Document of

The World Bank FILE tFOR OFFICIAL USE ONLY

Report No. P-2596-TU

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED THIRTEENTH LOAN

TO

TURKIYE SINAI KALKINMA BANKASI A. S.

WITH THE GUARANTEE OF

REPUBLIC OF TURKEY

June 21, 1979

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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CURRENCY EQUIVALENTS

1/Currency Unit Calendar 1978 March 1979

US Dollar 1 = TL 24.28 TL 25.00

TL 1 US$ 0.04 US$ 0.04

1/ Note: This Report and the Staff Appraisal Report have been preparedon the basis of the exchange rate of TL25 = US$1.00, which prevaileduntil Turkey introduced a multiple exchange rate system in April whichwas again modified on June 11, 1979. The current rate is TL 47.1 = US$1.00,except for oil and fertilizer imports and agricultural exports for whichit is TL 35 = US$1.00.

FISCAL YEARS

Republic of Turkey - March 1 to February 28TSKB - January 1 to December 31

ABBREVIATIONS

CLAs - Convertible Lira AccountsDESIYAB - Devlet Sinai ve Isci Yatirim Bankasi

(State Industry and Labor Investment Bank)DYB - Devlet Yatirim Bankasi

(State Investment Bank)EEC - European Economic CommunityEIB - European Investment BankKfW - Kreditanstalt fur WiederaufbauL.A. - Loan AgreementLDRs - Less Developed RegionsLIBOR - London Inter Bank Offered RateSEE - State Economic EnterprisesSMLI - Small- to Medium-Sized Labor-Intensive IndustriesSYKB - Sinai Yatirim ve Kredi Bankasi

(Industrial Investment and Credit Bank)TSKB - Turkiye Sinai Kalkinma Bankasi

(Industrial Development Bank of Turkey)

FOR OFFICIAL USE ONLY

TURKEY - TSKB XIII

LOAN AND PROJECT SUMMARY

Borrower: Turkiye Sinai Kalkinma Bankasi A.S. (TSKB)

Guarantor: Republic of Turkey

Loan Amount: US$60 million equivalent, in various currencies.

Terms and US$59.3 million for project financing to be repaid sub-Conditions: stantially in conformity with the aggregate of the

amortization schedules for sub-loans, with a maximumrepayment period of 15 years. US$0.7 million for train-ing, studies, research, and project promotion, to berepaid over 7 years, including 3 years grace. Interest at7.9 percent per annum.

Relending Terms: The Borrower will on-lend at the Government-determinedinterest rate for long-term foreign exchange loans (cur-rently 20 percent per annum), with the sub-borrowerassuming the foreign exchange risk in respect of boththe prirncipal and the interest; amortization depends onindividual subprojects, but is expected to range from 10to not more than 15 years.

The Prolecit: The proposed loan aims to encourage and assist TSKB to:(i) increase substantially the amount and proportion ofits lencling for export-oriented projects; (ii) continuethe emphasis in its resource allocation on the lessdeveloped regions and small- to medium-sized labor-intensive projects; and (iii) bridge a part of itsforeign exchange resource gap up to end-1980, as itcontinues its efforts to increase and diversify suchresources.

TSKB's new drive to escalate its lending and technicalassistance to export-oriented projects will have a majordirect impact on the Government's efforts to increasesuch investments in Turkey. The risk that Governmentpolicies may not maintain sufficient incentive to achievethis objective, is being addressed by inter alia financingof exporters' imported requirements and a dialogue onexport policy under the Bank's Program Loan.

Disbursements: -----$ Million------Bank FY 80 81 82 83

Annual 5.1 32.4 21.0 1.5Cumulative 5.1 37.5 58.5 60.0

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

Procurement: Through normal commercial channels, but with comparison ofoffers from more than one supplier.

Consultants: To (i) help train TSKB staff in export aspects of projects(25 man-months); (ii) assist TSKB in studies of Turkey'sindustrial export potential (30 man-months); (iii) assistTSKB in its ongoing program of research studies and projectpromotion.

Appraisal No. 2447a-TU, dated May 17, 1979, issued by the IDFReport: Division, EMENA Region

REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSEDTHIRTEENTH LOAN TO TURKIYE SINAI KALKINMA BANKASI A.S.

WITH THE GIJARANTEE OF THE REPUBLIC OF TURKEY

1. I submit the following report and recommendation on a proposed loanto Turkiye Sinai Kalkinma Bankasi A.S. (TSKB) with the guarantee of theRepublic of Turkey, for the equivalent of US$60 million to help financeprivate sector industrial development. Amortization of US$59.3 million forsubproject financing would conform substantially to the aggregate of thesubproject amortization schedules, and not exceed 15 years. Amortization ofUS$0.7 million for training TSKB staff in the export aspects of projects, forstudies of Turkey's industrial export potential and for TSKB's ongoing programof research studies and project promotion would be over 7 years including 3years grace. The interest rate would be 7.9 percent per annum.

PART I - THE ECONOMY 1/

2. An economic report (No. 1272-TU) entitled "Country Economic Memo-randum - Turkey" dated October 21, 1976, was circulated to the ExecutiveDirectors con November 2, 1976. The situation subsequently deteriorated,culminating in a serious economic crisis. This Part analyzes these develop-ments. (A fuller account may be found in the Economic Annex to the Reportand Recommendation of the President on the Erdemir Stage II Steel Project,dated June 15, 1978.) It also describes the short and medium-term policyinitiatives of the Ecevit Government which took power in early 1978, andcautiously assesses economic prospects. A special economic mission visitedTurkey in April 1979 to review the Fourth Five-Year Plan (1979-83). A com-prehensive report on the medium-term outlook is being prepared based onits findings.

Economic Structure and Causes of 1977 Crisis

3. In most respects, the record of Turkish economic development overthe last two decades has been good. As the result of a strong commitment torapid growLh and modernization, real output has grown, on average, by morethan 6 percent per annum. Laudable strides have also been made towardsmeeting basic needs in such areas as education, health care, water supply,and rural roads. This impressive record has been punctuated (in 1958, 1970and most recently in 1977) by severe balance-of-payments crises. The recentcrisis has been the product partly of extraneous factors and partly of theTurkish development strategy itself, which paid insufficient attention to thestructural weaknesses of the economy and perhaps exacerbated some of them.

4. The emphasis of successive governments on industrialization doubledthe sector's share in total output between 1955 and 1977, but resulted incomparative neglect of agricultural development, already hampered by inappro-priate subsidy and pricing policies. Moreover, although some parts of

1/ This Part is identical to that in the President's Reports on the PortsRehabilitation and Grain Storage Projects.

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Turkish industry are efficient, and more have the potential to become so, astrong emphasis so far on sophisticated capital-intensive technology hasresulted in high-cost production in certain sectors. Unselective protectionagainst competition from imports has also inhibited the development of anindustrial structure well-suited to Turkey's comparative advantages in termsof location, natural resources and labor availability. One important con-sequence of this, has been that Turkey has so far been unable to develop astrong industrial export base, and has relied mainly instead on its tradi-tional agricultural exports (supplemented by workers' remittances) to financethe imports of materials and capital goods needed for its ambitious moderni-zation effort. This pattern of trade has been a fundamental cause of thedifficulty which Turkey has periodically experienced in reconciling rapidgrowth with a viable external payments position.

5. During the world recession of the mid 1970s, unlike many othercountries, the average annual real rate of GDP growth in Turkey was 7.2percent. This includes 1977 when real GDP grew by only 4.4 percent, follow-ing the economic crisis that year and shortages of power, imported inputsand the like. Growth over this period was made possible by rising publicsector activity, which provided a stimulus to aggregate demand that more thanoffset the depressing effect of sluggish exports and the increased outflowof payments for oil and other imports. The growth of output was thereforeconstrained not by demand, but by supply. Favorable weather and improvedinputs led to an average annual rate of growth of agricultural output of about4.1 percent in the period 1970-77, while industrial output grew at about 9.2percent--principally as a result of the sustained high level of industrialinvestment. The general pace of investment in Turkey also did not slackenduring the world recession of the mid 1970s. On the contrary, largelyas the result of an intensified public investment drive from 1975 onwards, theshare of fixed investment in GDP remained around 20 percent during 1973-78.

6. In this period, employment was not at the forefront of developmentobjectives. Unemployment and underemployment were relatively high, totalingabout 11 percent of the labor force in 1970 and over 13 percent in 1977.The underlying causes, aggravated by a sharp reduction in the emigrationrate since 1973, are a high rate (2.5 percent per annum) of population growthand the adoption of relatively capital-intensive methods of production in themodern sectors of agriculture and industry. The comparatively slow rate ofgrowth of employment has also had an adverse effect on the distribution ofincome, although basic needs are largely met. The two main causes of thisinequality, however, are the large gap between agricultural and non-agricultural labor productivity and the wide dispersion of farmers' incomes.

7. During the mid 1970s, Turkey's external trading position deterioratedmarkedly due to rapid increases in imports of goods. These tripled in valuebetween 1973 and 1977, reaching $5.8 billion. About half this increase wasdue to rising world prices, including a four-fold rise in the price of oil,which currently accounts for one third of the import bill. The other half wasdue to a steep rise in the volume of imports.

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8. lligh import demand has been characteristic of Turkey in the 1970s,and may partly be a "catching up" phenomenon. In 1970, after a decadeof strict import rationing, the ratio of imports to GDP was only 7 percent,about half the average for countries of Turkey's size and stage of develop-ment. By 1L977, after several years of liberalization of import restrictions,it reached 14 percent. This process was associated with increased importedinputs in agriculture and changes in industrial structure and technology,which rested growth on imported inputs. After 1973, the growth of importswas accelerated by: a fall in the local currency price of imported goodsrelative tD domestic output, due to a rate of inflation which exceeded theinternational inflation rate by more than the rate of depreciation of theTL against other currencies; an absolute shortage of domestically producedgoods; an increase in the slhare of fixed investment in total expenditure; anda tendency to build up imported stocks in anticipation of devaluation orimport restrictions.

9. From 1970 to 1973, rising imports were more or less offset by rapidexpansion of exports--particularly manufactured exports such as cotton yarnand fabric, leather products and processed food--and workers' remittances.In value terms, merchandise exports increased from $588.5 million in 1970to $1,317 million in 1973, or 31 percent per annum. Manufactured exportsincreased even faster--from $100.3 million in 1970 to $443.4 million in 1973,or by 64 percent per annum. In volume terms, they increased by an averageannual rate of 22 percent, a very high rate indeed. The increase in workers'remittances was even more dramatic--up from $273 million in 1970 to $1,183million in 1973, reaching a peak of $1.4 billion in 1974. Since 1973 however,export performance has been weak and remittances also declined after 1974.The value of exports of goods rose by 33 percent between 1974 and 1977, whenit reached $1.8 billion, mainly due to rising world prices; in volume terms,they showed no upward trend. Thus by 1977, merchandise exports were onlyone-third of the imports.

10. The poor showing of exports between 1974-77, is partly attributableto world recession. This not only affected industrial exports; it alsodepressed Turkish agricultural exports such as hazelnuts, raisins and tobacco,and industrial raw materials like cotton. The difficulties were aggravated bytwo other factors: (a) agricultural support prices bore little relation toworld prices, and thus failed to provide incentives to farmers to increaseproduction of exportable commodities; and (b) this was compounded by a generalneglect of agricultural development, buoyant domestic demand for its produceand ineffective administration of its export sales. More importantly, indus-trial exports, presently only 7 percent of the value of industrial output,were stifled by a more rapid increase of production costs in Turkey than inher trading partners, which was insufficiently offset by periodic smalldevaluations of the TL. Consequently, exporting, which had been lucrative inthe early 1970s, became less profitable, and potentially exportable productionwas diverted to a booming and profitable domestic market.

11. The current account balance moved from a surplus of $0.5 billion in1973 to a deficit of $3.5 billion in 1977, because of a rapid deterioration

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in the trade balance, besides a decline in workers' remittances from a peak of$1.4 billion in 1974 to around $1 billion in 1977. One important cause of thishas been the restrictions on immigration imposed by Western European countriesin the face of growing domestic unemployment caused by the world recession.The rate at which earnings were remitted also fell substantially. This partlyreflected the overvaluation of the TL, which induced workers to hold theirsavings abroad or remit through unofficial channels.

12. The large current account deficit was not matched by an increasedinflow of medium and long-term external capital. Turkey had deliberately keptboth foreign private investment and private long-term borrowing to a minimum.The gross inflow from official long-term borrowing during 1970-75 stagnated atabout $300 million per annum. Initially, this was due to a manageable needfor foreign finance, given the tremendous increase in workers' remittances inthe early 1970s. Subsequently, it was because of a lack of experience andinitiative on the part of successive governments to develop and tap newsources of external borrowing, when faced with a decline in multilateral andbilateral lending on concessional terms. While in 1976 and 1977, long-termloan commitments rose to over $1 billion per annum, disbursements continued tobe slow because most loans were tied to specific projects, whose implementa-tion was slow. Consequently, the overall balance of payments moved from asurplus of $0.9 billion in 1973 to a deficit of $2.4 billion in 1977. It wasfinanced by running down the foreign exchange reserves and by various forms ofshort-term borrowing, which by the end of 1977 totalled $6.5 billion.

