0.7 f/

IcOx 2.9 2.9 5.7 4.5kerginal savings rate (X) 28.2 19.5 30.8 31.6lort elsiticity 1.7 1.8 0.5 1.8

A/ At market prices components are expressed at fector cost and .rill not add due to eitclusion of net indirect taxes and sublsidies.b/ Includes sining and quarrying. manufacturing, and electricity, gea, and water.ci At constant 1980 prices.di In accordance with Turkish Goverment's specifications, vhich are not compatible wi,.h SITC's.e/ Provisiomal.7 1 1NO-82.

ANNEX I-51 - Page 5 of 5

TURKEY - BALANCE OF PAIYIENTS, EXTERNAL CAPITAjL, AND DEBT /s(,sillio, US at current prices)

Population: 46.5 million (1982)GNP Per Capcta. US$1370 (1982)

Actual Estimated Projected

1972 (979 19B0 1981 1982 1983 198 1986 1987 1988

BALANCE OF PAYMENTS

Net exports of goods & NFS 674 2391 4627 3526 1993 2235 1315 1446 1706 2042 2518

Exports of goods 8 NFS 1153 3334 4171 6483 7874 8086 9610 10993 12883 15153 17865

Imports of goods & NFS 1827 5725 8798 10008 9867 10321 10924 12438 14589 '7194 70383

Workers' remittances 740 1694 2071 2490 2187 1554 1420 1750 1907 207Q 2266

Net transfers 46 - - - - - - - - - -

Current account balance iS -1720 -3175 -2138 -1131 -1991 -1139 -1220 -1438 -1703 -2170

Direct private invest.ent - 82 200 148 129 90 141 145 159 212 266 320

Publtc M&LT (gross) /b 294 4336 2350 2237 2504 2209 2190 2123 2484 2890 3366

Amort 5t-5n on MLfLT /b -117 -414 -436 -560 -954 -1514 -1475 -1815 -2234 -2669 -3096

Publ-c M4LT (net) lb 177 3922 1914 1677 1550 695 715 308 250 221 310Other cap,tal _c 292 -2291 1616 613 184 999 608 744 592 1611 2034Change - rese-ves (- increase) -566 -111 -503 -281 -693 156 -329 9 424 -395 -4g9

Internat onal reserves 1325 800 1463 1744 2437 2281 2610 2601 2177 2573 3058

eserves as wonths of -oports 9 2 2 2 3 3 3 3 2 2 2

Actual1972 1978 1979 1980 1981 1982

GROSS DISBURSEMENTS

Gross dtsburse..ents 372 904 4219 Id 2276 2165 2396

Officiai grs-ts - - - - 300 200

Concess onal 261 227 590 812 622 434Bilateral 139 128 408 749 599 410

IDA 4 8 3 - - -

Other multilateral 118 91 179 63 23 24

No.-conceaasonal 111 677 3629 /d 1462 1242 1756

Official e.port credits 1 172 253 279 289 338

IBRD 25 165 277 313 454 500Other multilateral 27 35 15 154 167 165Private 58 305 3084 /d 713 333 759

EXTERNAL DEBT

Debt outLtand-ng sun d-sbursed 2450 6434 11081 15136 15435 15933

Official 2273 5583 7297 9977 10540 10941

IBRD 92 648 890 1158 1546 1962

IDA 99 188 190 189 188 187

Other 2082 4747 6217 8630 8806 8792

Private 177 851 3784 5159 4895 4992Debt outstanding including undisborsed 3560 10030 14876 18653 19039 18763

DEBT SERVICE

Total debt service Ie 224 434 630 1020 1313 1818Payments 161 268 403 407 524 886Interest 63 167 227 613 790 932

Total debt service as 1 exports of goods o NFS* workers' remittances 11.8 10.5 12.5 16.3 14.6 18.1

Average interest rate on new loans (X) 4.4 6.9 11.3 7.8 7.6 11.3Off-cial 4.5 5.6 3.5 7.0 6.7 10.0

Private 6.8 8.2 13.6 15.1 15.5 15.0

Average maturity of new loans (years) 22.1 13.3 11.1 16.0 15.3 12.7

Official 26.0 15.2 25.1 17.1 16.5 15.3

Private 11.0 7.6 7.1 4.8 5.0 5.7

RANIK GROUP EXPOBURE (2)

IBRD DOD/total DOD 3.7 10.1 8.0 7.7 10.0 12.3

IB8D disbure.ents/total gross disbursements 6.7 18.2 6.6 13.8 21.0 20.9

IBRD debt service/total debt service /e 5.1 19.2 16.8 13.2 13.9 12.4IDA DOD/total DOD 3.9 2.9 1.7 1.2 1.2 1.2IDA disburaements/t.tal gross disbursements 1.1 0.9 0.1 - - -

IDA debt service/total debt service /e 0.4 0.5 0.4 0.2 0.2 0.2

As Z of Debt Outstandingat End of Most Recent

Year (1982)TERMS STRUCTURE

Maturity structure of debt oatstanding (1)Naturittes due within 5 years 42.9

Maturities due within 10 years 77.8

Interest structure of debt outstanding (S)Interest due w-thin first year 5.9

/a All entries on external capital and debt section are defined as in the Bank'. Debtor Reporting System (only public and private guaranteed M&LT debt).

7T Includes private guaranteed and non-guaranteed debt end grants./c Includes errors and emis.ions, and for projected years it includes net IMF, abort-term, and unidentified capital inflows.

/d Includes $2,638 million of consolidated short-term debt./e Takes account of debt relief due to debt reschedulin., and excludes interest on short-term debt and private non-guaranteed debt.

ANNEX II-52- Page 1 of 2

STATUS OF BANK GROUP OPERATIONS IN TURKEY

A. STATEMENT OF BANK LOANS AND IDA CREDITS /a(As of March 31, 1984)

Loan Fiscal Amount ($ millions) /dNumber Year Borrower Purpose Bank IDA Undisbursed

Thirty-eight loans and fourteen credits fully disbursed 2130.0 177.4

883-TU 1973 Republic of Turkey Ceyhan Aslantas 44.0 7.31130-TU 1975 Republic of Turkey Rural Development 75.0 7.41248-TU 1976 Agriculture Bank of

Turkey (TCZB) Agriculture Credit 54.3 26.81265-TU 1976 Republic of Turkey Livestock III 21.5 5.61310-TU 1976 Republic of Turkey Tourism 23.0 9.61585-TU 1978 Republic of Turkey Northern Forestry 86.0 47.41586-TU 1978 Republic of Turkey Livestock IV 24.0 17.61606-TU 1978 Republic of Turkey Erdemir Steel Stage II 95.0 28.21741-TU 1979 Republic of Turkey Ports Rehabilitation 75.0 25.81742-TU 1979 Republic of Turkey Grain Storage 85.0 80.81754-TU 1979 TSKB Private Sector Textiles 65.0 37.41755-TU 1979 SYKB Private Sector Textiles 15.0 10.0S-15-TU 1979 Republic of Turkey Ankara Air Pollution Control 6.0 5.11844-TU 1980 Republic of Turkey Karakaya Hydropower 120.0 70.61847-TV 1980 Republic of Turkey Sumerbank Cotton Textiles 83.0 53.51862-TU 1980 Republic of Turkey Livestock V 51.0 43.31916-TU 1980 Republic of Turkey Petroleum Exploration 25.0 18.11917-TU 1980 Republic of Turkey Oil Recovery 62.0 29.61952-TU 1981 Republic of Turkey Labor Intensive Industry 40.0 28.11967-TU 1981 Republic of Turkey Second Fruit and Vegetables 40.0 35.91985-TU 1981 Republic of Turkey Fertilizer Industry

Rehabilitation 110.0 88.81998-TU 1981 Republic of Turkey State Industrial Enterprise

Finance 70.0 58.82093-TU 1982 TSKB Export-Oriented Industries 100.0 94.42094-TV 1982 Republic of Turkey Erzurum Rural Development 40.0 33.92131-TU 1982 Republic of Turkey Second Fertilizer

Rehabilitation 38.0 36.42137-TU 1982 Republic of Turkey Highway 71.1 55.12159-TU 1982 ISKI Isitanbul Sewerage 88.1 86.22318-TU 1983 TCZB Second Agricultural Credit 150.4 150.4

2321-TU 1983 Republic of Turkey Fourth Structural Adjustment 300.8 1.32322-TU 1983 TEK Third TEK Transm:ission 163.0 162.52327-TO 1983 TPAO Thrace Gas Exploration 55.2 55.02399-TU/b 1984 Republic of Turkey Industrial Training 36.8 36.82400-TU/b 1984 Republic of Turkey Technical Assistance for SEEs 7.6 7.6

Total 4450.8 177.4 1455.3of which has been repaid 504.2 11.0

Total now outstanding 3946.6 166.4Amount sold 3.5

of which has been repaid 3.6 - 0 - - 0 -

Total now held by Bank and IDA ic 3946.6 166.4Total undisbursed 1455.3 - 0 -

/a The status of the projects listed in Part A is described in a separate reporton all Bank/IDA financed projects in execution, which is updated twice yearlyand circulated to the Executive Directors on April 30 and October 31.

/b Not yet effective./c Prior to exchange adjustments./d Net of cancellations.