13. An important source of short-term borrowing was the Convertible LiraAccounts (CLAs). It provided nearly $2 billion in 1975 and 1976. These aredeposits placed with Turkish banks by foreign commercial banks and non-resident Turks, which were guaranteed until last year against exchange raterisk, by the Central Bank. Another major source of finance was short-termsuppliers' credits, partly covered by export credit insurance in the export-ing countries. A swap facility was also established with the Bank for Inter-national Settlements, and a scheme whereby the Dresdner Bank took in timedeposits from Turkish workers in Germany, offered high interest rates, andmade the proceeds available to Turkey. During 1977 however, foreign banksbecame reluctant to rollover the outstanding stock of short-term debt, andeven more reluctant to make further substantial loans. The Central Bank wasdriven to delaying foreign exchange transfers on a large scale. The resultingsubstantial accumulation of arrears, made it even harder to obtain new credits.

14. The deterioration in the balance of payments position can alsobe viewed partly as a reflection of inadequate efforts at demand managementand domestic resource mobilization, especially in the public sector. Thepublic sector deficit rose steadily from TL 6 billion (2 percent of GDP) in1973 to TL 77 billion (9 percent of GDP) in 1977. This occuarred despite acreditable tax performance and was mainly due to a deterioration in thefinancial position of the State Economic Enterprises (SEEs), and in particularof the operational SEEs which dominate the transport and energy sectors and

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account for half the outpul: of mining and manufacturing. Successive govern-

ments, in an effort to slow inflation, held the price increases of operational

SEEs below the rate at which their already high costs were rising, thus

transforming a TL 5 billion profit in 1973 into a TL 20 billion loss in 1977.

The scale of SEE investment was also greatly escalated, further widening the

gap between public sector savings and public sector investment. Most of the

increased deficit was financed by borrowing from the Central Bank, since

administered ceilings on interest rates made it hard to attract sufficient

purchasers for government lbonds. As a result, and despite a large decline in

the foreign exchange reserves, the money supply increased rapidly, at an

average annual rate of about 30 percent between 1974 and 1977.

15. The rate of inflation (as measured by the wholesale price index)

declined from 30 percent in 1974 to 10 percent in 1975, but rose to 24 percent

in 1977. Besides cost-push influences on the price level (including a power-

ful labor union movement and a farmer-oriented agricultural price support

policy), the recent trend also results from excess demand caused by the

enlargement of the public sector deficits and the private investment boom.

Recent Economic Programs and Performance

16. Tentative stabilization measures to stem the resulting economic

crisis, taken by the coalition government of Mr. Demirel towards the end of

1977, did not go far enouglh and came too late. In early 1978, a new govern-

ment, with a small but working majority, came to power under Mr. Ecevit. It

purposefully set about taking painful, but essential, steps to restore order

in the chaotic economic house it inherited and build up the confidence of the

international financial community in Turkey's future. It swiftly formulated

a package of stabilization measures as part of the 1978 Budget and Annual

Program. This formed the basis of a Standby Agreement with the IMF in April,

1978. In summary, the short and medium term remedies applied by the Govern-

ment to solve the economic crisis contain four salient elements. First,

restraint of domestic demand relative to output, through increases in public

and private savings relative to domestic investment. Second, measures that

directly boost exports substantially, including the maintenance of competi-

tiveness, or that restrain imports. Third, sustained efforts to obtain a

substantial increase in medium and long-term external loans. Fourth, pari

passu with the rescheduling of the outstanding stock of short-term debts,

conversion of these debts into medium-term obligations, and exercise of

strict control over future short-term borrowing. Ultimately, considerable

restructuring of the economy to rectify imbalances in Turkey's current

foreign t:rade pattern, will be entailed.

17. To raise domestic savings relative to domestic investment, the

Ecevit government, between March and May 1978, increased a wide range of

SEE prices and tariffs. In early September 1978, SEE prices for petroleum,

petroleurn products and sugar were increased by 80 percent. All price in-

creases t:ogether were expected to add TL 54 billion to SEE revenues in a

full year. The Government also substantially raised the stamp duty on

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imports, and proposed to the Parliament, a number of other tax revenue mea-sures, including a large increase in motor vehicle, income, corporation andmunicipal taxes, as part of a broader set of measures designed to enhance theefficiency and equity of the fiscal system. To control public sector expendi-tures, especially investment, it decided to concentrate on the completion ofexisting projects and cut back on new projects, except in the bottleneckenergy and ports sectors, and for exports and such basic imported commoditiesas steel and fertilizers. In these ways, the Government aimed to markedlyreduce public sector deficits and public sector borrowing from the CentralBank. In conjunction with other limits on Central Bank lending agreed withthe IMF, these were expected to reduce the rate of growth of the money supplyand the availability of credit, so as to restrain investment and consumption.To mobilize private savings, most interest rates, including those on govern-ment bonds and the repatriated savings of migrant workers were increased.

18. Despite the stringency of these politically difficult stabilisationmeasures, the results were mixed. The consolidated budget deficit in 1978 isofficially estimated at about TL 34 billion, compared with TL 48 billion in1977. But the rate of growth of the money supply in 1978 was 37 percent,roughly the same as in 1977. Moreover, the price level rose very sharplyin 1978, even at the end of the year, the rate of inflation was around 50percent per annum. Money wages also increased at an annual rate of over 50percent, despite the Government's "social contract" with the largest tradeunion federation in July 1978.

19. To discourage imports and stimulate exports further, the TL wasdevalued against the dollar three times between September 1977 and March 1978,by a total of about 50 percent. In addition, it drifted downwards with thedollar against other currencies. The effect of this devaluation on importswas augmented by the increase in stamp duty in 1978 and in the short term,also by government's decisions to reduce imports of investment goods and givepriority to -imports of materials and spares needed to maintain, as far aspossible, output from existing installed capacity. This, together with theshortage of foreign exchange, resulted in a drop in merchandise imports from$5.8 billion in 1977 to about $4.6 billion in 1978. This compares with the $5billion figure envisaged under the April 1978 Standby Agreement.

20. As regards exports, the effects of the devaluations were partlyoffset by a reduction in April 1978 of export rebates. In July 1978, theserebates were increased again. As an additional financial incentive, theGovernment accorded priority in the allocation of foreign exchange for thepurchase of imported inputs for export production and that of essentialgoods for domestic sale. Exporters have also been given special permissionto finance their import requirements through acceptance credits. The degreeof priority accorded to exporters in the allocation of domestic creditthrough the banking system was increased, as were the interest rate rebateson domestic borrowing by exporters. An inter-ministerial Export CoordinationCommittee set up to resolve the problems faced by exporters, has succeeded insimplifying some export licensing and registration procedures. Export targets

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have been set for SEEs and Agricultural Sales Cooperatives. The Governmenttook prompt steps to earn foreign exchange by disposing of large existingstocks of exportable commodities, notably wheat. It also took steps to:restrain domestic demand through its fiscal, monetary and price policies,help prevent diversion of potential export goods for domestic use, and improvecompetitiveness through exchange rate adjustments. In response, the value ofexports rose by 28 percent in 1978 to around $2.25 billion. But this wasbelow the $2.6 billion anticipated in the Standby Agreement.

21. With these developments in foreign trade and a marginal decreasein worker remittances over the 1977 level, current account deficit droppedmarkedly to an estimated $1.7' billion in 1978. This compares favorably to$3.5 billion in 1977 and the $1.8 billion deficit anticipated in the StandbyAgreement. This substantial reduction, achieved mainly by severe curbing ofimports, and vigorous efforts to raise fresh medium and long-term funds alongwith the rescheduling of existing debt (para. 23) led to an improved balanceof payments position. Nevertheless, the overall 1978 deficit is estimated atabout $900 million, some $15() million more than that envisaged in the StandbyAgreement. On a net basis, it was financed by $180 million in IMF drawings(para. 22), $340 million in petroleum and Eurodollar loans, $145 million fromthe Dresdner Bank scheme and the remaining $235 million from various commer-cial banking sources.

22. The Standby Agreement provided for the immediate withdrawal of about$89 million in compensatory financing. In addition, since the WitteveenFacility was not in operation, Turkey was eligible to draw up to 150 percentof its quota, amounting to about $360 million, under the Exceptional Circum-stances clause. This entitled Turkey to withdraw $60 million in May 1978.A further drawing of $48 million was made in September, following reneweddiscussions between the Government and the IMF concerning short-term economicdevelopments and prospects. Further discussions with the IMF to revise thestabilization package in light of developments since April, prior to therelease of the remaining tranches of about $252 million, took place inDecember.

23. Since April 1978, Turkey has taken steps to cope with its largestock of short-term debt ($6.5 billion at the end of 1977). The exchange rateguarantee on new CLAs with a maturity under one year was removed, stemming newinflows of these deposits. It also secured, from the members of the OECDConsortium for Turkey, a rescheduling of approximately $1.2 billion in interestand principal payments falling due between January 1977 and June 1979, onpublic bilateral debt and private debt guaranteed by bilateral export finan-cing agencies. The terms were 2 years grace followed by 4 years to repay forshort maturities, and 3 years grace with 5 years repayment for longer-termmaturities; the interest rates were to be negotiated bilaterally. Bilateralagreements have now been signed with all countries concerned. However, nearly$1 billion of unguaranteed trade debts remain to be rescheduled. Finally,negotiations have been completed with some 220 commercial banks involved, toconsolidate! about $3.0 billion of outstanding short-term liabilities (includ-ing most of the CLAs, arrears on CLAs, reimbursement credits and banker'scredits) into obligations with a maturity of 7 years, including 3 years of

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grace, at an interest rate 1.75 percent above LIBOR. In view of the complexi-ties and numbers of banks involved, progress on this was slow. But reschedul-ing agreements are ready and are expected to be signed after the ongoingdiscussions with the IMF have been completed. While all these efforts haveeased the debt servicing burden for 1978 and 1979, it will cause a substantialbulge in debt service payments in the early 80s.

24. Concurrently, the Government pursued new sources of medium andlong-term external finance, including the Middle East. In response to thisinitiative: Germany provided program credits of $75 million and projectcredits of $72 million; the US, Austria and Belgium provided program loanstotalling $70 million; Libya provided a program credit of $100 million andanother $300 million spread over five years to finance oil imports; Iranprovided a short-term credit of $150 million for oil imports; an agreementwas also signed with the Saudi Fund for $250 million in project aid; Austria,Norway and Finland provided project credits; trade agreements were signedwith Romania, Bulgaria and U.S.S.R. Another indication of Turkey's changeof direction in seeking external financing vigorously, is the engagement forthe first time of internationally-reputed investment firms to assist in therescheduling exercises and the tapping of new sources of private capital inEurope and U.S. As a first step, in conjunction with the commercial bankrescheduling, a fresh loan of about $400 million is expected to be provided bya group of banks, with disbursement contingent on a new Standby Agreement.

25. The discussions begun in December 1978 between Turkey and IMF ona revised stabilization program were interrupted because of difficulties inreaching agreement on certain important policy issues. They have since beenresumed (see para 27). The discussions focussed on the need to continue theausterity measures initiated in early 1978 and to strengthen efforts to copewith excessive monetary growth, sagging SEE finances and the high inflationrate. It is evident that progress in these areas is complementary to strictercontrol of imports, tight control over short-term borrowings and the growth ofarrears, and the continuation of foreign trade policies and measures directedto improve the balance of payments position further.

26. Against this background, adopting the pattern followed in early1978, the Government announced its revised stabilization program in mid-March1979 and amplified it further in early April. To improve the financialposition of SEEs, increased prices of sugar (34 percent), iron and steel (41percent), cement (63 percent), gasoline (84 percent), fuel oil (80 percent),diesel fuel (82 percent) and kerosene (110 percent), were announced. Theseprices are now well above their imported costs at the current rate of exchange.The Government estimates that these increases will together, yield an addi-tional TL 80 billion in the current Turkish fiscal year and significantlyreduce the SEE deficits, despite inflation in costs and wages (although thelatter will be restrained by new limits on the growth of SEE employment).To ensure more effective mobilization and allocation of fiscal resources,interest rates for both deposits and lending have been substantially augmented.For time deposits, increased rates range from 12 percent for deposits between

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6-12 months, to 24 percent for those between 3-4 years; in addition, therepatriated savings of migrant workers will receive an interest premium of 10percentage points (15 points for deposits above 3 years). The interest ratefor medium and long-term loans have been considerably increased: in theagricultural sector from 10.5 percent to 16 percent; for small-scale indus-trial enterprises from 10.5 percent to 16 percent; and for general lending inindustrial and other sectors from 16 to 20 percent. There is no ceiling inrespect of loans extended by development and investment banks using fundsacquired through the domestic bond issues of at least 5 years maturity.However, interest rate rebates have been increased for export oriented enter-prises, and for those estabLished in the poorer areas of Turkey.

27. To improve the baLance of payments, a number of steps were taken.The TL was devalued against the US Dollar by about 6 percent to TL 26.5 =US$1. Pari passu, a multipLe exchange rate regime was introduced for thefirst time, under which a more favorable exchange rate with a premium of 40percent (TL 37.1 = US$1) became applicable for foreign tourists, workers'remittances and repatriated savings. This favorable rate carried an addi-tional premium, bringing the effective rate to TL 47.1, if transactions tookplace up to May 9, and to TL 42.1 for those made between May 10 and June 9,1979. In addition, a significant development was the creation of an officiallysanctioned, but still limited, parallel market in respect of manufactured andmineral exports. Specifically, Turkish industrial exporters could retain 50percent of their foreign exchange earnings and either use this to financetheir own import requirements or transfer it to other industrialists, atwhatever price it fetched. All these measures announced in April appear to goin the desirable direction, although it was clear that further adjustments inthe exchange regime would need to be introduced in due course to correct theover-valuation of the official exchange rate. In mid-April, the ManagingDirector of the IMF met the Turkish Finance Minister in Zurich and agreed thatdiscussions on a revised standby agreement should resume as soon as possible.An IMF mission visited Turkey during late April and mid-May for this purpose.The discussions concentrated upon the current developments and the salientelements of the economic policies that could become the basis for a standbyagreement. While no formal agreement was possible, an understanding wasreached that the negotiations should be adjourned for a short while, to allowthe OECD-sponsored pledging session to take place, and the talks should beresumed thereafter. A successful pledging session took place in Paris on May30, 1979. The pledges were made, subject to an early agreement on a newStandby Agreement between Turkey and the IMF, the negotiations for whichresumed in Paris on May 31. The various member governments pledged a total of$661 million as special aid, and $245 million as special export credit aid toTurkey, and are considering further rescheduling of the official bilateraldebt and guaranteed export credits to ease the debt servicing burden in comingyears. In. addition, an early agreement with the IMF would also trigger theprovision of new fresh commercial bank loans of $400 million (para. 24),besides ar. agreement for the rescheduling of the outstanding short-termliabilities owed to the comlmercial banks by Turkey. On June 11, Turkey againrevised the multiple exchange rate system introduced in April and devalued theTL further to TL 47.1 = US$1, with a rate of TL 35 = US$1 for oil and fertil-izer imports and traditional agricultural exports. Other complementarymeasures are expected.

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28. For 1979, pending agreement with the IMF, the projections of thebalance of payment can only be tentative. However, based on cautiouslyoptimistic assumptions concerning exports, worker remittances and capitalinflows, and taking into account the recent increases in international oilprices, the realization of a volume of imports similar to that achieved in1978 would entail a foreign exchange gap of about $1.5 billion.

Medium-Term Policies and Prospects

29. The Fourth Plan was approved by the Turkish Parliament in November1978. Its important feature is the strong emphasis on the balance of paymentsand in particular, on the promotion of exports. The export thrust is one ofthe cornerstones of Government's medium-term development strategy, whosesuccess will be crucial to the restoration and maintenance of Turkey's credit-worthiness in the medium-term future.

30. The Government's objective is to increase the volume of merchandiseexports by a factor of almost two and a half between 1978 and 1983. Thisimplies a real export growth rate averaging around 18 percent per annum duringthe Plan period. This is expected to be achieved broadly, in the followingmanner. The volume of agricultural exports is expected to grow at an annualrate of 6 percent, and that of manufactured products by an average annualrate of over 30 percent starting from about $700 million in 1978. About 40percent of the latter is expected to come from food and beverages, textilesand clothing, and leather products; another 40 percent from intermediate goodssuch as rubber and plastics products, chemicals, cement, glass and ceramics,and basic metals; the remaining 20 percent is expected to consist of consumerdurables, capital goods, and other products of the metal-working industries.

31. Preliminary Bank projections suggest that the share of unprocessedagricultural and mined products in total exports is likely to be higher thanenvisaged in the Plan, and that the overall export target, though ambitious,is feasible, provided that the present widespread commitment to export growthcontinues to be translated into appropriate policies. In addition, theGovernment intends to study the effects on export incentives of the existingsystem of protection, with a view to making appropriate changes when thebalance of payments situation permits; and it has already begun to bring therelative support prices of different agricultural commodities more closelyinto line with relative world prices. There will also be a drive to increaseinvisible exports, particularly earnings from transportation, tourism andcivil engineering contracts abroad.

32. The other Plan targets include an average annual real GDP growthrate of 8 percent, which seems overly optimistic, especially in view of the3-4 percent growth rate achieved in 1978, and the prospect of a similarperformance in 1979. Efforts not to allow unemployment to increase over the1977 level, is now - for the first time in any Plan - a specific developmentobjective. Real fixed investment is expected to grow at an average annualrate of 12 percent (27 percent allocated to industry, 27 percent to energy

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and transportation and 12 percent to agriculture). Gross domestic savingsare expected to rise from 16 to 22 percent of GNP, implying a marginalsavings rat'io of 35 percent, which seems over-optimistic in view of theexperience of the last two ]Plan periods, in which the realised marginal savingsratio was only 12 percent, 'Largely due to poor savings performance in thepublic sect:or. Significant'Ly, in the Fourth Plan, the main contributor tothe rapid growth of savings is expected to be the public sector, whose reve-nues are e:xpected to increase in real terms at an average annual rate of 12percent, cDmpared with a re,al growth rate of 9 percent for public consumption.

Possible Outlook for the Future

33. If the export drive is successful and imports are appropriatelyrestrained, and assuming significant growth of workers' remittances as aresult of the recent exchange rate changes and interest rates for remittances,it should be possible, despite the increasing burden of interest charges onrescheduled debts, to keep the balance of payments current account deficit toan average of about $1.5 billion dollars per year during the Plan period. Tofinance such deficits and amortize the considerable external debt, it willalso be necessary for Turkey to continue its efforts to achieve a much higherlevel of medium and long-term borrowing than in the past, both in commitmentand disbursement terms. But this depends on the assessment of Turkey'screditworthiness, which in turn hinges on a successful export effort andcareful debt management.

34. The extensive short-term borrowing of 1975-77 greatly increasedTurkey's external debt, adversely affected its previously rather attractivematurity structure, and caused a sharp rise in debt service payments. Atthe end of: 1978, total external indebtedness amounted to approximately $13billion. Of this, $5.5 billion was medium and long-term debt. About one-fourth of it was held by international organizations, mainly the Bank ($836million, plus $842 million committed but undisbursed) and the European Invest-ment Bank; and about one-half by foreign governments and government agencies,notably those of the United States, Germany, Canada and the Soviet Union.The remaining $7.5 billion consisted of short-term liabilities of varioussorts. IE the consolidation arrangements finalized with the commercial banksand creditor countries are fully implemented, about $4.1 billion of short-termdebt will be converted into medium and long-term debt. To summarize, theseconsolidations consist of: (a) about $3.0 billion to be rescheduled bycommercial banks (para. 23); (b) guaranteed suppliers credits of about $700million under the terms of the OECD sponsored agreement of May 1978 (para.23); (c) another $100 million of short-term credits to be refinanced by CMEAcountries; and (d) refinancing of $350 million of oil credit owed to Iraq.

35. Turkey's debt management initiatives should help restore a moreattractive maturity structure to the external debt, by transforming a goodportion of the short-term liabilities into medium-term obligations. However,a relatively high debt service ratio over the medium-term must be anticipatedas a result of the large sihort-term debts and the rather hard terms available

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to Turkey. In 1977, debt service payments, including interest on short-termdebt, amounted to 20.2 percent of exports of goods, non-factor services andworkers' remittances. In 1978, after making allowance for the rescheduledservice payments, this ratio is estimated to have risen to around 25 percent.In subsequent years it will increase further, since Turkey has to take onnew borrowings to maintain sound economic growth. Taking these factors intoaccount, the debt service ratio is likely to peak in the early 1980s to a highlevel of about 40 percent, before it begins to decline. This, however, shouldrepresent the culmination of the financial consequences of the present crisisand should be manageable, provided the export drive is sustained. Thus,although the balance of payments situation will remain tight in the medium-term future, given sound economic and fiscal policies and careful debt man-agement which the present Government shows determination to pursue, Turkeycontinues to have a substantial capacity to service long-term borrowing, andremains creditworthy for such financing.

PART II - BANK GROUP OPERATIONS IN TURKEY

36. Prior to 1970, Bank Group assistance was limited and intermittent.However, the success of Turkey's 1970 stabilization program, permitted largerand continuing lending. To date, the Bank/IDA have lent $1,814 million for54 projects. Agriculture accounts for 28 percent of the funds lent, indus-try and DFCs for 37 percent, power for 21 percent and urban development,transportation, education and tourism for the rest. Annex II contains asummary statement of Bank loans, IDA credits and IFC investments as ofApril 30, 1979, with notes on the execution of ongoing projects.

37. Implementation of private sector projects has been satisfactory.But in the public sector, political uncertainty, limited coordination amongagencies and staffing problems have resulted in uneven and delayed projectimplementation. Therefore, a system of joint project reviews between Turkeyand the Bank was instituted in June 1975. Since up to end 1977, these resultedin modest improvements, the situation was reviewed with the new Ecevit Govern-ment in March 1978, and further discussed during my visit in April 1978.Subsequently, Turkey established a new high-level coordination team for Bankprojects. This team set up procedures for monitoring and achieving realisticimplementation and disbursement targets, and reviewed possible changes insector policy covenants which because of Turkish laws and practices con-strained effective project performance. As of January 31, 1979, disbursementsincreased to 72 percent of appraisal estimates against 51 percent in June1975. The encouraging progress and constructive cooperation which hasnow become manifest allow cautious optimism that performance will graduallyimprove further, permitting expansion of the Bank's lending.

38. Bank lending is now aimed at supporting Turkey's efforts to improveits: (a) capacity to earn or save foreign exchange, through promotion ofindustrial and agro-industrial exports; (b) income distribution, employmentopportunities and living standards, through rural and urban development; (c)lagging public sector savings, through the encouragement of improved manage-ment and financing of the investments of key SEEs; and (d) infrastructureposing bottlenecks for development. The Bank has begun discussions with the

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Government: on how its lending can best contribute to the new Plan's objec-tives, especially export promotion, without being handicapped by past policyand institutional obstacles. Meanwhile, agriculture and industry remain thekey sectors for lending. I.n agriculture, projects emphasize livestock, ruraldevelopment, agricultural credit and exports; in industry (including DFCs),the emphasis is on promotion of exports and employment, as also the gradualstrengthening of the SEEs. Projects for urban development, public utilitiesand transportation supplement these efforts.

39. A Program Loan and the Bati Raman Enhanced Oil Recovery Engineeringloan were approved in November 1978. Other projects scheduled for considera-tion in FY79 are ports rehabilitation and grain storage. Projects beingprocessed for the next two years include the second fruit and vegetable,Erzurum rural development, the fifth livestock, private and public sectortextiles rationalization, and fertilizer production projects, besides thosefor alleviation of air pollution in Ankara (an engineering loan), transportand sewerage development in Istanbul, secondary oil recovery and employment.In addition, the exceptional economic circumstances being faced by Turkey,require further support for the financing of critical imports. The earlyconclusion of a new Standby Arrangement with the IMF and its effective imple-mentation, and the creditable performance under the first program loan, wouldenable us to consider a second program loan in FY80.

40. At the end of 1978, the Bank Group's share of Turkey's medium andlong-term external debt (outstanding and disbursed) was 15 percent. Its shareof estimated total externaL debt (including short-term obligations) was about7 percent. The gradual conversion of much of the short-term debt into mediumand long-term debt, will cause the Bank's share of medium and long-term debtto fall sharply to around 10 percent by 1980. Thereafter, assuming the cur-rently projected increase in Bank lending, the share would increase. TheBank's share of service payments on medium and long-term debt is expected tofollow a similar path, dropping from 12 percent in 1977 to about 8 percent in1980, but rising thereafter.

41. IFC has invested in the production of synthetic yarns, pulp andpaper, glass, aluminum, iron and steel products, motor bicycle engines, pistonrings and cylinder liners, and tourism. It has also invested in TSKB. As ofApril 30, 1979, gross IFC commitments totalled $206 million, of which $105million were still held by IFC. In March 1979, IFC approved a $31 millionloan (of which $11 million for a participant) and $4 million equity investmentin an export-oriented glass project. Additional investment opportunities arebeing pursued.

PART III - INDUSTRY, THE FINANCIAL SETTING AND THE BORROWER

The Industrial Sector

42. The manufacturing sector has grown by 10 percent per annum over thelast fift.een years, increasing its share of GDP from 15 to about 18 percent.

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However, its share of total fixed investment has declined from about 30 per-cent up to 1975 to 23 percent in 1978. With the increasing capital intensityof investments, manufacturing employment increased relatively slowly toits current 11 percent of total employment.

43. The public sector is the major producer in steel, petroleum refin-ing, fertilizer, petrochemicals, and pulp and paper. The private sector,historically focused on consumer goods and durables, has only recentlyventured into intermediate and capital goods production, and is concentratedin large cities. However, it produces about 50 percent of the sector's valueadded. However, private investment in manufacturing stagnated in real termsbetween 1974 and 1977, and fell by 11 percent in 1978 as a result of theeconomic crisis.