53- ANNEX IIPage 2 of 2

STATUS OF BANK GROUP OPERATIONS IN TURKEY

B. STATEMENT OF IFC INVESTMENTS(As of March 31, 1984)

Fiscal Amount ($ Millions)Year Obligor Type of Business Loan Equity Total

1964 TSKB DFC - 0.92 0s921966 SIFAS I Nylon Yarn 0.90 0.47 1.371967 TSKB II DFC - 0.34 0.341969 TSKB III DFC - 0.41 0.411969 SIFAS II Nylon Yarn 1.50 0.43 1.931970 Viking I Pulp and Paper 2.50 0.67 3.171970 ACS Glass 10.00 1.58 11.581971 NASAS Aluminum 7.00 1.37 8.371971 SIFAS III Nylon Yarn 0.75 - 0.751971/83 Viking II Pulp and Paper - 0.15 0.151972 SIFAS IV Nylon Yarn - 0.52 0.521972 TSKB IV DFC - 0.43 0.431973 TSKB V DFC 10.00 - 10.001973 Akdeniz Tourism 0.33 0.27 0.601974 Borusan Steel Pipes 3.60 0.43 4.031974 AKSA Textiles 10.00 - 10.001975 Kartaltepe Textiles 1.30 - 1.301975 Sasa Nylon Yarn 15.00 - 15.001975 Aslan Cement 10.60 - 10.601975 DOKTAS Steel 7.50 1.37 8.871975 TSKB DFC 25.00 1.23 26.231976/83/84 NASAS Aluminum 1.58 0.09 1.67

1976 TSKB DFC 25.00 - 25.001976 Asil Celik Steel 12.00 2.20 14.201977 Borusan Steel Pipes - 0.06 0.061978 DOKTAS Steel - 0.16 0.161979 Ege Mosan Engines for M4opeds 2.15 - 2.151979 ISAS Motor Vehicles & Accessories 8.85 0.45 9.301979 Asil Celik Steel - 1.80 1.801979 Trakya Cam Glass 33.15 3.23 36.381980 TSKB DFC - 1.09 1.091980/82/84 ISAS Motor Vehicles & Accessories - 1.53 1.53

1980 MENSA Textiles and Fibers 4.0 4.01981 Kirklareli

Cam SanayiiA.S. Glass Tableware 12.99 - 12.99

1982 M.A.N.Motors Motor Vehicles & Accessories 8.53 - 8.53

1982 TSKB DFC 7 0.35 0.351984 Pinar Food aand Food Processing 3.90 3.90

Total Gross Commitments 218.13 21.55 239.68Less Cancellations, Terminations,

Exchange Adjustments, Repaymentsand Sales 157.05 8.31 165.36

Total Commitments ncow held by IFC 61.08 13.24 74.32

Total Undisbursed 7.46 - 7.46

- 54

ANNEX IIIPage 1 of 2

TURKEY

FIFTH STRUCTURAL ADJUSTMENT LOAN

Supplementary Loan Data Sheet

Section I: Timetable of Key Events

(a) Date of first presentaticn to 3ank: January 1984

(b) Appraisal Mission: March 1984

(c) Completion of negotiations: May 1984

(d) Planned date of effectiveness: August 1984

Section II: Special Bank Implementation Act:ions

None.

Section III: Special Conditions

A. Special Condition of Effectiveness

Establishment of a Special Acccunt in the Central Bank for theproposed revolving fund (para. 118).

B. Other Main Conditions

Disbursement of the second tranche of $126 million is dependentupon.

(a) Completion of the preparation of a Fifth Five-Year DevelopmentPlan compatible with the aims of the structural adjustmentprogram (para. 34);

(b) Satisfactory progress in carrying out and implementing theresults of a review of the public investment program (para. 49);

(c) Satisfactory progress in the elimination of quantitativerestrictions on imports and the rationalization of the tariffstructure (para. 64);

(d) Satisfactory progress based on the agreed plan of action for theinstallation of a computerized debt management system (para. 71);

- 55 -

ANNEX IIIPage 2 of 2

(e) Satisfactory progress on financial sector reforms (para. 82); and

(f) Satisfactory progress in the preparation of an energy actionplan (para. 90).

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ANNEX IV-APage 1 of 7

May 1, 1984

Mr. A. W. ClausenPresidentInternational Bank for Reconstructionand Development

Washington D.C.

Dear Mr. Clausen:

The Turkish Government has now completed the fourth year of theprogram for restructuring the Turkish economy. The majoraccomplishments in 1983 as well as our program for 1984 have beensummarized in the attached Statement of Development Policies. Ourmain objective is to curtail inflation and increase export earnings.I am writing to you at this time to request a Fifth StructuralAdjustment Loan in the amount of $376 million during the Bank's 1984Fiscal Year to support the Government's ongoing medium-term programof structural change.

The attached Statement of Development Policies for 1984 outlinesthe main elements of the Government's medium-term program forstructural adjustment and the measures under way or to be takenduring the year. These policies have been discussed in detail withyour staff.

Yours sincerely,

/s/Ismet Kaya ErdemDeputy Prime Minister

andMinister of State

Attachment

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ANNEX IV-APage 2 of 7

STATEMENT OF DEVELOPMENT POLICIES - 1984

Introduction

1. The economic reform program introduced on January 24, 1980 producedpositive results through the end of 1982. For example, exports increaseddramatically from $2.9 billion inL 1980 to $5.8 billion in 1982. Inflation,which rose to over 100 percent in 1979/80, was reduced to 25 percent in 1982.Moreover, during the period 1981-82 economic growth averaged about 4.3 percent.

2. The positive trend was reversed in 1983. Exports did not rise abovethe 1982 level in value and the growth in GNP slowed to about 3 percent. Evenmore serious, the rate of inflation accelerated to around 40 percent at theyear's end. The policy of setting interest rates for private savers above therate of inflation lagged behind events. Special measures were required toassist commercial banks facing liquidity problems and as a result, othergovernment expenditures were reduced below the programmed level.

3. The main objective of the Government's economic policy in the shortrun is to bring inflation again under control. This is necessary to establisha stable economic environment. In an economy which develops under stableconditions, social issues are resolved more easily and more rapidly.

4. The Government will pursue an economic system in which free marketrules predominate. The main function of the state in economic developmentshould be regulatory, helping to remove obstacles to the growth ofproductivity. The direct activities of the state should be confined mainly tothe development of an infrastructure (including energy) that serves the nationas a whole.

5. The Government believes that changes should be made in administrativeand legal procedures to serve better the interests of the society and hasinitiated such improvements. Procedures are being examined to permit theintroduction of new ideas and new incentives. The objective is to speed upadministrative processes and make them less wasteful of resources.

Economic Restructuring

6. The Government has already taken a number of steps to broaden theprocess of structural adjustment. Briefly they are:

(i) a reorganization of the administrative machinery which,inter alia, concentrates authority over economic affairs in thePrime Minister's office;

(ii) a substantial import liberalization;

(iii) a rationalization of export incentives;

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ANNEX IV-APage 3 of 7

(iv) a liberalization of the foreign exchange regime;

(v) an interest rate policy designed to provide a real rate of returnon savings while largely freeing lending rates to be set by thecommercial banks;

(vi) a reduction in the financial transactions tax and the withholdingtax on interest payments; and

(vii) a re-affirmation that, with some exceptions, SEEs will be free toset their own prices.

7. The medium-term framework for economic restructuring will be set outin the Fifth Five-Year Development Plan (1985-89) which will be submitted tothe Grand National Assembly in July 1984 . The Plan is intended to beindicative in nature, linking the macro-economic strategy to be pursued withthe sectoral and sub-sectoral strategies. The new Plan will differ somewhatfrom previous plans. The Government does nor intend to create a rigidcentralized framework for the development process. Instead it is theGovernment's intention to promote an environment in which social and economicobjectives may be pursued in harmony. The Government intends to strengthenindicative planning capability so that the puiblic investment program isdesigned and implemented in a manner which facilitates the adoption of a freemarket system. The following paragraphs present some details on the targetsthat will be set for the main macro-economic indicators over the Plan periodtogether with a brief review of tlhe main policy objectives that will beincluded.

The Basic Strategy

8. The basic theme of the Plan will continue to be outward-orienteddevelopment with an increased reliance on market forces. The Plan will definethe respective roles of the public and private sectors, with increasingreliance placed on an efficient private sector as the engine of growth.Private initiative and innovation along the lines of Turkey's comparativeadvantage will be encouraged. The public sector will provide theinfrastructure required to allow the private sector to achieve its potential.This shift in emphasis means that the Government will make greater use ofprivate sector participation in the planning committees.

9. At the heart of the structural adjustment program is a developmentstrategy based on sustained export growth over the medium term. Such atrategy requires that the private sector be allowed to play a leading role,;ince export growth is critically dependent on private manufacturers<leveloping their comparative advantage. Not only will the size of the Planhave to be in line with the availability of domestic and foreign resources,but in addition, the public investment program would have to be so designedthat it does not lead to a pre-empting of resources for the private sector.

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ANNEX IV-APage 4 of 7

10. The Government considers that the achievement of a satisfactory rateof growth is essential to provide a stable economic environment. To encouragethe necessary level of private investment, the Government believes thatpriority should be given to bringing inflation under control. This will

entail tight monetary and fiscal. policies designed to keep public expendituresin line with public resources as they materialize. While the adjustmentprocess may involve hardship in the short run, it is designed to provide asounder economic base from which will emerge improvements in the standards ofliving of the population over the medium term. The Government is aware thatcertain shorter term social dislocations resulting from the structuraladjustment process have to be gradually eliminated. However, the medium-termand longer-term benefits are cle!arly in favor of restructuring.

Key Targets of the Plan

11. While it is premature to present any precise figures since these will

have to await approval of the Plan by the Grand National Assembly, someindications can be given of the key targets that the Government would propose!to include in the draft Plan. Sustaining the growth of exports is central tothe Plan and the Government envisages a target for the annual real growth ofmerchandise exports during the next five years in the 8-11 percent range.Given the low base from which the export drive started, and the Government'scommitment to the maintenance of a competitive exchange rate together with acarefully designed set of trade incentives, this target is both realistic andattainable.

12. The size and composition of public investment will also receive

careful attention. It is the Government's objective that public investmentshould increasingly be financed by public resources. Consequently, the sizeof the public investment prograrn will be so regulated that the ratio of publicsector borrowing requirements to GNP declines over time, from about3.5 percent in 1984. It is also the Government's intention to restore anapproximate balance between pubLic and private fixed investment in the mediumterm. Given the public/private balance in 1984 of about 60/40, this implies agrowth rate of private fixed investment which is more than double that ofpublic fixed investment over the Plan period.

13. In terms of the composition of public investment, energy, 1!agriculture, and transport and communications would remain the prioritysectors. The share of total public ifixed investment to be allocated to thesesectors will be not less than the share achieved in 1983. Within thesesectors, projects identified as of high priority will receive the bulk of theallocations. At the same time, the Government will progressively withdrawfrom new investments in manufacturing activities that can more efficiently becarried on by the private sector.

1/ Including electricity, petroleum exploration and refining, coal andlignite mining, and pipelines.

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ANNEX IV-APage 5 of 7

14. Within this framework, and under reasonable assumptions regardingexternal capital flows, a target average annual GNP growth rate of about6 percent is envisaged for the Plan period. The annual gross external capitalrequirements to support this rate of growth will be compatible with a debtservice ratio 1/ averaging about 25 percent in the medium term.