44. The Government has traditionally viewed industrialization as the keyto high growth rates and greater self-sufficiency. Industrial policy hastherefore stressed import-substitution, advanced technology and a shift fromconsumer goods to intermediate and capital goods production. To accomplishthis, the main policy instruments have been large public investments, generousincentives and high protection against imports for private investment. Thesepast policies produced many achievements, including high growth rates, domesticproduction of large quantities of basic commodities using Turkey's naturalresources, new techniques, and craining of the labor force. Dispersal of SEEs,industrial estates, regional investment incentives, and lending by TSKB havemitigated regional inequalities.

45. However, these policies have given rise to major problems. Theimmediate ones are low capacity utilization because of heavy reliance onimported inputs, and the low level of manufactured exports (paras. 9 and 10).The longer range ones are that many heavily protected manufacturing opera-tions are uncompetitive by international standards. In addition, by adoptingcapital-intensive manufacturing techniques despite its surplus labor, Turkeyhas for too long neglected employment growth. Finally, the Government'srecent industrial investment plans have been over-ambitious in light of bothimplementation capacity and resource availability.

46. On the other hand, Turkey has a considerable natural resource basefor further industrialization, a comparatively low-wage and skilled laborforce, and a diversified, complex and interdependent industrial base, anda dynamic private sector responsive to market incentives. It also has anadvantageous location near Western and Eastern European and Middle Easternmarkets.

47. The Government intends to increase the contribution of manufactur-ing to GDP. Exports are now an integral element of its strategy. Import-substitution should continue where this is demonstrably economically viable,subject to adequate priority for export-oriented investments. Careful projectselection, with the elimination or postponement of low priority investments,and efficient implementation will be crucial. In this way, lurkey can bothsurmount the existing problems and achieve its desired long-term structuralchanges and greater self-sufficiency in strategic areas like fertilizers,chemicals, metals, metal products and machinery.

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48. Over the long term, substantial improvements in structure, effi-ciency and international competitiveness will be needed, particularly inthe SEEs. The development of exports can make an important contribution.The present variability of effective protection should be gradually reduced,to mitigate distortions in resource allocation. More generally, efficiencywould be spurred by replacing reliance on quantitative restrictions by agradually lowered level of tariff protection. Finally, faster job creationin manufacturing is needed to prevent a further rise in the unemploymentrate, partly through changing the bias of present investment incentives tobetter reflect the relative scarcities of capital and labor in Turkey.

49. The Fourth Plan provides for manufacturing to grow at over 11 per-cent per annum and further increase its GDP share. Investment goods produc-tion is to grow fastest. Manufacturing would increase its share of totalinvestment to 27 percent, but with the private sector component falling to 46percent of the total over the period 1979-83, compared with 57 percent overthe last decade. The investment allocation, however, is clearly along tradi-tional lines, with 71 percent going to large import substituting projectsmainly for intermediate goods production, many already underway. While it isdesirable t:o complete some ongoing projects in these subsectors, the invest-ment allocations for light and consumer goods industries with higher exportpotential (particularly food, textiles and clothing, and leather products)appear small in relation to the export targets set for them, and may need tobe increased in the second Fphase of the Plan when more new investments can beundertaken, More rapid job creation in manufacturing will be attempted,partly through the rapid expansion of relatively labor intensive subsectors.Redistribution of activity and income will be fostered through a continuationof the incentives for investing in less developed regions of Turkey.

50. W4hile these plans and the prospects are being evaluated by therecent economic mission, both investment and output growth in manufacturingare likely to be sluggish in 1979 and 1980. In addition, the Plan targets formanufactur:ing industry appear ambitious in the light of available resources.However, as discussed in Part I (paras. 9, 10, 20, 27, and 29 through 31),the most important feature of the Plan strategy is its strong emphasis, incontrast to the past, on the promotion of exports, particularly manufactures.

Financial Setting

51. Roughly 50 percent of private fixed investment in manufacturing isfinanced by intermediaries, with TSKB the most important source of long-termforeign exchange. The other institutional sources are the well-establishedsmaller Industrial Investment and Credit Bank (SYKB) which so far has financedpredominantly local currency expenditures, the new State Industry and LaborInvestment Bank (DESIYAB) designed to mobilize the savings of migrant workersfor investment particularly in less developed regions, and the public sectorHalk Bank financing private small-scale industry and artisans. Since 1972,the commercial banks have increased their 2-5 year loans in response toCentral Bank directives and incentives; they often cofinance TSKB-assistedprojects. Internally generated funds meet the bulk of remaining privateinvestment requirements.

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52. The capital market in Turkey is presently thin and stagnant, giventhe impact of inflation on the yields of non-financial assets. Share issuesby private corporations to the outside public are limited. The bond marketis dominated by Government and State Investment Bank (DYB) issues. Governmentbonds are highly liquid and yield 18 percent net as of May 1, 1979. Some 60percent have been placed with financial and other public institutions andalmost 30 percent with individual savers. Bond issues by private corporationsare a relatively recent development. TSKB played a pioneering role in guaran-teeing and placing some of the principal early issues. They yield 21 percentgross, a rate which is expected to be increased in summer 1979 to bring itinto line with the recent increases in other interest rates. Developmentbanks such as TSKB have however limited their own bond issues, since theysuffer a negative spread on loans made out of the proceeds of bonds at thebasic lending rate. Issues reached TL 2 billion in 1978, still a small amountand declining in real terms. In contrast, private savings and time depositshave grown rapidly, and reached TL 52 billion at the end of 1978. Most timedeposits are for 2 years and earn 22 percent as of May 1, 1979, while forthose over 4 years the rate is negotiable. To encourage TL equity invest-ment, especially in the less developed regions, the Investment Finance Corpora-tion was established by TSKB and a group of banks in 1976. TSKB manages thiscorporation, which by end-1978 had invested TL 353 million, including TL 205million as co-financing of TSKB-assisted projects.

53. The preliminary draft of the Government study of the financialsector, carried out from 1976-78 with Bank encouragement, is under reviewby the Government and the Bank. Joint discussions and further work areanticipated thereafter. The study has identified weaknesses in resourcemobilization and allocation, and recommends methods for investment banks toraise more resources from savers, both directly and through tapping thefunds of other institutions including commercial banks, and more effectivechanneling of bank resources to priority uses.

The Borrower

54. TSKB, established in 1950, is one of the oldest and most experienceddevelopment finance companies associated with the Bank Group. It has playeda signal role in Turkey's private industrial sector. Its paid in sharecapital is TL 425.4 million. The principal shareholder is lurkiye Is Bankasi,Turkey's largest commercial bank, which holds 22 percent of the share capital.The balance is distributed among a number of Turkish and foreign banks andother institutions. IFC holds 6 percent.

55. TSKB has a first class management team, which has been with it forabout two decades. The staff is competent, turnover is low, and staffingstrength is adequate except at branches outside Istanbul.

56. TSKB's Board adopted a comprehensive policy statemlent in April 1978.Projects supported by TSKB are to benefit the economy, with special emphasison attainment of the economic and social targets of Turkey's development plans,contribute to the competitiveness and exports of industry, lessen dependenceon imported inputs and capital goods, widen share ownership and create employ-ment and raise living standards in all regions of Turkey.

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57. TSKB finances around 6 percent of total private fixed investment.

Its approvals nearly tripled from 1974 to 1978 to reach TL 2.7 billion. Proj-

ects it helped finance involved an average investment per job of $34,000. It

provides 12-15 percent of the foreign exchange requirements of the private

manufacturing sector, with foreign currency loans of $198 million during

1977-78. Because of its high standards, its technical appraisals have been

readily accepted by commercial banks as a basis for increasing joint financing.

58. Until the early 1970s, TSKB financed mainly the domestic market

oriented projects of well established companies in the industrialized areas

around Istanbul and Izmir. Encouraged by the Bank, it moved to allocating

about 40 percent of its resources to the less developed regions of East and

Central Anatolia, thus supporting the national policy of industrial decentral-

ization. TSKB has also considerably increased its assistance to small and

medium-scale labor-intensive industries, helping to slow the growth of unem-

ployment. First time borrowers received 60 percent of its loans in 1976 and

1977. It has provided TL 1 billion per annum since 1975 to companies with

wide share ownership. It undertakes intensive subsector analysis and market

studies. It provides significant technical assistance to its clients at all

stages of the project cycle, including ensuring satisfactory competitive

bidding procedures on subprojects. It now intends to greatly increase its

financing of export-oriented industries, contributing to the Government's

major policy thrust of improving Turkey's balance of payments. Indeed this

constitutes the major rationale for the proposed loan.

PART IV - THE PROJECT

Project History

59. The proposed project is the thirteenth IBRD/IDA operation to assist

TSKB. It was appraised in October 1978. Negotiations were held in Washington

in May 1979. The Turkish delegation included Mr. 0. Eroguz, General Manager

of TSKB, and Mr. Yoruk of the Embassy in Washington represented the Government.

Project Objectives and Description

60. The objectives of the proposed project, in order of priority, are

to encourage and enable TSKB to: (i) increase substantially the amount and

proportion of its lending for export-oriented projects; (ii) continue the

emphasis in its resource allocation on the less developed regions and small-

to medium--sized labor-intensive projects; and (iii) bridge a part of its

foreign exchange resource gap up to end-1980, as it continues its efforts

to increase and diversify such resources.

61. The proposed loan of $60 million would provide: (i) $59.3 million

for financing sub-projects submitted before December 31, 1980, with a free

limit of $J4 million (L.A. 2.02(b)), and (ii) $0.7 million for the foreign

exchange costs of (a) a training program for TSKB staff in the export aspects

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of sub-projects ($200,000), (b) studies to identify for possible future Banklending, industrial subsectors having maximum potential for export ($300,000),and (c) TSKB's research studies and project promotion ($200,000). Projectdetails are provided in the Loan and Project Summary and Annex III to thisReport, and in the report entitled "Turkey--Turkiye Sinai Kalkinma BankasiA.S. Staff Appraisal Report" (Report No. 2447a-TU, dated May 17, 1979) whichis being distributed separately to the Executive Directors.

TSKB's Operations

62. TSKB expects foreign exchange approvals of US$322.0 million in1979-1980. Commitments would be $289 million in foreign exchange and TL 1.7billion in local currency. This projected considerable increase over 1977-78levels, despite the sluggish investment climate and the existence of substan-tial underutilized capacity, is realistic. The main constraint on TSKB'soperations in 1977-78 was its shortage of foreign exchange. This situationhas improved somewhat (para. 75) and, given Turkey's current difficulties,TSKB now has a virtual monopoly of long-term foreign exchange financing forprivate industry which explains the demand for its funds. As at end-April1979, the foreign exchange requirements of projects approved and awaitingcommitments were $132 million; those under study required $139 million.

Assistance to Export-Oriented Projects

63. Although TSKB's policy statement highlights exports, in 1977-78projects aiming at exporting more than 10 percent of output represented only8 to 12 percent of foreign exchange approvals.

64. Against this background, the major innovative feature of the pro-posed project, and indeed the Government's cardinal reason for requesting Banklending to TSKB, is TSKB's determination to contribute directly to the Govern-ment's crucial export drive, by greatly stepping up the amount and proportionof its lending devoted to export-oriented projects, and by technical assis-tance and studies directed toward exports. To do so, it will ease its owner-ship criteria for lending. About 80 percent of export-oriented lending isexpected to be in the most developed regions, and often sponsored by well-established firms. The projects are most likely to be in food processing,leather products, glass, mineral products, metal processing and machinery(apart from textiles and clothing). TSKB's pipeline as of end-April 1979included 19 projects with significant export orientation, 15 of them expan-sions, with requests for $70 million in foreign exchange. Agreement wasreached on a target of $115 million in foreign exchange approvals (40 percentof such projected approvals) in 1979 and 1980 for export-oriented projects(L.A. 3.07(a)(i)). These figures exclude projects TSKB will finance under theproposed Private Textiles Rationalization Project being advanced for lendingin FY80. Export-oriented projects are defined as those which will lead toexports of at least 40 percent of project output in the case of expansions orimprovements, and 30 percent in the case of new projects, by the time theproject is expected to reach full capacity (L.A. 1.02(m)). Agreement wasreached that TSKB's subloan agreements for these projects will specify minimum

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export targets (L.A. 3.02(a)(v)). In addition, an understanding was reached

that not less than 70 percent of this financing will be for projects with thehigher export percentage. These figures compare with 13.5 percent of output

exported by 49 TSKB-financed projects in 1976.

65. Further understandings were also reached to support this new lendingdrive. TSKB's appraisal reports on export-oriented projects will demonstratein each case, to the satisfaction of the Bank, the bona fide export potential

of the project, specifying that the expected production will be competitivewith respect to price (on the basis of sale at or above cost) and quality, and

that local demand will be satisfied. To do this, TSKB will include in itsappraisal reports, as relevant to each case, evidence of export orders, amarket study, past exports, effective marketing channels abroad, and other

marketing steps taken. TSKB will satisfy itself that sponsors obtain avail-

able incentives in accordance with their export targets. TSKB will report

semi-anually to the Bank on the degree to which the targets are being met, andthe steps it is taking to assist subborrowers. It will also calculate foreach project the domestic value added in relation to both the total value of

exports and. the foreign exchange investment costs, with a view to assessingtheir contribution to Turkey's balance of payments. Finally, it will submitfull appraisal reports in English on a Bank-selected sample of one in fiveexport-oriented projects, whether or not Bank-financed.

66. lo carry out its new role, TSKB will train its staff in the exportaspects of projects, with the assistance of the UNCTAD/GATT InternationalTrade Center or other export marketing organizations. The training programwill inclucle two years of on-the-job training from an international expert,

seminars and training courses with expatriate lecturers, operational travelincluding cooperation with export promotion organizations abroad, and consul-tant services for market studies and assistance to clients. Some 25 man-

months of consultant services are expected to be required at a cost of $6,000per man-month. The estimated foreign exchange cost of the program is $200,000and would be met from the proposed loan (L.A. 2.02(a)(iii)).

67. TSKB will also carry out, with the assistance of internationalexperts and under the State Planning Organization's direction, an in-depthstudy of industrial sub-sectors with maximum export potential, identify theirproduction bottlenecks and investment needs, and analyze their potentialmarkets (especially the EEC and the Middle East). Some 30 man-months ofconsultant services are expected to be required at a cost of $6,000 per man-month. The estimated foreign exchange portion of TSKB's share of study costsis $300,000 and would be financed from the proposed loan (L.A. 2.02(a)(iv)).

68. Agreement was reached that the detailed description of the trainingprogram; detailed outline arLd terms of reference for the study; technicalassistance agreements between TSKB and export marketing organizations; andthe qualifications, experience and terms of reference of consultants will beapproved by the Bank prior to disbursements on these components (L.A. 3.09).It was also agreed that any sums not required would be reallocated to sub-project financing.

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Assistance to Less- and Semi-Developed Regions

69. Under the last Bank loan, an understanding was reached that TSKBwould allocate at least 40 percent of its total resources in 1977 and 1978to projects in the less developed regions (LDRs), defined to include all butthree provinces in Central and Eastern Anatolia. This target was nearly met,as TSKB allocated 39 percent of its resources (including $70 million inforeign exchange approvals) despite limited entrepreneurship, equity financeand management expertise in those regions, thus playing a major developmentalrole.

70. Despite the presently crucial new stress on export-oriented proj-ects, it is important that TSKB continue to provide maximum assistance tothe LDRs. Agreement was therefore reached on a target of $90 million inforeign exchange approvals for LDR projects in 1979-80 (L.A. 3.07(a)(ii)),an expected 36 percent of total 1979-80 approvals (foreign exchange andlocal currency together). An understanding was reached that the classifica-tion of regions will be changed only to reflect the recent development ofthe south-eastern city of Iskenderun, and the backwardness of Ankara prov-ince outside the capital city. It was also agreed that the semi-developedregions of western Anatolia, which received 38 percent of TSKB's resourcesin 1977 and 1978, should receive a target $50 million in foreign exchangeapprovals in 1979-80 (L.A. 3.07(a)(iv)).

Assistance to Small- to Medium-Sized Labor-Intensive IndustrialProjects (SMLI)

71. Under the last Bank loan, understandings were reached that in 1977and 1978, TSKB would approve financing for small- to medium-sized labor-intensive (SMLI) industrial projects of $30 million in foreign exchange (in-cluding $15 million of the Bank loan) and TL 500 million in local currency.SMLI projects were defined as those with pre-project maximum fixed assets of$2.3 million, and with maximum fixed assets per project of $2.3 million andmaximum investment per job of $17,000, all in 1975 prices. TSKB approved$36 million in foreign exchange (including $13 million of the Bank loan),and TL 404 million in local currency financing. Fixed investment per proj-ect averaged $2 million equivalent and the cost per job $11,000 in currentprices. The latter compares well with the best available estimate of themanufacturing sector average of $33,500 in 1976-77.

72. In view of the growing unemployment, and the Fourth Plan's objec-tive of restraining it, TSKB should continue to build up its activities inthis field. Agreement was therefore reached that in 1979 and 1980 together,TSKB will approve financing of $35 million in foreign exchange, and TL 500million in local currency, for SMLI projects (L.A. 3.07(a)(iii) and (b)).The definition has been updated to reflect inflation since 1975, and restatedin Turkish lira as TL 110 million in fixed assets and TL 815,000 investmentper job, as of June 30, 1979; these figures will be adjusted quarterly usingthe general wholesale price index (L.A. 1.02(1)).

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External Retsource Mobilization

73. Since 1975, TSKB has received just over half of its foreign exchangeresources from the Bank and IFC. It has received $307 million through twelveBank/IDA operations. IFC has extended three loans totalling $60 million (ofwhich $45 million was placed with participants). As of December 31, 1978,Bank loans accounted for 52 percent of TSKB's disbursed and outstandingforeign exchange borrowings.

74. UJnder the last Bank loan, an understanding was reached that, inaddition to a $50 million IFC syndication with selected commercial banks(including $10 million from IFC), TSKB would make its best efforts to raiseat least $50 million more in medium- to long-term loans from the inter-national market, including export credits and Arab sources, by June 30,1978. The worsening of Turkey's economic situation in 1977 frustratedTSKB's efforts. The IFC operation did not materialize. TSKB's efforts toraise MiddLe Eastern resources also did not bear fruit, despite its effortswith the Bank's active support and the Government's willingness to guaranteeTSKB's borrowing from multilateral institutions. Germany provided the onlyofficial assistance. However, following country-to-country debt reschedul-ing agreements in 1978, TSKB secured a second line of export credit fromFrance ($34 million) and new lines from Norway ($19 million) and Finland($10 million).

75. TSKB had $121 milLion uncommitted at the end of 1978. This in-cluded $23 million from the last Bank loan which is expected to be committedby June 30, 1979. Without the proposed loan, it would face a shortage ofresources in the second half of this year and would have an inadequate start-ing balance for 1980. Thereafter, however, the situation would ease. To meetthe balance of its expected foreign exchange commitments of $289 million in1979 and 1980, and maintain a prudent level of resources for commitmentsexpected after 1980, TSKB expects part of a three-year EIB loan of $58 mil-lion, and the first of two KfW loans of $10 million, to become available latein 1979. The proposed Private Textiles loan (referred to in para. 39 above),if it is approved, is expected to provide $35 million in this period. The IFCplacement may go ahead, possibly now for $40 million, after debt reschedulingagreements between Turkey and the commercial banks, and the Government's ownfirst borrowing. However, TSKB's success is not assured, in view of thecommercial banks' heavy exposure in Turkey, and despite their willingnessto lend to TSKB. TSKB also aims to raise export credits from Belgium ($6-7million under negotiation) and Switzerland ($10-12 million) in 1979, andrecently secured a $1 million line of credit and $1 million guarantee arrange-ment from the US Export-Import Bank. Finally, TSKB plans to begin tappingMiddle Eastern financial institutions, especially bilateral official funds andconsortium banks. The Islamic Development Bank appraised a $5.0-6.5 millionline of equity in March 1979. TSKB renewed its contacts in several MiddleEastern capital markets in April, and an understanding was reached on itsspecific plans to follow uFp these efforts during the rest of 1979 and 1980.TSKB intends to: approach the Government immediately and formally with a viewto its malcing requests for loans to TSKB from the bilateral Arab aid-giving

- 22 -

agencies; once Turkish private sector borrowing from the international capital

markets becomes possible again, approach the Arab consortium banks based inEurope for new financing; and approach Arab investment companies with a viewto their underwriting bonds issues for TSKB in the Middle East in the firsthalf of 1980.

76. In addition to facing a possible resource gap in the second half

of 1979, TSKB needs considerable additional long-term untied funds to blendwith its other resources, most of which are at five-year terrns and/or tiedby procurement source. TSKB and the Government therefore turned to theBank, the only available source, for further assistance through the proposedloan of $60 million, which would all be committed in 1979-80.

Domestic Resource Mobilization

77. Domestic resource mobilization during 1977-78 compared reasonablywell with understandings reached under the last Bank loan. While TSKB'sshare capital was to be increased by TL 310 million by mid-1979, the remain-ing TL 175 million already authorized was paid in by mid-1978. Bonds totalingTL 325 million were to be floated, but TSKB could only place TL 260 million,due to both the stagnation of the bond market and its inabil:ity to match theearly redemption features offered by competitors. Furthermore, until recentlybond issues involved a significant negative spread. Even when TSKB wasempowered to increase its lending rate on these funds, to have done so wouldhave entailed loss of the right to discount at the Central Bank between 50 and70 percent of maturities of five years or less of loans made at the basicindustrial rate, on which TSKB has a 2 percent positive spread. TSKB made upits shortfall through unexpectedly large use (TL 239 million) of this discountfacility.

78. TSKB projects total local currency commitments (loans and equityinvestments) in 1979-80 of TL 1.7 billion, 19 percent of total commitments.Loan maturities eligible for discounting are expected to be TL 250 million.In March 1979, shareholders approved a capital increase to Tb. 1,500 million,which is expected to provide fresh money totaling TL 647 million in 1979-80.Discussions among the Government, TSKB and IFC, on the Government's requestfor an early full pay-in by TSKB's foreign shareholders, are shortly expectedto permit the capital increase to become effective. TSKB borrowed TL 275million on five-year terms from its shareholder commercial banks in early1979. An understanding was reached that TSKB will issue bonds and/or obtainloans from commercial banks with maturities of at least five years for a totalof at least TL 550 million in 1979-80.

Lending Rates

79. TSKB lends both foreign exchange and local currency at the basicrate for industry set by the Government (20 percent per annum from May 1,1979), but with transactions tax on interest and minor fees t:he effectivecost to sub-borrowers is 26 percent. Sub-borrowers bear the foreign exchangerisk on both principal and interest. They therefore incur a substantial

- 23 -

positive cost for foreign exchange funds in real terms. This reflects thehigh opportunity cost of external capital to the economy, and entrepreneursremain willing to pay it. It is currently acceptable for TSKB's on-lendingof the proposed loan, but an understanding was reached that TSKB will reviewit as part of the study on export potential and annually thereafter for itspossible impact on the international competitiveness of Turkish firms.

80. Turkey's inflation rate (measured by the general wholesale priceindex) increased from 16 percent in 1976 to 24 percent in 1977 and 51 percentin 1978. It is currently projected to be 40 percent in 1979, 30 percent in1980, 20 percent in 1981, and 10 percent thereafter. Over the life of atypical 7-year local currency loan from TSKB, or 5-year commercial bank loan,the current interest rates and projected decline in the rate of inflationimply a positive real cost of about 7 percent per annum to both TSKB's bor-rowers and commercial bank clients on local currency loans.

81. I'he May 1979 interest rate decree has converted TSKB's past negativespread on borrowed local resources into a positive one, through both an in-crease in the lending rate and new subsidies (expected to amount to an averageof around -l percent per annum to TSKB) granted to banks making term loansin less developed regions and priority sectors. However, the expected risein the private bond rate may cause the reappearance of a negative spread, asmay future changes in interest rates reflecting Turkey's changing economicconditions. This might again hamper TSKB's local resource mobilization becauseof its impact on profitability. To solve this problem, TSKB will review itslocal currency lending rate annually with the Bank, and adjust it as permittedby prevailing legislation, so as to achieve a positive spread on averagebetween the cost of borrowed local currency funds and local currency lendingrates, to the satisfaction of the Bank (L.A. 3.08). To make the adjustments,TSKB may impose a commission on its clients which are going concerns, orcharge a h:Lgher rate on a volume of loans not exceeding the amount of itsbonds outstanding.

Recent and Prospective Financial Situation

82. TSKB's net profits (after tax and provisions) as a percentage ofaverage net worth fluctuatecl between 18 and 21 percent from 1975-77, risingto 27 percent in 1978 as a r-esult of an increased lending rate. Theselevels are high in nominal terms, but considerably lower in real terms,although satisfactory. Administrative expenses were stable at 1.4 percentof average total assets. TSKB's dividend rate was 18 percent in 1976 and1977, rising to 25 percent in 1978. These levels are in line with prevail-ing practices in Turkey, ancd should enable TSKB to increase its equity baseas planned.

83. Net profits are expected to rise from TL 268 million in 1978 toTL 581 million in 1982. However, despite this the rate of return on averagenet worth is likely to decline from 31 percent in 1978 to 24 percent in1982. This remains high in nominal terms, and satisfactory in real terms.Both debt service coverage, at about 1.2 times, and interest coverage, at

- 24 -

about 1.3 times, will remain adequate through 1982. The debt-equity ratioas defined under the last loan rose to 9.4:1 by December 1978, as againstthe agreed maximum of 8.5:1, because the March 1978 devaluation caused anincrease in TSKB's foreign debt when denominated in Turkish lira. Theapproved capital increase will however shortly restore the ratio. Agreementwas reached to redefine the ratio by including in debt part of a subordinatedGovernment loan previously included in equity, and to adjust the limit corres-pondingly. Further agreement was reached that TSKB's future needs and com-fortable interest coverage justified a small increase in the maximum ratioto 10:1 (L.A. 4.06). The ratio is expected to remain within the new limitthrough 1982.