15. To summarize, the Government intends to prepare a Plan that does notconflict with its fight against inflation, while at the same time pursuing agrowth strategy commensurate with its ability to generate resources. Should

the projected resources fail to materialize during the course of the Plan, theGovernment will adjust its annual targets through the Annual Programs so as

not to jeopardize the gains to date from the structural adjustment process.

16. An elaboration of the objectives under key components of themedium-term program is presented in the succeeding paragraphs.

Monetary and Credit Policy

17. The aims of monetary and credit policy are to reduce inflation,

improve the balance of payments and lay the basis for growth. Agreement hasbeen reached with the IMF on performance criteria for the monetary program

under a new one year Stand-By in the amount of SDR225 million which was signedin April 1984. The Government is committed to a flexible exchange rate policyto maintain external competitiveness.

18. The aim of interest rate policy is to provide a real rate of returnon savings. However, lending rates remain high in real terms and thereforetend to hinder investments. The Government's objectives in this area are to:

(i) increase the role of the market in the determination of interestrates;

(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 forthe productive sectors of the economy.

State Economic Enterprises

19. The Government believes that State Economic Enterprises shouldprovide the infrastructure and services required for the society as a whole.But the State should not appropriate funds directly for investment inactivities that should be the province of the private sector. Thus theGovernment will not normally undertake any new investment in SEEs operating in

1/ Total debt service as a proportion of exports of goods and non-factorservices plus workers' remittances.

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ANNEX IV-APage 6 of 7

such areas. Moreover, the Government intends to explore opportunities forconverting selected SEE activities into joint stock ventures by offering suchstock to the public. The Government: does not, in principle, intend to protectthe monopoly status of any SEE in the industrial sector.

20. With respect to all SEEs, the Government intends to take measures tofacilitate the recruitment of experienced and able management and provide forappropriate remuneration for skilled SEE personnel. The Government alsointends to create an operational environment for SEEs in which managerialdecisions may be taken on the basis of sound economic, financial and technicalconsiderations. It follows that SEE managements will be called upon to meetappropriate performance criteria, including target rates of return on assetsemployed, according to the particular SEE and the sector in which it operates.

Import Liberalization

21. The Government places considerable emphasis on bringing about astructural change in the import substitution policy practised hitherto.Industry cannot develop in a stable manner when protected by subsidies,tariffs and import restrictions. Incentives should be afforded largelythrough the exchange rate.

22. Measures have already been taken to reduce drastically thequantitative restrictions on imports and to reduce tariffs. Our objectiveover the next few years is to complete the transition to a system relyingsolely on tariffs and to undertake a rationalization of the tariff structureto achieve significant uniform reduction in effective protection acrosssectors, provided similar developments take place in the countries that areTurkey's major trading partners.

Financial Sector

23. The Government recognizes that an important determinant of thesuccess of the domestic resource mobilization effort as well as the revival ofprivate investment will be the effectiveness of changes being introduced inthe financial system. The Government's objectives are to restore and maintiainconfidence in the financial system and to expand its range, reduce the cost ofcredit, improve the efficiency of credit allocation, allow more competition inthe financial sector, strengthen the institutions which supervise thefinancial system and revitalize the capital market. Substantial improvementshave taken place in the financial sector as a result of the enactment of thenew Banking Law in June 1983, the clhanges introduced in the capital market andrecent measures to reduce the cost of intermediation through reduction of thefiscal burden. In the banking sector actions will be taken to stimulate theprogressive reduction of excessive costs of bank intermediation, to promote aninter-bank market and to introduce standardization of bank accounts.Significant progress has been achieved in the capital market. Manyimprovements in the organization, the regulations and the instruments of thecapital market have already been introduced or are being contemplated.Further streamlining of selective credit practices is being considered inorder to reduce the high cost of credit for non-preferential borrowers.

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ANNEX IV-APage 7 of 7

Agriculture

24. The Government will continue to promote increasing productivity andgrowth of exports through encouraging a crop mix which better reflectsTurkey's comparative advantage. The outward orientation would include

movement towards freer trade, continued penetration of foreign markets,general reduction of government intervention, rationalization of publicinvestment and parastatal reforms. Special measures will be taken to improvethe availability of credit, to eliminate gradually the subsidy on short-termlending and to improve the administration and accountability of the salescooperatives. The Government would welcome art early opportunity to discussthese objectives with the Bank with a view to formulating an agreed actionprogram as a basis for a proposed agricultural sector policy loan.

Energy

25. The Government recognizes the criticalI importance of substantiallyincreased energy supplies for sustained econoulic: growth and the need to reduceenergy imports by increasing the efficient production of indigenous sources ofenergy and by encouraging greater conservation. In the investment program,highest priority will be accorded to investment in energy. A medium-termenergy action program is currently under consideration, and the Governmentwould welcome Bank assistance in the preparation and implementation of thisprogram. Emphasis will be placed on the completion of high priority,economically viable projects with (lue consideration given to theinzplementation capacities of the energy agencies and the availability offinancial resources. In the short-run the single most important issue is toresolve the problems facing the Elbistan Project.

Conclusion

26. The Government would welcome an opportunity to discuss theaforementioned economic objectives and the public investment program with thesWorld Bank before the second tranche release. The Government intends to takethe opportunity of the Plan preparation to undertake a detailed review of thepublic investment program, especially the major programs and projects, withthe objective of speeding up the completion of high priority projects andreducing or eliminating the allocations to projects of lower priority.Pursuant to this process the Government intends to ask the World Bank forfinancial support for speeding up the implementation of priority projects.

Policy Actions

27. In the attachment to the Statement, the policy measures that theGovernment intends to carry out in support of the medium-term objectives areidentified.

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ANNEX IV-AAttachmentPage 1 of 6

TURKEY - STATEMENT OF DEVELOPMENT POLICIES - 1984

Policy Area Measures to be Implemented

I. At the Aggregate Level

1. MediumrTerm Framework - Fifth Five-Year Plan (1985-39)to be drafted by mid-1984, forenactment into law by end-1984.

2. Public Investment - Review of the public investmentprogram to be undertaken in 1984in the context of the FifthPlan, to determine theappropriate size as well assectoral and project compositionof the program and the linkageto macro strategy.

3. 1985 Annual Program - 1985 Annual Program to becompatible with the objectivesof the Fifth Plan and theconclusions of the 1984 PublicInvestment Review, and to showfurther improvement in theprincipal indicators ofmacro-economic performance.

4. Import Liberalization - Remaining licensing for importsto be reduced to a negligiblelevel during the Fifth Planperiod.

- Average nominal tariff onimports subject to tariffs to bereduced from their present levelto about 7 percent by the end ofthe Fifth Plan period.

- Institutional mechanism to beset up to dispose of industryappeals as well as to establishcriteria for granting temporaryproduction incentives to infantindustries.

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ANNEX IV-AAttachmentPage 2 of 6

Policy Area Measures to be Implemented

5. Export Incentives -- Detailed review of the total setof export incentives to beundertaken in 1984 to assesstheir impact; review to examinein particular the feasibility of:

(i) implementing a system ofmedium and long-termcredits to support theexports of capital goodsand engineering services;

(ii) introducing a system ofexport credit insurance;and

(iii) establishing a new ExportDevelopment and PromotionCenter with strongprivate sectorparticipation.

6. Financial Sector - Efficiency of banking operationsto be improved through:

(:i) seeking legislativeapproval for theelimination before theend of 1984 of thefinancial transactionstax on inter-banktransactions;

(ii) continuation of the workon the preparation of astandardized accountingsystem for banks, andpreparation byOctober 1984 of a reviewspecifying the remainingsteps to be taken inorder to introduce thesystem in the first halfof 1985; and

(iii) study of fiscal measures(including the impositionof tax penalties) toreduce the operatingcosts of banks.

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ANNEX IV-AAttachmentPage 3 of 6

Policy Area Measures to be Implemented

- Further measures to develop thecapital market in 1984 toinclude;

(i) issue of Treasury bondsto be subscribed by thepublic at sufficientlyattractive interest rates;

(ii) study of diversificationof the channels formarketing Treasury bonds,to include banks andsecurities firmsqualified asintermediaries by theCapital Market Board;

(iii) establishment by the endof October 1984 of aprogram for the gradualadoption by companiesmaking public issues ofbonds or shares, of thestandardized accountingsystem and of theaccounting principlesdefined in the Communiquepublished in the OfficialGazette, Series VIII,No. 7, February 1, 1984.

(iv) seeking approval for theenactment of a lawregulating therequirements andactivities of externalauditors; and

(v) opening of the StockExchange and publicationof the regulationsrequired for that purpose.

7. State Economic Enterprises - Review to be undertaken in 1984Reform of the potential for selective

privatization of the assets ofSEEs.

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ANNEX IV-At]tachmentPage 4 of 6

Policy Area Measures to be Implemented

- SEEs to be encouraged toexercise their autonomy insetting their prices in linewith market conditions.

Import liberalization to providea more competitive environmentfor the SEEs in order toincrease enterprise efficiency.

Target rates of return on assetsto be prescribed for differentcategories of enterprises,especially manufacturingenterprises and utilities, toserve as a basis for monitoringtheir performance.

- Budgetary transfers for SEEs in1984 to be lower in real terms

than the level in 1983.

- New personnel regime for SEEs tobe announced in 1984; SEEs to beencouraged to make full use offleaxibility available to them inpersonnel management.

- Further upgrading of operationalef:Eiciency in SEEs to beeffected through managementstrengthening, introduction ofmodern management techniques,andl better manpower planning andtraining.

8. External Debt Management - On the basis of work alreadycorapleted with the assistance ofthe Bank and Fund, detailed planof action for the installationand testing of a computerizeddebt reporting system to beprepared by July 1984 andimplementation to startimmediately thereafter, forcompletion by mid-1985.

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ANNEX IV-AAttachmentPage 5 of 6

Policy Area Measures to be Implemented

II. At the Sector Level

1. Agriculture - Studies (agreed under SAL IV)relating to foodgrainsself-sufficiency, improvement inefficiency and accountability ofsales cooperatives, and interiestrates policy for medium andlong-term agricultural credit,to be completed in 1984.