Supervision and Arrears

84. TSKB's generally sound supervision procedures need strengtheningto deal with the special problems of widely-owned companies, which oftenlack management strength and technical staff. Cost overruns caused by imple-mentation delays and rapid inflation have left them under-capitalized. As aresult, TSKB's arrears situation worsened until, at the end of 1978, arrearsover three months reached 5.1 percent of loan portfolio and affected 31.6percent of loans outstanding. About 50 percent were on loans in less devel-oped regions, while two-thirds of cases of arrears over TL L[ million involvedwidely-owned companies. TSKB's loans remain adequately secured by provisions,while detailed analysis has shown that most problem projects remain concep-tually sound. However, corrective action was clearly required.

85. TSKB therefore started, in 1978, to monitor and follow-up projectsmore closely, especially during implementation and start-up. Its programincludes systematic reporting on, and review of, problem projects, and promptcorrective actions such as adjustment of grace periods, debt rescheduling/consolidation, share capital increases, and provision of technical or man-agerial assistance. An understanding was reached that TSKB will furtherstrengthen its procedures. In addition, TSKB plans to strengthen its branchoffices, which are not presently involved in either appraisal or supervision,and are sparsely staffed. An understanding was reached that TSKB will submitto the Bank for discussion by September 30, 1979, a plan of actions to beimplemented by mid-1980. As a result of actions already uncdertaken, the pro-portion of TSKB's portfolio affected by arrears of over 3 months had decreasedto 21 percent as of end-March 1979, while additional rescheclulings alreadyapproved but not formalized, and payments received, would reduce the figureto 14 percent as of May 1979. It is expected to be less than 10 percent bythe end of 1980. An understanding was reached that until this level isreached, TSKB will report quarterly to the Bank on the progress made, and onthe remedial actions taken for projects with outstanding arrears of more than3 months and more than TL 1.0 million.

Other Project Features

86. Spread. Agreement was reached that TSKB will retain a net spreadof 2.5 percent on the proposed loan, as under the last, with the balance paidto the Government as a guarantee fee (L.A. 4.11).

- 25 -

87. Economic Rate of Return (ERR). Agreement was reached that, asunder the last Bank loan, TSKB will compute the ERR for projects with totalfixed assets above $2.0 million equivalent, and that it will normally be 15percent or more (L.A. 3.06). In 96 such projects approved by TSKB in 1977 and1978, the ERR was over 20 percent (well above the opportunity cost of capital)in 53 cases. There were only five exceptional projects, all with ERR of atleast 10 percent, the minimum for such exceptional projects.

88. Project Promotion. TSKB has an ongoing active program of industrystudies and project promotion. The last Bank loan provided $500,000 forforeign exchange expenditures, and TSKB has financed the local currencyexpenditures from a portion of the gross spread on two previous Bank loans.TSKB's 1979-80 program includes (besides the export studies discussed in para.67) six subsector studies and one on the cost/price structure of Turkishmanufacturing industry. The spread on the two previous loans will cover thelocal currency costs. The total foreign exchange requirement will be met fromthe balance of the original $500,000 and from a new allocation of $200,000 outof the proposed loan (L.A. 2.02(a) (ii)). As in the past, TSKB will informthe Bank of the detailed use it intends to make of these funds. Any balancenot required would be reallocated to subproject financing.

Project: Benefits and Risks

89. TSKB's new drive to devote a greatly increased proportion of itsfinancial resources, together with technical assistance, to export-orientedprojects will have a major direct impact on the Government's efforts toalleviate the critical tbalance of payments constraint. The only significantproject: risk is that Government policies will not keep exports sufficientlyattractive for the expected benefits of TSKB's financing to materialize. TSKBwill do all it can to ensure actual exports. In addition, the Bank's 1978prograra loan, which provides for financing exporters' imported requirementsand for a review of export policies (which took place in April 1979), willhelp to minimize the risk, which remains acceptable.

90. TSKB's lending for projects in less-developed regions and/or spon-sored by widely-owned companies, undertaken in furtherance of national eco-nomic development policies, risks making it somewhat less attractive toforeign commercial lenders, on whom it needs to rely to an increasing extent.However, its recent progress in securing official export credits attests toits increasing acceptance as a creditworthy borrower, and the new stress onexport-oriented projects should further improve its prospects.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

91. The draft Loan Agreement between TSKB and the Bank, the draftGuarantee Agreement between the Republic of Turkey and the Bank, and theReport of the Committee provided for in Article III, Section 4(iii), of theArticles of Agreement are being distributed to the Executive Directorsseparately.

- 26 -

92. Special conditions of the project are listed in Section III of AnnexIII.

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

PART VI - RECOMMENDATION

94. I recommend that the Executive Directors approve the proposed loan.

Robert S. McNamaraPresident

AttachmentsJune 21, 1979Washington, D.C.

ANNEX I- 27 - Page 1 of 6

TABLE 3A

TURKEY - SOCIAL INDICATORS DATA SHEET

REFERENCE GROUPS (ADJUSTED AVERAGESTURKEY Ia

LAND AREA (THOUSAND SQ. KL.) - MOST RECENT ESTIMATE)TOTAL 780.6 SAME SAME NEXT HIGHERAGRICULTURAL 558.4 MOST RECENT GEOGRAPHIC INCOME INCOME

1960 Lb 1970 /b ESTIMATE /b REGION /c GROUP Id GROUP Ie

GNP PER CAPITA (US$) 280.0 510.0 1110.0 1898.8 867.2 1796.4

ENERGY CONSUMPTION PER CAPITA(KILOGRAMS OF COAL eQUIVALENT) 245.0 479.0 630.0 1869.3 578.3 1525.0

POPULATION AND VITAL STATISTICSTOTAL POPULATION, MID-YEAR

(MILLIONS) 27.8 35.6 42.2URBAN POPULATION (PERCENT OF TOTAL) 31.9 38.7 42.6 43.0 46.2 52.2

POPULATION DENSITYPER SQ. Kl. 35.0 46.0 54.0 81.4 50.8 27.6PER SQ. 72K. AGRICULTURAL LAND 52.0 65.0 76.0 135.2 93.3 116.4

POPULATION AGE STRUCTURE (PERCENT)0-14 YRS. 41.3 41.7 41.7 26.2 42.9 34.8

15-64 YRS. 55.2 54.0 53.9 63.4 53.5 56.065 YRS. AND ABOVE 3.5 4.3 4.4 9.9 3.5 5.7

POPULATION GROWTH RATE (PERCENT)TOTAL 3.0 2.5 2.5 0.8 2.5 1.6URBAN 5.1 .f 4.9 4.2 2.2 4.7 3.4

CAUDE BIRTH RATE (PER THOUSAND) 44.8 40.6 39.4 19.2 37.8 27.0CRUDE DEATH RATE (PER THOUSAND) 16.9 14.4 12.5 9.0 10.8 9.9GROSS REPRODUCTION RATE 2.9 2.6 2.3 1.3 2.5 1.9FAMILY PLANNING

ACCEPTORS, ANNUAL (THOUSANDS) .. 65.6 66.6USERS (PERCENT OF MARRIED WOMEN) 5.3 8.2 38.0 38.0 20.0 19.3

FOOD AND NUTRITIONINDEX OF FOOD PRODUCTION

PER CAPITA (1970-100) 91.5 100.0 111.2 113.7 107.3 103.6

PER CAPITA SUPPLY OFCALORIES (PERCENT OF

REQUIREMENTS) 110.0 112.0 113.0 127.4 105.3 110.4PROTEINS (GRAMS PER DAY) 78.0 78.0 75.7 92.8 63.0 77.7

OF WHICH ANIMAL AND PULSE .. 22.0 Is 24.7 39.3 21.7 22.2

CHILD (AGES 1-4) MORTALITY RATE 16.0 /b 14.7 /L . 1.6 8.0 1.9

HEALTHLIFE EXPECTANCY AT BIRTH (YEARS) 49.3 54.4 56.9 68.9 57.2 63.0INFANT MORTALITY RATE (PERTHOUSAND) 187.0 /f.1 153.0 /k .. 34.5 53.9 38.2

ACCESS TO SAFE WATER (PERCENT OFPOPULATION)TOTAL *- 52.0 68.0 68.3 56.8 67.7URBAN 51.0 74.0 74.3 79.0 83.5RURAL .. 53.0 64.0 64.4 31.8 41.5

ACCESS TO EXCRETA DISPOSAL (PERCENTOF POPULATION)

TOTAL *- .. 8.0 94.0 30.9 70.3URBAN .. .. 13.0 94.0 45.4 90.7RURAL .. .. 5.0 93.0 16.1 38.3

POPULATION PER PHYSICIAN 3000.0 /1 2250.0 1830.0 686.5 2706.8 1310.8POPULATION PER NURSING PERSON 3260.0 1880.0 1520.0 339.0 1462.0 849.2POPULATION PER HOSPITAL sEDTOTAL 590.0 /1 490.0 460.0 178.0 493.9 275.4URBAN 190.0 /1 200.0 210.0 70.0 229.6 129.9RURAL .. 5890.0 5750.0 1770.0 2947.9 965.9

ADMISSIONS PER HOSPITAL BED . 20.0 20.0 15.3 22.1 18.9

HOUSINGAVERAGE SIZE OF HOUSEHOLD

TOrAL 5.7 5.9 .. .. 5.2 3.9URBAN .. .. .. .. 5.0RURAL .. .. .. .. 5.4

AVERAGE NUMBER OF PERSONS PER ROOMTOrAL .. 2.2 .. 0.9 2.0 0.9URBAN 2.0 1.9 *- 0.8 1.5 0.8RURAL .. .. .. 1.0 2.7 1.0

ACCESS TO ELECTRICITY (PERCENTOF D'JELLLNGS)

TOTAL 29.0 40.0 57.0 57.5 64.1 59.2URBAN .. .. .. 99.0 67.8 79.0RURAL 2.0 18.0 .. .. 34.1 12.5

- 28 -ANNEX IPage 2 of 6

TABLE 3ATURKEY - SOCIAL INDICATORS DATA SHEET

REFERENCE GROUPS (ADJUSTED AVERAGESTURXEY l

- MOST RECENT ESTIMATE)

SAME SAME NEXT HIGHERMOST RECENT GEOGRAPHIC INCOME INCOME

1960 /b 1970 lb ESTIMATE lb REGION /c GROUP Id GROUP /eEDUCATION

ADJUSTED ENROLLMENT RATIOSPRIMARY: TOTAL 75.0 109.0 104.0 108.0 99.8 97.6

FEMALE 58.0 94.0 94.0 99.5 93.3 87.4

SECONDARY: TOTAL 14.0 28.0 30.0 62.8 33.8 47.8PENALE 8.0 16.0 18.0 63.6 29.8 42.6

VOCATIONAL (PERCENT OP SECONDARY) 18.0 14.0 15.0 28.2 12.8 22.7

PUPIL-TEACHER RATIOPRIMARY 46.0 38.0 34.0 24.9 34.9 25.4SECONDARY 19.0 28.0 27.0 17.3 22.2 24.9

ADULT LITERACY RATE (PERCENT) 40.0 / 55.5 Im .. 88.3 71.8 96.3

CONSUMIPTIONPASSENGER CARS PER THOUSAND

POPULATION 2.0 4.0 8.0 90.4 12.4 32.3RADIO RECEIVERS PER THOUSAND

POPULATION 49.0 89.0 107.0 199.0 104.5 201.9TV RECEIVERS PER THOUSAND

POPULATION .. 3.0 12.0 132.5 28.1 97.7NEWSPAPER ("DAILY GENERALINTEREST") CIRCULATION PERTHOUSAND POPULATION 51.0 41.0 .. 97.1 45.2 70.9CINEMA ANNUAL ATTENDANCE PER CAPITA 1.1 6.7 .. 6.6 4.6 4.4

EIPLOYMENTTOTAL LABOR FORCE (THOUSANDS) 13000.0 /n 14500.0 16400.0 /o

FEMALE (PERCENT) 40.2 37.2 37.3 32.4 25.7 17.4AGRICULTURE (PERCENT) 71.7 63.4 52.5 lo 32.8 46.2 38.4INDUSTRY (PERCENT) 10.5 12.1

PARTICIPATION RATE (PERCENT)TOTAL 50.1 44.3 42.8 39.1 33.8 33.7MALE 58.7 54.9 53.2 56.7 48.1 50.8FEMALE 41.2 33.4 32.1 29.7 17.3 12.6

ECONOMIC DEPENDENCY RATIO 1.0 1.1 1.2 0.9 1.4 1.4

INCOME DISTRIBUTIONPERCENT OF PRIVATE INCO1MERECEIVED BY

HIGHEST 5 PERCENT OP HOUSEHOLDS 33.0 /h 32.8 /P 28.0 31.9 23.6 20.2HIGHEST 20 PERCENT OP HOUSEHOLDS 61.0 /h 60.6 jp 56.0 59.7 52.3 47.9LOWEST 20 PERCENT OF HOUSEHOLDS 4.2 h 2.9 /p 3.5 4.0 4.3 3.2LOWEST 40 PERCENT OF HOUSEHOLDS 10.6 /h 9.4 _/ 11.5 12.9 13.1 13.7

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

URBAN .. .. .. .. 191.9RURAL .. .. 162.0 194.9 193.1 157.9

ESTIMATED RELATIVE POVERTY INCOMELEVEL (USS PER CAPITA)

URBAN .. .. 291.0 295.1 319.8 448.8RURAL .. .. 218.0 309.2 197.7 . 313.1

ESTIMATED POPULATION BELOlW POVERTYINCOME LEVEL (PERCENT)

URBAN .. .. 18.0 - 18.2 19.8 23.2RURAL .. .. 25.0 24.2 35.1 54.5

Not availableNot applicable.