- Action program for theagriculture sector to beprepared by end-1984, to includemeasures for:

(i) increasing productivityand exports;

(ii) promotion of greater useof market forces;

(iii) institutional reform andstrengthening of agencies;

(iv) continued rationalizationof the public sectorinvestment program,particularly inirrigation; and

(v) expanding credit supply.

2. Energy - Action program for the energysector to be prepared byend-1984, to include thefollowing elements:

(i) completion of ongoing,high priority power andlignite projects;

(ii) improvement in theefficiency of theexisting thermal powerplants, distributionsystem, and mines;

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ANNEX IV-A

AttachmentPage 6 of 6

Policy Area Measures to be Implemented

(ii:i) review of the feasibility

of constructing newgenerating plants,including combined cycleplants;

(iv) expansion of existinglignite mines; and

(v) strengthening of theenergy conservationprogram.

o V E R V I E W O F S T R U C T U R A L A D J U S T M E N T P R OG R A M A N_D S A L V

I. POLICY ACTIONS AT THE AGGREGATE LEVEL

Current Situation, Measures and Actions being Taken or to be TakenStrategy Recent Developments, and Project Lending,

Structural Issues and Objectives Progress under Previous SALs Sector Work or IMF SAL V

A. MEDIUM-TERM Carry out more sys- Pressing short-term problems Country Economic Memorandum (CEM) Draft Fifth Five Year PlanFRAMEWORK tematic evaluation and rapid changes in key para- outlining Bank's quantifications expected to be ready by mid-1984.

of policies and meters led to year-by-year of the medium-term prospects The Plan to be compatible with thetrade-offs to achieve planning, but no quantitative distributed in June 1983. Program aims of the structural adjustmentintended structural and comprehensive medium-term Review Mission (January 1984) process, namely an expenditure pro-adjustment; improve framework for assessing poli- focussed on recent developments gram in line with resources and a

medium-term planning cies existed. Fifth Five Year and revision of medium-term pro- non-encroaching public sector, acapability. Plan postponed in 1983 by one jections. Fifth Plan (1985-89) growth rate in line with the debt

year to allow new Government Review Mission scheduled for service constraint, and sectoral andto formulate its own medium- August 1984; Public Investment sub-sectoral strategies in harmonyterm program. Plan now sched- Review Mission, to help in with the macro-balance. Review ofuled to be submitted to Parlia- identification of public invest- the draft Plan in August 1984,ment in Fall 1984. Transport ment rationalization (or sector) followed in Fall 1984 by a review ofmaster plan completed, and loans, scheduled for Fall 1984. the 1985 Annual Program as the firstdraft iron and steel and irri- slice of the Plan, to ensure that itgation master plans under embodies the same criteria.preparation.

B. FISCAL POLICY

1. Control of Relieve inflationary Inflation dropped from 107 IMF Standby: Ceilings on budgetary Inflation target of 29 percent forInflation pressures by limit- percent in 1980 to 31 per- transfers to SEEs, on Central Bank 1984, together with a balanced

ing budgetary cent in 1983. Budget credit to public sector, and on net budget.deficits and Central deficit reduced from 4.6 domestic assets of the Central Bank.Bank credit to percent of GNP in 1980 to Previous one-year Standby cancelledpublic sector. 1.2 percent in 1982 and as requested by the Government, and

further to 0.5 percent in replaced by a new one-year Standby1983. commencing April 1984.

2. Debt Management Ensure manageable Rescheduling operations IMF Standby and SAL IV. Government Steps to improve external debtdebt service pay- substantially eased debt reaffirmed policy of no new reporting and computerizationments, obtain service burden; the first build-up of external arrears; through adequate staffing andadditional conces- phase of the Bank-Fund spon- limits on new non-concessional hiring of specialized consul-sionary assistance sored program to computerize debt. tants. The second phase of theand better infor- debt (initiated under SAL I) debt computerization program,mation on debt expected to be completed by involving installation and testingposition. mid-1984. of the system, to start in mid-

1984 and be completed by mid-1985.

' -

O V E R V I E W OF ST R U CT UR AL AD J US TM ENT PRO G R AM AND S AL V

I. POLICY ACTIONS AT THE AGGREGATE LEVEL

Current Situation, Measures and Actions being Taken or to be TakenStrategy Recent Developments, and Project Lending,

Structurai Issues and Objectives Progress under Previous SALs Sector Work or IMF SAL V

C. MONETARY ANDCREDIT POLICY

1. Exchange Rate Maintenance of Flexible exchange rate policy IMF Standby; Government under- Reconfirm policy of maintainingPolicy external competi- adopted since January 1980. taking to maintain external competitive exchange rate.

tiveness. Daily adjustments since May competitiveness.1981. New exchange rate regime(December 1983) allows commer-cial banks' rates to vary with-in a 6 percent band aroundthe Central Bank's rate.

2. Interest Promote private Commercial bank interest rates IMF Standby and the Financial Reaffirm commitment to increaseRates savings and appro- deregulated in July 1980, and Sector Report (September 1983): role of market in determining

pi-ivate investment- interest rates on private bonds Government confirmed inten- interest rates and progressivelyin July 1981 Lending rates tion to continue liberalized decrease sele.tisvity as policy too!now substantially positive in interest rate policies to in setting interest rates, includinIgreal terms. Some deposit rates reflect market conditions. SEEs; encouirage availability offell below the rate of infla- medium and long-term credits fortion during 1983, but the productive sectors of the economy; °Governnment increased them stib- and introduce long-term exportstantially in December 1983 financing. High nominial lendingand introduiced an inverted rates to be decreased by reductionterm, structure of deposi of inflatior, reduced cost of

interest rates in expectation financial intermediation and removalof inflation slow-down in 1984. of distortions in the credit markets.Commercial banks now largelyfree to determinie their ownlending rates.

D. PUBLIC INVESTMENT

1. Size of Program Restrain public Public investments in- Plan Review Mission (August 1984) Limit 1Q84 growth of fixed publicinvestment to levels creased by an estimated 1.7 to analyze the size of the investment to 3.1 percent in realjustified by percent in 1983: public public sector investment pro- terms. Progressively redu:ce shareresources; allow investment/saving deficit gram. Public Investment of public investment in totalfor growth of declined from 10 percent of Review Mission to analyze the investment, with the aim of restoringprivate investment. GNP in 1980 to 3.9 percent composition and quality of the approximate balance between public

in 1983. portfolio (Fall 1984). and private investment in the mediumterm. Raise share of SEE investmentsfinanced from their own resources.

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O V E R V I E W O F S T R U C T U_R A L A D J U_S T_M E N T P R O G R A M A N D S A L V

I. POLICY ACTIONS AT THE AGGREGATE LEVEL

Current Situation, Measures and Actions being Taken or to be TakenStrategy Recent Developments, and Project Lending,

Structural Issues and Objectives Progress under Previous SALs Sector Work or IMF SAL V

D. PUBLIC INVESTMENT (continued)

2. Composition Rationalize invest- Reduction from 9,000 projects 1981 Public Investment Review Continue emphasis on earlyment program to in 1980 Program to 7444 pro- analyzed large projects and completion of high priorityfocus on smaller jects in 1984 Program, with recommended focus on higher pri- projects. Monitor further rational-number of high pri- focus on high priority pro- ority projects as well as a ization of project portfolio.ority projects, to jects and only nominal allo- review of unproven projects.speed up imple- cations for low priority 1984 Review will concentrate onmentation. projects. About 90 percent further "cleaning up" of the port-

of the funds allocated to folio with the objective oflarge projects in 1983 went expediting completion of highto the 112 projects identified priority projects.as of high priority.

3. Balance and Achieve more 1981 Program began shift of 1981 Public Investment Review Conrinued improvement in sec-Content balanced investments emphasis to energy, agricul- supported shift of investment toral balance. Further reduction

with greater impact ture, and transport; their program to priority sectors in the share of manufacturing toon net foreign share expanded from 65 per- (infrastructure, agriculture below 15 percent; the priorityexchange earnings, cent in 1982 to 72 percent and energy). sectors to account for about two-employment and in 1983. thirds of the 1984 Program.growth. Government commitment to a clear _

sectoral strategy in energy andagriculture.

4. Project Better project Steps taken to strengthen State Investment Bank (DYB) loan Strengthen project evaluation unitsSelection selection and selection and evaluation supports improved analysis and in SPO, in executing agencies andand Evaluation evaluation capacity capacity in SPO, DYB and broader role for DYB in project SEEs; further upgrading of training

to ensure adequate key agencies; tighter evaluation. First joint EDI/DYB programs in collaboration with EDI;rate of return on screening of projects in training course on project continued emphasis on ensuring thatmajor investments. preparing 1984 Program. preparation, evaluation and all new projects meet satisfactory

selection held in Fall 1983. economic and financial criteria.

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O V E R V I E W OF ST R U CT UR AL AD J US TM ENT PRO G R AM AND S AL V

I. POLICY ACTIONS AT THE AGGREGATE LEVEL

Current Situation, Measures and Actions being Taken or to be TakenStrategy Recent Developments, and Project Lending,

Structural Issues and Objectives Progress under Previous SALs Sector Work or IMF SAL V

E. IMPORTLIBERALIZATION

1. Eiimination of Increase efficiency Quota list abolished in 1981. Draft Protection Study of Turkish Remaining licensing for imports toQuantitative of domestic produc- More than 200 items shifted manufacturing completed in be reduced to a negligible levelRestrictions tion and support from the restricted List II to February 1984. during the Fifth Plan period.

exports by reducing List I during 1981-83. Majoranti-trade bias. import liberalization in

December 1983 lifting quanti-tative restrictions onapproximately three fifthsof imports previously subjectto licensing; also a structuralreform of the impport regime:in the past the regime speci-fically defined goods thatcould be freely imported orthat required a license,thus virtually prohibitingimports of all other goods; thethe new regime defines pro-hibited and licensed importsand ipso facto liberalizesimports of all other products.

2. Rationalization Help the restruc- More liberal access of ex- Draft Protection Study of Turkish Move toward more uniform effectiveof Tariffs uring of the economy porters to duty-free imports manufacturing completed in protection across industries.

along the lines (since 1980-81). Important February 1984. Average nominal tariff on importsof comparative tariff reductions, affecting subject to tariffs to be reducedadvantage. about 20 percent of total from their present level to about

value of imports, effected 7 percent by the end of the Fifthby the 1984 Import Regime. Plan period. Institutional

mechanism to be set up to disposeof industry appeals as well asto establish criteria for grantingtemporary production incentivesto infant industries.

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O V E R V I E W O F S T R U C T U R A L A D J U S T M E N T P R O G R A M A N D S A L V

I. POLICY ACTIONS AT THE AGGREGATE LEVEL

Current Situation Measures and Actions being Taken or to be TakenStrategy Recent Developments, and Project Lending,

Structural Issues and Objectives Progress under Previous SALs Sector Work or IMF SAL V

F. EXPORT INCENTIVES Encourage exports Exports responded favorably 1981 Industrialization and Trade Continue strong support forand efficient import to flexible exchange rate Strategy Report recommended exports; carry out a detailed reviewsubstitution by policy and to increased finan- simplification of subsidies and of the incentive regime and itsfurther refining of cial incentives (average greater use of exchange rate impact on exports, including aincentive structure. volume growth in the 1980-83 policy. CEM (June 1983) and review of the feasibility of imple-

period about 38 percent p.a.). Financial Sector Report (Septem- menting a system of medium and long-Tax rebates increased in ber 1983) contain recommendations term credit support for exports oflevel and expanded in scope, on future design of the export capital goods and engineering ser-becoming a very important incentives, including medium vices, introduction of a system ofexport incentive. and long-term export financing. export credit insurance, and

establishment of a new ExportDevelopment and Promotion Center.

Continued simplifi- Considerable simplification of Encourage further simplification ofcation of adminis- export procedures. Centrali- administrative procedures, with atrative procedures. zation of responsibility for more stable export policy framework.

export promotion; delegationof export credit and foreignexchange authority to commer-cial banks. 1982 Export Regimeremoved requirement thatexports obtain license toexport. Further rationalizationin the implementation of theexport incentives policy(December 1983).

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O V E R V I E W O F S T R U C T U R A L A D J U S T M E N T P R O G R A M A N D S A L V

I. POLICY ACTIONS AT THE AGGREGATE LEVEL

Current Situation Measures and Actions being Taken or to be TakenStrategy Recent Developments, and Project Lending,

Structurai Issues and Objectives Progress under Previous SALs Sector Work or IMF SAL V

C. REFORM OF STATEECONOMIC ENTERPRISES

1. Improvement of Eliminate buffers SEE reform law enacted October IMF Standby: Budget transfers in Further progress on import liberal-"Environment" between SEEs and 1983. Government taking 1984 to be limited to TL 330 ization including tariff rational-in which SEEs market forces in measures to make economic billion, implying a real decrease ization intended to reduce effectiveOperate order to foster environment more competitive of 14 percent over 1983; decline protection; SEEs encouraged to

efficiency. and to grant greater manager- in financing requirement of SEEs generate internal resources to coverial autonomy to SEEs and to 5.9 percent of GNP in 1984. increasing portion of investmentstrengthen their financial Project lending encourages SEEs to program.structure. Outstanding debts strengthen their financialof SEEs consolidated and position and use pricing autonomy.arrears to Government convertedinto equity; SEEs free to settheir own prices except in a fewspecial cases; 1984 importliberalization will introduceforeign competition andimprove efficiency.

2. Reorganization of Decentralization of Holding companies set up under Legislation enacted to empowerSEEs and their decision making. SEE reform law. Founding laws Governiment to sell shares and income-Links to More authority to of SEEs have been reviewed and sharing certificates in state-ownedGovernment SER managemAnts=m ended as necessary to con.for companies to private investors.

Reducing role of with SEE reform law. Review to be undertaken in 1984 ofpublic sector in the potential for selectivemanufacturing. privatization of the assets of SEEs.

3. Operational Focus on efficiency SEE reform law provides for Project lending continues to address Target rates of return on assets toEfficiency and of individual SEEs greater continuity in top operational efficiency in important be prescribed for different cate-Management in order to improve management and greater inde- SEEs. Technical Assistance Loan to gories of enterprises, especiallyStrengthening profitability and to pendence in hiring. Regular TKI, Sumerbank and TCDD-ADVAS to manufacturing enterprises and

decrease dependence ministerial reviews of SEE address specific operational utilities, to serve as a basison Government for performance. efficiency issues. Further lend- for monitoring their performance.investment ing operations planned for rail-resources. ways, lignite, power and pulp and

paper. Bank's macroeconomic workwill include a review of SEEprofitability.

4. Management Improve manpower Employment levels of SEEs Project lending continues to New personnel regime for SEEof Human planning. Reduce brought under control. Decline emphasize manpower planning and employees to be announced in 1984.Resources overstaffing, in employment from 550,000 in training. Industrial Training O z

improve skills. 1979 to 520,000 in 1982. Some Loan to raise industrial prod-Better use of incen- salary incentives instituted, ductivity and help meet thetives to motivate including contract appoint- shortage of skilled technical tIlpersonnel. ments. More emphasis on manpower.

training.

O V E R V I E W O F S T R U C T U R A L A D J U S T M E N T P R O G R A M A N D S A L V

II. POLICY ACTIONS AT THE SECTORAL LEVEL

Current Situation, Measures and Actions being Taken or to be Taken_Strategy Recent Developments, and Project Lending,

Structural Issues and Objectives Progress under Previous SALs Sector Work or IMF SAL V

A. FINANCIAL

1. Interest Rates

(a) Cost of Promote efficient Commercial bank interest rates Financial Sector Report distributed Study fiscal measures (includingCredit credit allocation. deregulated in July 1980. in September 1983. Follow-up imposition of tax penalties) to

Severe liquidity squeeze discussions with the Government stimulate the reduction ofcurrently faced by both banks in January 1984. operating costs of banks; encourageand firms. The current real further development of an inter-interest rate for non-prefer- bank market by seeking legislativeential credit is about 30 approval for eliminating thepercent. In order to reduce 3 percent transactions tax on inter-cost of intermediation, finan- bank transactions.cial transactions tax reducedfrom 15 percent Lo 3 percent inDecember 1983. Withholding taxapplicable to interest paymentson deposits and bonds reducedfrom 20 percent to 10 percentin February 1984.

(b) Selective Lessen excessive About two-thirds of all credits Financial Sector Report distributed Further progress in 1984 towards theCredit burden on cost of allocated according to Govern- in September 1983. Follow-up goal of setting interest rates onPolicies non-preferential ment mandate at specified discussions with the Government preferential credits at least equal

credits and improve interest rates which vary con- in January 1984. to the rate of inflation.resource allocation siderably; excess demand inby reducing both many programs due in part toamount of credits subsidized interest rates, e.g.covered and degree agriculture, SEEs, housing andof subsidization small business, and exports. Ininvolved under December 1983, the Governmentselective credit increased certain importantpolicies. preferential interest rates--

agriculture (short-term) from20 percent to 26 percent,agriculture (long-term) from 22percent to 28 percent, exportcredits from about 28'percentto 35 percent; interest rate onexport credits subsequentlyincreased to 40 percent.

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O V E R V I E W O F S T R U C T U R A L A D J U S T M E N T P R O G R A M A N D S A L V

II. POLICY ACTIONS AT THE SECTORAL LEVEL

Current Situation, Measures and Actions being Taken or to be TakenStrategy Recent Developments, and Project Lending,

Structural Issues and Objectives Progress under Previous SALs Sector Work or IMF SAL V

A. FINANCIAL (continued)

1. Interest Rates(continued)

(c) Term Mobilize adequate Inadequate supply of medium and Financial Sector Report distributed Study committed under SAL IVFinancing amount of medium and long-term financing due to un- in September 1983. Follow-up on introducing a system of floating

long-term resources certainty in interest rates discussions with Government in interest rates for medium and long-for productive and lack of resources in January 1984. term credits to be completed insectors. development banks. Foreign 1984.

loans under-utilized due tounwillingness of potentialborrowers to bear foreignexchange risk.

2. Development of Promote development Interest rates on private Financial Sector Report distributed Further measures to develop thethe Capital of capital market bonds deregulated in July in September 1983. Follow-up capital market in 1984 to includeMarket with view to stimu- 1981. Capital Market Law discussions with the Government issue of Treasury bonds to be sub-

lating competition enacted March 1981. Capital in January 1984. Assistance scribed by the public at sufficientlyin financial sector, Market Board, a new regulatory being provided by IFC to the attractive interest rates; study ofwobilizing medium authority, established Febru- Government for efficient develop- diversification of the channels for aand long-term ary 1982. (SALS II and III). mient of capital market. marketing Treasury bonds, to includecapital, contribu- banks and securities firms quali-ting to deconcen- Treasury bonds offered to fied as intermediaries by the CanFialtration of ecoic0 the public at more attractive Market Board; establishment by theownership and interest rates than in the past end of October 1984 of a program forstrengthening and introduction of floating the gradual adoption by companiessystem of super- interest rates (SAL IV). With- making public issues of bonds orvision,of financial holding tax on bearers' secur- shares, of the standardizedinstitutions. ities reduced from 30 percent accounting system and of the account-

to 10 percent. ing principles defined in theCommunique published in the Official

Insufficient development of Gazette, Series VIII, No. 7,equity market, both primary February 1, 1984; seeking approvaland secondary. for the enactment of a law regulating

the requirements and activities ofexternal auditors; and opening of theStock Exchange and publication of theregulations required for thatpurpose.

IFC to continue to provide technicalassistance to the Government and the XQ

Capital Market Board on the develop- a cment of the Capital Market. co

O V E R V I E W O F S T R U C T U R A L A D J U S T M E N T P R OG R A M A N D S A L V

II. POLICY ACTIONS AT THE SECTORAL LEVEL

Current Situation, Measures and Actions being Taken or to be TakenStrategy Recent Developments, and Project Lending,

Structural Issues and Objectives Progress under Previous SALS Sector Work or IMF SAL V

A. FINANCIAL (continued)

3. Banking Sector Improve efficiency Excessively high transactions Financial Sector Report Distributed Strengthening of the interbankReforms of banking system by costs of commercial banks: 8-9 in September 1983. Follow-up market by seeking legislative

reducing costs of percent of assets, 2 to 3 times discussions with the Government in approval for eliminating the 3 per-intermediation of international standard. Lack January 1984. cent transactions tax on interbankbanks and by pro- of competition on lending side transactions. Continuation of workmoting more competi- due to interlocking ownership of on preparation of a standardizedtion in finance. banks and firms and weak capa- accounting system for banks, to

city for appraisal of credit enable introduction of such aapplications. New Banking Law system in the first half of 1985.enacted in June 1983, covering Study of fiscal measures (includingmany recommendations of the imposition of tax penalties) toFinancial Sector Report and induce banks to reduce operatingSAL IV including measures to re- costs.duce the undercapitalization ofbanks, place limits on the realassets and investments of banks,link the establishment of branchesto the level of banks' equity, re-duce the interlocking between banksand corporations, introduce adeposit insurance scheme and in-crease the role of the Central ofBank in the supervision of thebanking sector.