NOTES

la The adjusted group averages for each indicator are population-weighted geometric means, excluding the extremevalues of the indicator and the most populated country in each group. Coverage of countries among theindicators depends on availability of data and is. not uniform.

lb Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969and 1971; and for Most Recent Estimate, between 1973 and 1977.

Ic Europe; /d Intermediate Middle Income ($551-1135 per capita, 1976); /e Upper Middle Income (S1136-2500per capita, 1976); If 1955-60; /g 1965-70; /h 1963; /i 1967-68; 11 Based on sample surveyestimates of 9.700 households; might be underestimated; /k 1967; /1 1962; /m Six years and above;or 1965; /o 1977; /p 1968.

May 1979

- 29 - AMNEX IDEFINITIONS OF SOCIAL INDICATORS Page 3 f

NgS,g.g;TheadJu-ted.gr-up avrages forec- niao r cpaplatloo-ueighted geometric means, excluding the extreme values of the indicator and tho mostpopulatd coutry cm each group. la..eage of countries amng trye indicators depends non availability of dare and is not nsiform. Due to lock of data.gcosp averages or CapItal Porplo Oil Isport-r an- indi-ator of access to water and excrete disposal, housing, income distribution and poverty a.,eolxple pepulatios-weighted geometric means ,Itout the exclusion of extreme values.

Lt~AtLARA (thousa.nd s4. in) Population 5 r hospital bed - total, urhan. ond rural - Population (total,Total - Tetol corface area conprisi,g land area and imland waters, urban, and rural;I divided by their cespective nubhr of hospital RedsAgnLs_olttoal - Most resect estimate of agiotutocl ares used temporarily available in poblic and private general1 and peciali-ed hospital and e

orp-erna.enty for crops, pastures, narkot ad kitchen gardens or to habilitotion centers. Hospitals are estahlisbne..ts permnetly stoffed bylie fallow. ~~~~~~~~~~~~~~at least one physiclon. Emtshlisbmemts providing principally custodial

care are mar incloded. Rural hospitals, however, include health end n-di-CNP PER CAPITA IR1) - GN'P p-crnpica estimates or c-ret marbet prunes, ral centers sot permnently Staffed by o physician (but by a nedica- as-

calculated h;' Sane cenverui.n method en World Bar.k Atlas (1975-77 basis); sietant, norse, midwife, etc.) which offer in-patient accocooodstx- and1960, 1970, ,..d 1977 data. provide a limited rage of -edOoa1 facilitieo.

Adolssixn. erhsytl e - Total number of admissions to or dischargesE-NERGY iORSitMPTOiT PER CAPITA - A.nnua nonsamption of conerria1 energy from hospitals divided by the nuber of bedo.

(coal andll;Ie petroleum, natural gus and hvdrn-, nucle. and geo-thermal elecoriuity) in kilogram. of coal equa~valent per capita. HOUlING

Avteree_sor f house.hold (ners..ns pvr hooseho1d) - total, orhan. nd rural -POPULATION Aoll VITAL STATOITC A household consists of a group of indoidoa1s who share lnin,g -corto..

Tota ponlaidlu.yŽyoa (inllisu) -AS of Jolly 1: if nut available. a-d their main meals. A bxarder or lodger map or ray not he Included Inoverage of toe eud-youv eutioatos; l960, 1971, ond 1977 data, the bousebold for etatistiral porposes. DStatitical definitions of house-

Urban papulati,m (cercem of total) - Earto of u-am to total ppl-held vary.tion; different defiootiano of urbao areas may affect coxparability Averaxe combat of pers-es per revs - total, urban, and rural - Av,erage nmo-of data among contries, bet of persons per room in all, urban, and rural -ccpied c--nrtulnal

FpulaItloc des-lty dwellimgs, r-spe-tv-ly. Dw,ellings exclude mom-permanen..t structures andPer so. km. -. Mid-year population per square kilometer (LII hecrores) unoccupied parts.of total are., Access to electricity (percent of dwellings) - total, r an, d ru-ral -

Per v. o,.a~nculurelaud - Computed as above for agricultural lind Con,,entioxal dwellings with elentricity is living q-arters as percentagxonly. of total, urban, amd rural d.olliogs respectively.

Population ago structure (percent) - Children (0I-14 years), working-age

(15-64 years;, and retired (65 years and nor) as percenrages of mid- EDUCATIONyear popolot ton. Adjusted enrollmen.t ratios

Popolotion grouth rac- pyet - _totl, and urban - Compsond annual Primary School - total, and female - Total and female enrvllment of all agesgrowth retia ti total and urban mid-year popuLations for 1950-bb, at the prlnary le'eel as percentages of respectively primary ubo-l-age1960-70, and 1970-75. populations; normally includes children aged 6-11 years but adjusted for

Crude birth rate (per thousand) - Actu,al live births per thx..sand of different lengths of primary education; for countrue with oniversal edo-old-year pop-s.iaio; ten-your arithmetic averges ending in 1960 and catino enrollment may exceed 100 perceot siore some pupils are boaluwo1970 asd fiv--y-x avecgs -rime ho 1971~ icr moot or.ent -suinto. abuse the official School age.

Crude doath rate (per th--sad) - Annual dsuths pen thousand of cud- lecoodary suc -total, and female - Compared as above; uec--or-eduua-year pplto;te-yea uvitb-tiuc av-rapos ending in 1960 asd 1970 tien requires at least four years of approved primary i-st-utioc; yo-and five-pear average codIng in 1975 for mot recent estimate. id.s general vocational, or teacher t-raiing ic,utr-rtlon for pupIls

Cres reprod-uono ruts - Average sunse of daughters a woman will heor usually of 12 to 17 pears of age; correspondence coorses are generall1yRn. her norma -pc-d-tiv- period if She ecr rece ecxent agx- enoluded.specific fertilIty rates; 1oull fivs-yxar -oeages ending in 1960, Voca.tional esro1lnet (percent of secondary) - Vonational iu.stitxtions in-1970, and 1971. clude technical, indootria1, or other y,rxgraos whiob operate independ-utlc

Family nlen_n_ig -npos ona touud)-Annual number of or as departments of nenondary institutions.a.coptors of hlrth-cooto-l device onder auspices of natioxal fa-ily Pupil-teacher ratio - primary, and Secondary - Txtal stodents ecrolled isplanning program, primary and secondary levels divided by numbers of teochers in the torte-

FoxIl plucciseusr- fyvoe-est ofnridsoo)- Peroentago of pynndinc level.narried w..e. of child-hearing age (l5-dc years) who ue birih-rontrol Adult lit,eSty cute (peocest) - Literate adults (able te read and write) adevices to oIl married wov en in sane ae gru. a percentage of total adult population aged 15 years and over.

FOOD AND NOTRITITI CONIULFTIO NInd.. of dead Rroduniv yjen capita (17'10) - Index en.ber of Per Pas...opor cars (per rho..sand ouatn)-Passeno- *ars -pni- motor cars

capitana producui-n of oil food cc-oditi-s seating les than eiaht pers..o-; enclodosahlocs hease od suitorsPer capita Afgp~

1fclre p(yetnt vi reguir-ents; - Computed from vehicles.

emergy equ4valeot of net food Suyplies .aalloblo in country per capita Radio --ceP-rs (per thous.and population) - All types of recevrs ion radIoper day. A,,uilable supplue- compri.e domes.tic productIon. imports c... broadcasts to general1 pohlic per thous.and of population; excludes urlitcvc-exports, and changes is Stock. le~t Supplies exclude ninal feed, s.eds, receivers in contries and In years when registration of vadia set. wau .isquantities used in food! procesing, and losses. in distributi-m Re- effect; data fxr recen.t ypeacs 007 not he comparable Since moot count riesquir-exurs were earfmatad 1y FAG based on physiological needs for nor- abolished licensing.mal actIv,ity and health coosiderlng esvilrormmtal temperature, body TV roceiverm (per thcasand yopulatico) - TV re-i-ero for broadcast no geu-rwoighro, age and sex dictrobunto- at popalanioin, amd allowing 11 Por- Public p..r thousand papalation; ensloden -lionensd TV reeio ,,t -cc-cen,t far wasie at ho...ehold level. tries and in yeora when registration of TV' Sets was in effect.

Pot capita saynly of pretein (grams per day) - Protein content of per Newspapen circulation (per thous-nd popolatiom) - Sbey the averag circal-cepits mnet supply of food per day. let supply of food is defined as tivo of "dailp general intteres nespaper', dofined aS a perhooioa publI-above. Reqsirenents for all -octries esreblished by USDA provide for cation devoted prlnarily to renording general newa. It is considered toa minimum allownce of 60 grams of total protein per day and 10 grams be "daily" if it appears at leas.t four tinos a week.of anisal -ed Pulse protein, of usich 1i gram. Should be anisci protein. Cinea aonmual attendance per neplto per scar- - Based on the un.ber of ti~cketsThes standards eve lowe than those. of 75 gruns of total protein and Sold during the year, including admissions to drove-is ciee.as an d mohole23 grams of alo proccia u an a.verge for the world, propoced by units.

FAO in the Third World PoodOue.Per cxpita ptc rein supy rmanmlx use - Protein supply of food 2TL0YM4ENTde-ive fr- animals and puIuex is grass per dcv. Total labor farce (tho..sards) - E-n-im-oaly artivo peron, incitiung ar-d

Ibild fageo 1-4) motait tvs (p-v th-nud( - Annual deaths per thous- farcex and u-enlcyci hut -uclodlog housewies, students, etc. tefluc-end fo ago group 1-1 yeas, to chIldren us this age group. tio.s in variou c..o..trien are nor comparable.

Female (percent), - Female1 labor forte as percentage cf total labor fce

HEALTH Agricu1tore footret) - labor force in frmiog, forestry, hunting c-d Pinion0

Life esp,esutaoy us bIrth (year) - Averago rumbor vi ye-s of life as percntage of total la.bor force.renainong ul birth; usuall five-year -- vrgs ending in 1960, 1970, Industry (percent)- Labor forc in sisong, -oovsir anlsulgadand 1971. electricity, water and gas as percntage of total labor fore.

Infant r-tolltt rate_jyor thuad) - Annual rehar of infants un,der Participation rate (perceut) -_tol, tale, and -sonule - Total, sale, andone year of age pro tho..asod Ive hirnts. cerale labor force us poovrt-t.u of thervuec(-pcolscs

Acceos tv sfEalvalor dorcootf yiyjub(-t. ara2

drrl-Thsare 1L0's adjusted prsiainrtsrfetn c-eNuohor of ,opo (-tot-, urban, ucid r-ya, u-eb rtsus ucs tc rrcurar of the pop.Ifati- -od ion 'lie steed.

vaIwter oyIplo lnclnde- treosec s-o-or -at-S or sorauibt icc-ici drp-sfe-r-tac- iato. of popul.t-o order 15 .od sI ud oetu--o-ntalaec -00e suc as tics icon rto(toc sd hroespsrioss, the labor force us age gr-op of 1h-6u nears.an ..onitartn -11sf as p-rcenrg-u of toe, or a rpec-o popolotic-o.In en 'etho cr0 a public fouctals or -t-acc-t lo-.ted sot .rot I10O"1 tIhTIITKTIGNthou 210 n!r from a 'c-u- nap no c-o-drd us being cithi.c-0 P-rcetsac of yrioat iscn (both in -ah and kfnd) received ho richest -bcole ccs of thai ho--v is rua-r-.rosrb OOs tovid p-rcent. richest 20 ye7-cet, Pooret 20 Percet asd poorest P-T rsc

imply that- to. hv-tv'ilO -0 -b..her ci rh , cot Jr sot hav to of hoosehoids.spend s di,rcrporri-ute part of ole J-i In touch4iug tic lulipy'swater -vds. PCVEiTY TAliC,T GROUPS

Alcs to e-,yta dir4p2-i (pe--et cO pop- t-ros -dial rb1, and OsiaodaoL-cu poverr i-come flerl (ill pr c_oltjaf - ,7TrOa -Nod b-oo of c-opl (oct01, --o; 2. a) s..t b, 0-cr. 000 iuoite fvt coolelcotvat Income Ioor -olc .0 0

diopocol asr eto t o tors _vszcooa -o orr otiost(o', doy.o-e olet Plus cueoil r-foodotto,t

LO 00010--- -- o, .-- orot tenr-d .. I -p-fro anonc;oT~_---r oo aoo ~5aptoito, a aao aoc',-n . attocal -- cs5.,0 '-e.actre pot', 'hicl ... r Is ratr

i-dornuc AnOatoce io-.-

- 30 -

TUBEY - £COOaC DEV31LOP1IT DATA SHEI5 T / Paeg 4 of 6

Aetual Est. Projected

1970 1973 1975 1976 1977 1978 1979 1980 Growth 2 tee Share oi GP

N. NA;10N.AL ACCOUNTS (TL Billion, 1976 Pric.)

1. Gross Doeetic Product 423.3 514.1 607.7 659.0 688.0 720.3 740.7 769.0 7.2 3.8 100.02. G. i trom Tere of Trade 6.9 4.5 _5.4 0.0 .0.7 .6.2 -13.4 -19.6 O0.