B. AGRICULTURE

1. Medium-Term Increasing produc- The Government has not formally Agriculture Sector Report Action program to be prepared byAction Program tivity and exports developed a medium-term action distributed in June 1983. the end of 1984.

through encouraging program. Fey elements of such Agriculture Sector Strategya crop mix which a program should be: Paper prepared by the Bankbetter reflects (a) promotion of greater use will be discussed with theTurkey's comparative of market forces through the Government in the first halfadvantage. reforms of trade policies, of 1984 as part of the

further reductions in sub- preparation of a proposedsidies and price supports, Agriculture Sector Loan.interest rate reforms andimproved marketing;(b) institutional reform inthe areas of research andextension, sectoral planning,marketing and input supply, A

and implementation capacity @

of irrigation agencies; 0 c(c) continued rationalization , W

of the public sector invest-ment program; and(d) expanding credit supply,particularly for medium andsmall-scale farmers.

O V E R V I E W O F S T R U C T U R A L A D J U S T M E N T P R OG R A M A N D S A L V

II. POLICY ACTIONS AT THE SECTORAL LEVEL

Current Situation, Measures and Actions being Taken or to be TakenStrategy Recent Developments, and Project Lending,

Structural Issues and Obl_ctives Progress under Previous SALs Sector Work or IMF SAL V

B. AGRICULTURE (continued)

2. Producer Prices Reduce subsidization Number of supported cotmmodities Agriculture Sector Report Methodology to be developed byof proaucer prices redtLced from 25 to 14. Real distributed in June 1983. end-1984 for setting floor prices into bring theni in value of support prices line with domestic and internationalline with inter- now roughly in line with border commodity price trends and thenational price price parities. exchange rate, including criteriaparities. Shift for adding new commodities to list.from producerincentive pricingto protective floorpricing.

3. Initerest Rates Attain positive real Tntention announced in 1983 Agriculture Sector Report Further adjustment to agriculturalinterest rates for to set lowest selective distributed in Jtune 1983. interest rates to make them atagricultural credit, credit interest rate at Progress on adjustment of least equal to inflation by end-and maintain these least equal to the rate of interest rates to be super- 1984. Study committed tinder SAL IVthereafter. inflation by end-1984 (SAL vised under the Second on introducinig a system of floating

IV). Agricultuiral interest Agricultujral Credit Project. interest rates for medium and long-rate revised upwards in term credits to he completed in X

December 1983 -- from 20 per- 1984.cent to 26 percent for short-term credit and from 22percent to 28 percent forlong-term credits.

4. Sales Strengthen the TORs being developed for study Agriculture Sector Report Study on sales cooperativesCooperatives' parastatal sales of sales cooperatives' organi- distributed in June 1983. to be completed in 1984. DraftParastatai cooperatives' pro- zation, management, staffing, terms of reference for studyMarketing cessing, marketing operations and financing and sent to the Government.System anid export opera- preparation of action plan for

tions, and financial improvement (SAL IV).discipline in theareas of cotton,nuts, dried tobacco,and tea.

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O V E R V I E W O F S T R U C T U R A L A D J U S T M E N T P R O G R A M A N D S A L V

II. POLICY ACTIONS AT THE SECTORAL LEVEL

Current Situation, Measures and Actions being Taken or to be TakenStrategy Recent Developments, and Project Lending,

Structural Issues and Objectives Progress under Previous SALs Sector Work or IMF SAL V

B. AGRICULTURE (continued)

5. Food Security Emphasis on wheat TORs being developed for study Agriculture Sector Report Study on foodgrains self-System and barley. Define of present subventions for distributed in June 1983. sufficiency to be completed

appropriate role and food security in foodgrains in 1984. Draft terms ofpolicies for TMO, (SAL IV). reference for study sent tominimize TMO's oper- the Government.ating costs, providebetter price andincomes stabilizationfor producers andconsumers, furtherliberalize graintrade.

C. ENERGY

1. Medium-Term Reduce the energy The Government is aware of Energy Assessment Report Detailed energy action plan toAction Program deficit as rapidly problems but has not yet distributed in March 1983. be agreed with the Bank by

as possible, to developed a cohesive medium- Energy Strategy Paper forwarded December 1984.mitigate adverse term action plan. The Energy to the Government, forimpact of energy Strategy Paper (ESP) presents discussion in the firstshortages on the outline of an action pro- half of 1984.economic growth. gram. Key elements are:

(a) Completion of highpriority projects, throughadequate project managementand allocation of necessaryfinancial resources;(b) Actions to improveefficiency of existingfacilities;(c) Rehabilitation and ex-pansion existing lignitemines;(d) Review of the feasibilityof constructing new generationplants, including combinedcycle units; and(e) Strengthening of theenergy conservation program. atz

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O V E R V I E W O F S T R U C T U R A L A D J U S T M E N T P R O G R A M A N D S A L V

II. POLICY ACT'IONS AT THE SECTORAL LEVEL

Current Situation, Measures and Actions being Taken or to be TakenStrategy Recent Developments, and Project Lending,

Structural Issues and Objectives Progress under Previous SALs Sector Work or IMF SAL V

C. ENERGY (continued)

2. Investment Optimal investment 34 percent of public invest- Energy Assessment Report Commitment to maintain a significantProgram program with ade- ment in 1983 and 1984 programs distributed in March 1983. share of public investment for energy

quate human and allocated to the energy Energy Strategy Paper forwarded in the 1985 Program. Major energyfinancial resources sector. to the Government, for projects will be included in thetied to high pri- discussion in the first half Public Investment Review plannedority projects, of 1984. for Fall 1984.and with realisticcompletion schedules.

3. Project Improve project Improved but not yet fully Actions to improve performance Energy action plan expected toImplementation management. Reduce satisfactory performance at on Elbistan being pursued under include measures to improve the

administrative and individual project level. proposed Elbistan Supplementary efficiency of existing thermalfinancial bottle- Progress made in hydro sub- Loan. power plants, distributionnecks to project sector where project manage- system and mines.implementation. ment has improved, but noImprove coor- significant progress in Idination. lignite and thermal power 0

plants. Adequacy of local ;funds still a problem at theproject level. Progress onkey Elbistan Project remainsunsatisfactory.

4. Conservation Encourage greater Retrofitting projects in steel, Technical assistance for demand Legislation on energy conservationconservation and fertilizers, cement, power and management included under the under way. Action plan for energyimprove efficiency paper being studied or under Third Power Transmission Project. conservation to be discussed alongof energy use. way. Energy audit program with the Energy Strategy Paper.

being undertaken for major Detailed energy action plan to beindustrial users. Conservation agreed with the Bank by Decemberdrive initiated by the Energy 1984.Conservation CoordinatingCouncil.

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T U R K E Y - S T R U C T U R A L A D J U S T M E N T L O A N S I-IV

Government Commitment Timetable in SDP a/ Status Remarks

SAL I and Supplement

Export Promotion

1. Study to introduce Phase I to be completed by Phase I completed in advance of schedule Results of study willmore rational protection January 31, 1981 and Phase II and recommendations for changes implemented guide further tariffand incentive system based on by end-1982. Liberalized in 1981 Import Regime. Draft Technical rationalization.tariffs. system to be fully in Paper (coefficients and interpretation of

place by end-1984. results) completed February 1984. DraftPolicy Paper submitted in October 1983inadequate since not based on TechnicalPaper. Revised Policy Paper expected tobe completed in 1984.

2 Establishment export credit March 31, 1981 Law to establish a permanent scheme Feasibility of a systemrisk insurance scheme. deferred owing to likely costs of scheme. of export credit

insurance proposed tobe reviewed under SAL V.

3. Improvement of institutional No date specified Decree issued to establish specializedarrangements for export promotion. exporting and importing companies giving

them substantial incentives. Centralization Iof responsibility within Government for X

export promotion; administrative Iprocedures progressively simplified.

4. Priority access to credit for No date specified New decree (May 1980) enabled exportersexporters. to obtain credit on preferential terms.

Public Investment

5. Rationalization of public 1980/1981 Beginning made in rationalization Progress monitored underinvestments, including those of of public investments. subsequent SALs.SEEs, in line with availableresources and investmentpriority criteria.

Domestic Resource Mobilization

6. Reduction in overall public 1980/1981 Budget deficit/GNP ratio declined fromsector deficit financing. . 4.6 percent in FY80 to 1.6 percent in FY81.

Significantly greater pricing autonomygranted to SEEs in January 1980. Enactmentof legislation on comprehensive taxreform package. Public sector borrowing '0requirement decreased from 10 percent ofGNP in 1980 to 7.3 percent in 1981. X

o -

a/ Statement of Development Policies.

T U R K E Y - S T R U C T U R A L A D J U S T M E N T L O A N S I-IV

Government Commitment Timetable in SDP Status Remarks

7. Review of measures to increase July 31, 1980 Interest rates liberalized in July 1980.household savings and time Yields on private and Government bondsdeposits. increased.

8. Review of financial sector study. No date specified Study discussed with Bank mission in March1980. Principal recommendations implementedor accepted for implementation.

External Debt Management

9. Improvement in external debt No date specified Measures taken to restrtucture composition ofmanagement policies. external debt.

10. Completion of ongoing study on October 31, 1980 On account of improvement in debt management,external debt management. study replaced by an undertaking to

improve debt reporting and introducecomputerization of data.

11. Computerization of external 1981 Government attempted on its own to set up a Following a request fromdebt data. system but with very little success, since Government for TA in this area,

system designed with assistance of local a joint Bank/IMF project wasconsultants proved inadequate to handle launched under SAL IV. Progresscomplexity of Turkey's external debt. will be further monitored under

SAL V.

SAL II

Domestic Resource Mobil--aio

1. Reduction of financial May 1981 Done. Reduced from 25 percent totransactions tax. 15 percent.

2. Rationalization of production May 1981 Rates and coverage of sales tax andand sales taxes. production tax reviewed and adjusted.

3. Introduction of a value added 1982 Bill drafted but law not yet enacted, as Government still appearstax. matter turned out to be more complex than the committed to the proposal.

Government anticipated.

4. Indexing of income tax December 1981 Government given authority to adjust taxbrackets and penalties. rates to take account of inflation. Tax

on lowest bracket will go down from40 percent in 1981 to 25 percent in 1985.

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T U R K E Y - S T R U C T U R A L A D J U S T M E N T L O A N S I-IV

Government Commitment Timetable in SDP Status Remarks

5. Improvements in tax adminis- No date specified Tax Courts law enacted January 1982.

tration including enactment Tax administration showing steady progress.

of Tax Courts law.

6. Enactment of Capital Market Bill. March 1981 Law enacted July 1981. Capital MfarketBoard set up February 1, 1982.

7. Enactment of law to regulate No date specified Draft law prepared but not yet enacted. Matter to be pursued under

accounting and auditing SAL V. IFC providing advice

profession. and technical assistance to

the Government.

8. Enactment of law to allow No date specified Law enacted January 1983.

revaluation of assets.

9. Placing of a limit on tbe issue No date sDecified. Done. Yields on Government bonds

of "bearer" shares, lifting of continue to be comparable to

ceilings on private bond rates Bank deposit rates.

and raising of interest onGovernment bonds.

Trade Policiescm

10. Enactment of law to establish 1981 Law deferred because of likely costs of Recommendation to introduce export

export credit insurance agency. scheme. credit insurance made again inFinancial Sector Report (1983).Feasibility of proposal to bereviewed in study of exportincentives proposed under SAL V.

11. Enactment of law to establish 1981 Law enacted in 1983. Directorate General of Free Trade

free trade zones. Zones now under Deputy Prime

Minister.

12. Revitalize Export Promotion No date specified Following an internal study, Government decided Incentives to private trading

Center (IGEME) and encourage to set up new public/private export promotion companies a major focus of

private export promotion agency. Small privately operated center estab- Government support. Proposed

organization. lished . Two regional fruit and vegetable study of export incentives under

marketing corporations established under SAL V to review proposal to set

Bank-assisted Fruit and Vegetable Project. up a new agency.

13. Further institutional action No date specified Continuing. Administration procedures being -

to promote exports. progressively simplified.

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T U R K E Y - S T R U C T U R A L A D J U S T M E N T L 0 A N S I-IV

Government Commitment Timetable in SDP Status Remarks

14. Improvement in structure of Study to be rompleted Draft Technical Paper (coefficients and Results of study will guideimport tariffs on the basis of end-1982 interpretation of results) completed further tariff rationalization.the study of Turkey's protection February 1984. Study expected to beand incentive system agreed under completed in 1984.SAL I.

Public Investment

15. Discuss Bank's Public investment Discussions in Done, September/November 1981.Review report and take account May 1981of Bank's views in formulating1982 program.

Energy

16. Maintain energy prices at levels No date specified. Frequent adjustment of petroleum prices,broadly reflecting international which are now in line with international prices.costs. Major adjustments of others.

17. Joirt review of the energy sector 1981 Done. Preparation of an energy actionwith the Bank. plan proposed to be pursued

under SAL V.

18. Reorganization of TPAO. No date specified Reorganization implemented as part of SEE - ireform decree in 1983.

19. Revision of mining law to allow No date specified Done. Further revision of mininR lawprivate mining of lignite under under consideration.specified conditions.

20. Enactment of law for takeover No date specified Done.by TEK of municipal distributionof power.

21. Encouragement of oil exploration No date specified Petroleum law amended to make oil exploration -by foreign private companies. more attractive to foreign companies.

22. Enactment of a new energy conser- No date specified Draft law under consideration.vation law.

Agriculture

23. Reorganization of the Ministry No date specified Substantial progress achieved in both Most agricultural agencies broughtof Agriculture. (but envisaged as provincial and central reorganization. under Ministry of Agriculture in

long-term process) December 1983. 'O

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T U R K E Y - S T R U C T U R A L A D J U S T M E N T L O A N S I-IV

Government Commitment Timetable in SDP Status Remarks

24. Extension of export incentives No date specified Done.to agriculture.

25. Review of agricultural support No date specified Continuous improvements in policy and implemen- Further work on refining

prices to maintain incentives for tation. Number of supported commodities methodology for settingproducers. reduced. Floor prices moving in right floor prices proposed under

direction. SAL V.

26. Phase-out of fertilizer subsidies. Over five years Progress on track.

27. Levy of full O&M cost of DSI 1981 Government and Bank have agreed to phase-inirrigation schemes. recovery over a five year period, reaching

full recovery by April 1986.

28. Introduction of investment cost No date specified Draft bill submitted to parliament by Action on legislation being

recovery for on-farm irrigation previous government but action on it not pursued under proposed IAEE

works. completed. irrigation Project.

State Economic Enterprise Reform

29. Constraints on SEE employment 1981 Employment levels maintained well below

levels. program ceilings.

30. Limiting access to Central Bank 1981 Done. Access reduced to one in 1982.to two agricultural SEEs.

31. Channelling foreign exchange 1981 Implemented only on a pilot basis. DYB's statutes amended in 1983 to

loans to SEEs through State enlarge its role in relation toInvestment Bank (DYB). SEEs.

32. DYB to adopt market interest 1981 Only partially implemented, for Bank- Subsidies on credit to SEEs slowly

rates for SEE lending. financed subprojects. being reduced.

33. Further rationalization of SEEs' Continuing Considerable progress to-date, monitored

investment programs. under SALs.

34. Multi-year contracts to be No date specified Law enabling multi-year contracts for senior New SEE personnel regime expected

offered to SEE managers, and SEE managers passed in November 1981. Modest to be announced shortly.salaries to be increased for salary increases in February 1982.key managers.

35. Study of measures to strengthen No date specified Actions continuing. Authorized capital

SEE capital structure. of several SEEs reviewed and increased since 1981.

36. Reform of the structure of the 1981 Delayed SEE reform decree issued in May 1983. -

entire SEE system.

0

Nh

T U R K E Y - S T R U C T U R A L A D J U S T M E N T L O A N S I-IV

Government Commitment Timetable in SDP Status Remarks

SAL III

Trade Policies

1. Daily adjustment of exchange rate 1982 Continuing.against currencies of majortrading partners to continue.

2. Exporters to be allowed conti- 1982 Continuingnued unrestricted duty-freeimport of needed inputs.

3. Tax rebates to trading companies No date specified Principles kept in view in formulatingto be based on net foreign incentives. Additional tax rebates tied toexchange earnings rather than higher value of total exports.total export value, and exportcredits to take value-added intoaccount.

4. Study on ways to establish more 1982 Study not completed. Small privately operated Matter proposed to be pursuedeffective export promotion center center set up. under SAL V.to be completed.

5. Selective imports of basic 1982 Policy put into effect in 1983 import regime. -products to be permitted toexert competitive pressure ondomestic compan-ies.

6. Drawing on the results of the No date specified Process of import liberalization continued. Results of Trade ProtectionTrade Protection Study, tariff Trade Protection Study expected to be Study to be iniput to 1985system to be rationalized completed in 1984. import regime.further, with a gradual shiftfrom a licensing system to atariff system and a generalreduction in tariffs overfive years.

Tax Administration

7. To improve tax collection, number 1982 Done.of district tax controllers to beincreased from 350 to 700.

sszr m

o cFb

T U R K E Y - S T R U C T U R A L A D J U S T M E N T L O A N S I-IV

Government Commitment Timetable in SDP Status Remarks

Debt Reporting

8. Additional staff and consultants 1982 Additional staff recruited but progress in Joint Fund-Bank project forto be recruited by Ministry of computerization continued to be slow. technical assistance in thisFinance to comuputerize debt area launched in 1983 underreporting. SAL IV.

Foreign Investment

9. Mining, tourism and petroleum 1982 Petroleum and tourism laws amended. Revision -laws to be revised to facilitate of mining law currently under consideration.foreign investment.

Medium-Term Framework

10. Medium-term framework to be Early 1983 Five-Year Plan postponed by one year by Review of the framework of thedeveloped for the next five year previous Government to enable new Government to Fifth Five Year Plan proposedplan. prepare its own medium-term program. under SAL V.

11. Preparation of Master Plans in 1982/1983 Transport Master Plan completed 1982. Others Preparation of an energy actionTransportation, Iron and Steel, are unider prepaatiou. plar proposed to be pursued underand Energy. SAL V.

_,Public Investment

12. Further rationalization of the 1983 Program Continued progress. Increased share ofpublic investment program, with allocations to priority sectors and projects,priority given to agriculture, and reduction in share of manufacturing.energy and infrastructure Sectoral pattern moved closer to patternprojects and reduced allocations recommended in Bank's Public Sector Investmentto manufacturing. Review Report.

13. Use of economic criteria in No date specified Criteria for project selection stress highselection of new projects. rates of return, early completion, development

of indigenous energy resources, rehabilitationof infrastructure and support for exports.

14. Training program in project 1982 Discussions held with EDI staff on preparation -evaluation to be prepared for of training programs. First joint DYB/EDIthe staff of the State Planning course held in Ankara in 1983. Courses onOrganization (SPO) and agencies. project evaluation held by DYB strengthened.

State Economic Enterprise Reform

15. Enactment of major SEE reform 1982 SEE reform decree issued in May 1983. Follow-up action nowlegislation. under way. N z

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T U R K E Y -S T R U C T U R A L A D J U S T M E N T L O A N S I-IV

Government Commitment Timetable in SDP Status Remarks

Energy

16. Continued adjustment of energy No date specified Frequent adjustments of energy pricesprices to reflect changes in continued.economic costs.

Agriculture

17. The Agriculture Bank's lending 1982 Reorganization started. TCZB's lending beingto give increased emphasis to being monitored under ongoing Bank-assistedagriculture, and its reorgani- projects.zation to be commenced.

18. Provincial strengthening of 1982 Completed.Ministry of Agriculture to becompleted.

19. Support of livestock production 1982 Done.for export to be increased.

20. Study of the best means of 1982 Following the study, new seeds decree issued coimproving seed production to be in December 1983.undertaken.

21. Tighter control to be maintained 1982 Considerable improvement in situation.on fertilizer stocks to reducefinancial burden.

SAL IV

Medium-Term Framework

1. 1984 Annual Program to be drafted 1983 Fifth Five-Year Plan postponed by one year Framework of the Fifth Fivein the context of the Government's to enable new Government to draw up its own Year Plan proposed to bemedium-term projections. medium-term program. 1984 Annual Program under reviewed under SAL V.

revision in light of the economic measuresannounced by new Government and expected toshow further progress towards goals ofstructural adjustment program.

2. Improvement in planning 1983 Some improvement. Bank assistance provided Matter to be pursued undercapability in SPO and in data management and modelling. SAL V.executing ministries.

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T U R K E Y - S T R U C T U R A L A D J U S T M E N T L 0 A N S I-IV

Government Coemmitment Timetable in SDP Status Remarks

Public Investment

3. Design Fifth Plan with stated 1983 Fifth Plan postponed by one year. In the 1984 Further rationalization of public

priorities in energy, agriculture Program, agriculture, energy and transport investment to be pursued under

and infrastructure with a account for 65 percent of the allocations. SAL V.

minimum of 50 percent of theallocations going to these sectors.

4. Ensure that 87 priority projects 1983 Done. 90 percent of the estimated

receive at least 85 percent of the expenditures on large projects went to the

allocations for large projects in priority projects.

1983.

5. Diminish further role of the 1983 Done.

public sector in manufacturingby limiting allocations to16.3 percent of the total.

6. Continue to review ongoing 1983 Adequate progress. 12 large projects dropped

projects in order to identify (including 5 in manufacturing).

priority projects and drop thoseof uncertain economic merit.

~07. Ensure that all new projects 1983 Adequate progress.

meet satisfactory economicand financial rates of returncriteria.

State Economic Enterprise Reform

8. Attain program financial targets 1983 Achievements fell slightly short of targets: Fall in profitability partly

of total profits to GNP tatio of profits/GNP 0.4 percent, investment/GNP attributable to delayed

0.6 percent, SEE investment to 7.2 percent, and financing requirement/GNP adjustment in SEE prices in

GNP ratio of 6.5 percent and 6.4 percent. 1983 because of elections.

financing requirement to GNPratio of 5.9 percent.

9. Limit budget transfers to 1983 Achieved.

SEEs to TL292 billion.

10. Seek Bank assistance in 1983 Done. Technical Assistance Loan approved

improving performance of selected in March 1984.

SEEs.

Import Liberalization

11. Introduce a rational tariff 1983 Significant tariff adjustments made in 1984 Results of Trade Protection

structure based on reco_mmendations import regime. Study will guide further

of ongoing protection studies. rationalization."3

T U R K E Y - S T R U C T IJ R A 1 A D J tl S T M E N T LO A N S I-IV

Government Commitment Timetable in SDP Status Remarks

12. Adopt a plan and timetable 1983 No formal plan adopted, but major liberali- Remaining licensinig for importsfor shifting from a licensing zation introduced in 1984 regime, with licensing to be reduced to a negligiblesystem to one relying on tariffs, eliminated for nearly 75 percent (by value) of level during the Fifth Planand shift substantial share of the items issued authorizations in 1983. period.imports to more liberalizedtreatment in the 1984 regime.

13. Further simplification of 1982 Procedures further sinmplified.import formalities.

Export Incentives

14. Detailed review of export 1983 No formal review undertaken, but export Detailed review of the total setincentives. incentives rationalized to some extent in of export incentives proposed

December 1983. Competitive exchange rate to under SAL V.to be used as main incentive for boostingexports.

Financial Sector

15. Reduce real interest rates, by 1983/1984 Deposit interest rates reduced twice in 1983 Deposit rates will now belowering deposit interest rates in line with slowdown in inflation, but had to reviewed avery quarter.and reducing the level of the be raised again as inflation accelerated.financial transactions tax. Financial transactions tax reduced from

15 percent to 3 percent.

16. Reduce disparity uf i-rte,est 19S3/1984 Interest rates raised on export credits Matter proposed to be pursuedrates applied to preferential and credits to agriculture, to levels close to under SAL V and sector lending.credits, with the lowest rates current rate of inflation or rate targeted forset equal to the rate of 1984. Some interest rates (principally forinflation. credits to SEEs) still remain significantly

negative in real terms.

17. Introduction of a deposit 1983/1984 Introduced as part of new Banking Law.insurance scheme.

18. Study for introducing a system 1983/1984 Study proposed to be initiated and monitoredof floating interest rates for under SAL V.medium-term and long-term credits.

19. Measures to strengthen Capital 1983/1984 Steady progress in development of capital IFC to continue to provideMarket Board and assist in further market. Treasury bonds offered at more technical assistance to thedevelopment of capital market. attractive interest rates, and a beginning Government in this area.

made with floating rates. Withholding tax onbearer securities substantially reduced. Newcapital market instruments being examined.

T U R K E Y -S T R U C T U R A L A D J U S T M E N T L O A N S I-IV

Government Commitment Timetable in SDP Status Remarks

20. Enactment of legislation to 1983/1984 Legislation enacted January 1983.

enable firm to revalue assets

without initial tax liability.

21. Introduction of legislation for 1983/1984 Draft law prepared but not yet enacted. Matter proposed to be pursuedregulating auditing and under SAL V.

accounting profession.

22. Enactment of new Banking law 1983/1984 Banking law enacted June 1983, covering

designed to strengthen the many of the recommendations made in Bank's

banking sector. report on the Financial Sector.

Agriculture

23. Allocation for agriculture in 1983 Actuals for first 9 months in line with target. -

1983 program to be maintained at

not less than 11 percent.

24. Revision of seeds decree. No date specified New decree issued December 1983.

25. Review of food self-sufficiency Initiate by end-1983 Not yet initiated Draft TORs sent to the Government

policies. by the Bank in January 1984.

26. Development of methodology for No date specified Approach not yet fully systematized but floor -

setting agricultural floor prices generally moving in the right direction.

prices.

27. Establishment of inter- No date specified Establishment of working groups delayed Agreement reached unider the

ministerial working groups for by the general elections and subsequent proposed Agriculture Extension

(i) developing a medium term reorganization of Ministry of Agriculture to and Research Project that the

planning capability; include most of the agencies dealing with deadline for the establishment

(ii) developing medium-term agriculture. Merger of former Ministries of the working groups would be

plans for reorganizing and of Agriculture and Village Affairs is an no later than loan effectiveness.

consolidating research important step in the right direction. Studies to be monitored under

activities; and SAL V.

(iii) developing medium-term

plans for reorganizing

and consolidating extension

services.

28. Study of sales cooperatives. No date specified Not yet initiated. Draft TORs sent to the Government

0b

T U R K E Y - S T R U C T U R A L A D J U S T M E N T L O A N S I-IV

Government Commitment Timetable in SDP Status Remarks

Energy

29. Further revision of petroleum No date specified Matter under consideration. Draft mining -and mining laws to stimulate law prepared.private sector involvement.

30. Enactment of law on energy No date specified Draft law under consideration.conservation.

31. Reorganization of Ministry of 1983 Ministry reorganized in December 1983. Further progress to be monitoredEnergy and Natural Resources under Bank's ongoing energyto improve planning capability. program.

32. Evaluation of large high- No date specified Ongoing work, which will serve as input Bank will review major projectspriority projects in the into the Fifth Plan (1985-89). in connection with discussionsenergy investment program. on energy action program.

33. Review of energy pricing End-1983 Prices of petroleum products, electric Petroleum prices are in linepolicies and practices. power and lignite adjusted in end-1983 with international prices. Pace

and the beginning of 1984. of adjustment of other energyprices towards their economiclevels generally satisfactory.

m

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- 93 - ANNEX VIPage 1 of 1

TURKEY: OPERATIONAL SEEsSummary of Financial Results, 1980-84

(TL billions)

1980 1981 1982 1983 1984I. PROFIT AND LOSS Est. Prog. a/

Sales Revenues 1146 1767 2650 3403 4940

ExpendituresWages and Salaries 238 314 370 458 645Purchases of Goods

and Services 898 1390 2135 2785 3983Depreciation 23 28 48 67 126Other 10 27 30 41 20

Total Expenditure 1169 1759 2583 3351 4774

Profit/Loss (+/-) -23 8 67 52 16tBefore Taxes, of which:

Duty losses b/ -75 111 -107 -175 - 212Operational Profit/Loss 52 119 174 227 378

II. FINANCING OF INVESTMENTS

Fixed Investment 281 406 533 678 863Changes in Stocks 178 210 151 131 228Total Investment 459 616 684 809 1091

Profit/Loss -23 8 67 52 166Depreciation 23 28 48 67 126

Financing Requirement 459 580 569 690 799

Budgetary Transfers 149 241 205 292 330Taxes -15 -41 -57 -104 -126Central Bank 50 32 31 -3 -7State Investment Bank 16 16 59 28 76Foreign Borrowing cI 67 122 104 139 76Short-term Borrowing 161 136 151 241 330Transfer from Price

Stabilization Fund 30 74 76 97 120

III. PERFORMANCE INDICATORS CIn percent of GNP)

Profit/Loss Before Taxes -0.5 0.1 0.8 0.4 1.0Operational Profit/Loss 1.2 1.8 2.0 2.0 2.4Total Investment 10.4 9.4 7.8 6.9 6.9Financing Requirement 10.4 ,.9 6.5 5.9 5.0

(In percent of total investment)

Own Resources d/ -3.2 -0.9 8.5 1.9 15.2(Adjusted OwnResources e/ (13.1) (17.2) (24.1) (23.5) (34.6)

Budgetary Transfers 32.5 39.1 30.0 36.1 30.2Central Bank 10.8 5.2 4.5 -0.4 -0.6Short-term Borrowing 35.1 22.1 22.1 29.8 30.2

a! Includes four enterprises which were previously part of the AnnexBudget and included in the Consolidated Budget.

b/ Non-operational losses of SEEs subsictized by the Government. Theselosses result from price controls retained for social reasons.

c/ Including counterpart of IBRD structural adjustment loans.d/ Gross profit/loss less taxes plus depreciation.e/ Gross profit/loss less taxes plus depreciation plus duty losses.

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