3. Gross Domeetic Incoe 430.4 318.6 602.3 639.0 687.3 714.1 727.3 749.4 6.9 2.9 100.0

4. Exports (G * NFS) 21.3 36.9 29.6 35.0 32.0 47.4 53.0 61.4 5.6 24.3 5.3

5. Leports CG NFS) 31.4 50.2 81.2- 82.8 96.7 81.3 77.3 75.6 17.4 -7.9 12.6

6. Resource 3elncd .9.6 -13.3 -51.6 -47.8 -64.7 .33.9 -24.3 -14.2 7.3

7. onet et 79.5 97.3 145.8 156.7 163.8 146.3 146.3 146.3 10.9 -3.7 23.8

8. Coneoupcion 353.6 430.1 513.5 550.1 588.8 607.9 618.7 636.9 7.6 2.7 83.5

9. Do.etic S-rioge 76.6 88.5 88.8 108.9 98.5 106.2 122.0 132.1 3.6 10.3 16.5

10. National Savinge 83.2 114.7 104.3 119.9 107.1 109.5 125.0 134.1 3.7 7.8 18.2

8. SECT20 O TPUT ShAr of Tosel 0otrut

1. Agrlcoitpoe 27.1 22.6 23.4 23.2 22.1 23.3 23.0 22.0 4.1 3.62. Idostryd 22.8 25.2 25.0 25.2 25.8 24.3 24.8 25.4 9.2 3.2

3. Other 50.1 52.1 51.6 51.5 52.2 52.4 52.2 52.6 7.9 4.0

C. PRICES (1976 . 100)

1. Export Pri c. 57.4 66.6 96.1 100.0 102.3 85.7 83.4 84.2 8.6 .6.32. Eport Price. 43.2 60.3 113.1 100.0 104.2 95.4 103.7 111.9 13.4 2.43. Ter. of Trede 132.9 110.4 85.0 100.0 98.2 89.8 80.4 75.2 -4.2 -8.54. GDP Deflator 34.4 57.5 95.4 100.0 124.1 186.2 260.7 338.9 20.0 39.8

5. Average fehoge Rate (81.00 . TL) 11.5 14.1 14.4 16.1 18.0 24.3

Pereent of GDP -

D. PUBLIC FINAsCL

1. Co -trel overreet Revenue 19.9 19.7 20.5 21.4 22.4 21.52. Centrel Goverrant xditores 22.5 22.0 22.8 24.1 27.4 24.1

3. Fublic Sector Defieitct N.A. 2.1 6.1 8.1 9.0 N.A.

1970.77 1970 1975 E.t.

E. SELECTED INDICATDRS F. LOaR FORCt

ICOR 2.9 CivElien Labor Fore (.llion.. 13.8 15.7 16.2

Export Elasticity 2.4 U0eIoynet nd Uoderepl.ymet (1 of C7F) UL.0 12.3 13.5A-erege Do-exic Saving Rate 15.4 CLEillen Rploymet (millions) 13.1 14.7 14.7MargInal Doetic Saving Rat 7.7 of hiEch (l3Inveet- ntslP 21.1Lports/GDP 11.4 Agrieulture 67.1 64.5 61.8

Induetryl/ 10.6 11.5 12.6Other 22.3 24.0 25.6

rtls nay not add up becaue of rounding errors.

j 5 Sorro-iog r-qoire-ent of centrl gover-nt, tate ecoosic enterprise, nd other public euthoeitie.

3/ Incldee nioog, enufaturing, electricity, gee, wter orks, selude construction.

4/ 1977-80 r-srded as oorsprent.ttve tr-nnitioni years. ENCA IPI1A

May 8, 1979

- 31 -

TURKEY - BALANCE OF PAYMENTS ANNEX I

(Million US Dollars) Page 5 of 6

Actual Est. Proiected

1970 1973 1974 1975 1976 1977 978 1979 1980

A. SUMMARY OF BALANCE OF PAYMENTS

1. Exports of Goods and NFS 754 1799 2123 2152 2742 2556 3258 3545 4146

2. Imports of Goods and NFS -1096 -2391 -4183 -5219 -5735 -6436 -5164 -5338 -5633

3. Resource Balance -342 -592 -2060 -3067 -2993 -3880 -1906 -1793 -1487

4. Interest (net) 1/ -47 -59 -102 -124 -217 -500 -678 -744 -920

5. Profits -33 -35 -71 -36 -83 -116 -58 -89 -94

6. Workers' Remittances 273 1183 1426 1312 983 982 975 1090 1180

7. Net Factor Service Income 193 1089 1253 1152 683 366 239 257 166

8. Transfers (net) 91 18 27 23 15 12 14 25 30

9. Current Account Balance -58 515 -780 -1892 -2295 -3502 -1653 -1511 -1291

10. Direct Foreign Investment 58 27 88 153 27 67 40 150 175

11. Imports with Waiver 34 50 58 98 136 102 100 102 104

12. Public M and LT (gross).2/ 271 376 330 386 491 502 650 1639 1775

13. Amortisation of Public M and LT 1/ 2/ -146 -72 -126 -117 -119 -214 -387 -511 -674

14. Public M and LT (net) 125 304 204 269 372 288 263 112a 1101

15. IMF (net) 48 -11 - 243 148 - 180 150 -100

16. Short TermL (net) 3/ 18 -224 -80 916 1806 2972 730 - -

17. Capital not included elsewhere 4/ -39 67 79 -204 -306 -478 540 -19 61

18 Charge in Reserves (- - increase) -186 -728 431 417 112 551 -200 - -50

B. M and LT LOAN COMMITMENTS 2| 506 547 577 721 1461 1076 1368

Public sector 497 491 527 615 1374 1076 1368

j. Bank Group 40 135 228 158 237 144 358

2. Other Multilateral 132 100 135 40 55 3 63

3. Governments: Market Economies 154 218 145 178 180 301 375

4 Governments: Centrally Planned Economies 114 4 - 3 295 216 343

, Suppliers 47 3 - 45 161 160 53

6. Financial Institutions - 32 19 191 423 251 177

7. Other - - - - 24 - -

Private Sector 19 56 50 106 87 n_a. n.a.

C. AVERAGE TERMS OF M and LT LOANCOMMITMENTS /5

1. Grant EleEment (%) 36.4 39.0 29.7 15.4 14.3 14.0 n.a.

2. Interest (x) 3.6 4.7 5.9 7.3 7.2 7.4 n.a.

3. Maturity (yrs.) 18.0 25.6 22.9 13.4 12.6 12.7 n.a.

4. Grace (yrs.) 4.6 7.0 5.6 3.9 3.8 4.6 n.a.

LI Net of debt relief./2 Up to and including 1978 these figures are Government estimates, which are not consistent with Bank DRS data.

/3 Up to and including 1978 mainly convertible Lira Accounts, Acceptance Credits, Commercial and Oil arrears, Bankers'

Credits, Reimbursement Credits, Overdrafts, and Dresdner Bank Scheme deposits.

/4 Mainly errorsI and omissions up to and including 1978; in 1979 and 1980 represents net private M and LT borrowing.

/5 Public and puLblicly guaranteed external debt only.

EMENA CPIIAMay 8, 1979

- 32 -

ANNEX I

Page 6 of 6

TURKEY - EXTERNAL DEBT AND CREDlITWORTHINESS

Actual Estimate1970 1973 1975 1976 1977 1978

A. OUTSTANDING DEBT (Million US Dollars)

1. Public M and LT (Disbursed) 1/ 1854 2869 3176 3585 4314 49282. Private M and LT (disbursed) 1/ 42 115 16C 253 479 5573. Short Term 2/ n.a. n.a. 1388 3342 6539 74694. Total Outstanding Disbursed Debt 1896 2a/ 2984 2a/ 4724 7180 11332 12954

5. Undisbursed Public M and LT 1/ 840 1101 1608 2427 2787 2972

B. DEBT SERVICS (Million US Dollars)

i. Interest on all Debt (net of relief) 3/ -47 -59 -124 -217 -500 -6782. Amortisation of M and LT Debt (net of relief) 3/ -146 -72 -117 -119 -214 -3873. Total Debt Service Payments -193 -131 -241 -336 -714 -1065

C. DEBT BURDEN

1. Debt Service Ratio 4/ 18.8 4.4 7.0 9.0 20.2 25.22. Total Outstanding Disbursed Debt/GDP 4a/ 15.0 14.3 13.1 17.5 23.9 24.1

D. TERtS

1. Interest on all Debt 5/ / Total Outstanding Diabursed Debt 2.5 2.0 2.6 3.0 .4.4 5.22. Total Debt Service 5/ I Total Outstanding Disbursed Debt 10.2 4.4 5.1 4.7 6.3 8.2

E. EXPOSURE

1. Bank Group DOD/Total Outatanding Disbursed Debt 7.2 8.5 9.1 7.7 6.1 6.52. Bank Group Debt Service/Total Debt Service 3.2 14.9 13.5 13.4 9.1 6.6

F. COMPOSITION OF TOTAL OUTSTANDING DISBURSED DEBT(Million US Dollars) 1977L______

1. medium 6 Long-Term Debt 479.3 42.3 5485 42.4

a. Public M and LT

(i) Bank Group .693 6.1 836 6_5(ii) Other Multilateral 502 4.4 558 _ 3

(iii) Governments 2469 21.8 2907 22..kiv) Suppliers 133 1.2 131 1.U

(v) Financial Institutions 483 4.3 464 * 6(vi) Other 34 0.0 32 0.2

Total 4314 38.1 4928 38.1

b. Private F and LT (Total) 479 4.2 557 4.3

2. Short Term

(i) Convertible Lira Accounts 2267 20.0 2860 22.1(ii) Suppliers' Credits/Comsmercial and Oil Arrears 1858 16.4 1675 12.9

(iii) Acceptance Credits 710 6.3 862 6.7(iv) bankers Credits, Reimbursement Credits, Overdrafts 828 7.3 924 7.1

(v) Dresdner Bank 173 1.5 363 2.8(vi) IMF 409 3.6 622 4.8

lvii) Other 294 2.6 163 1.3Total 6539 57.7 7469 57.6

3. rotal Outstanding Disbursed Debt 11332 100.0 12954 i00.0

/I Bank DRS data./2 Based on Turkish Central Bank estimates. /2a Excluding short-term./3 Based on Turkish Balance of Payments data./4 Total debt service (line B3) divided by exports of goods and non-factor services plus workers' remittances./4a At market prices. /5 Net of debt relief./6 As of December 31 for respective years.

EMENA C?I:AMay d, 1979

-33 ANNEX II

Page 1 of 8

STATUS OF BANK GROUP OPERATIONS IN TURKEY

STATEMENT OF BANK LOANS AND IDA CREDITS(As of April 30, 1979)

Loan andCredit (Less Cancellations US$11)Number Year Borrower Purpose Bank IDA Undisbursec

Sixteen loans anld ten credits fully disbursed 297.0 127.2

748-TU 1971 Republic of Turkey Education 13.5 3.9762-'TU 1971 Republic of Turkey Fruit and Vegetable 10.0 1.2257-TU 1971 Republic of Turkey Fruit and Vegetable 15.0 0.1281-TU 1972 Republic of Turkey Irrigation Rehabilitation 18.0 0.8817-TU 1972 Republic of Turkey Steel Mill Expansion 76.0 0.3844-TU 1972 Republic of Turkey Istanbul Water Supply 37.0 9.7324-TU 1972 Republic of Turkey Istanbul Urban Development 2.3 0.7330-TU 1972 Republic of Turkey Livestock II 16.0 1.5883-TU 1973 Republic of Turkey Ceyhan Aslantas 44.0 24.1892-TU 1973 Republic of Turkey Istanbul Power District 14.0 1.5893-TU 1973 Turkish State Railway Railway Project 46.7 9.3957-TU 1974 Republic of Turkey Antalya Forestry 40.0 5.11023-TU 1974 TEK/TKI Elbistan Power 148.0 69.91024-TU 1974 DYB Industry 40.0 3.31078-TU 1975 TSKB Industry 65.0 2.31130-TU 1975 Republic of Turkey Rural Development 75.0 51.91248-TU 1976 Agriculture Bank of

Turkey (TCZB) Agriculture Credit 54.3 38.81258-TU 1976 State Pulp and Paper

Industry (SEKA) Newsprint 70.0 23.41265-TU 1976 Republ-ic of Turke!y Livestock III 21.5 17.91194-TU 1976 TEK Power Transmission II 56.0 37.21310-TU 1976 Republic of Turkey Tourism 26.0 24.41379-IU 1977 DYB Industry 70.0 68.01430-TU 1977 TSKB Industry 74.0 42.01585-TU 1978 Republic of Turkey Northern Forestry 86.0 85.41586-TU 1978 Republic of Turkey Livestock IV 24.0 24.01606-TU 1978 Republic of Turkey Erdemnir Steel Stage II a/ 95.0 95.01627-TU 1978 Republic of Turkey Program Loan 150.0 118.2S-13-TU 1978 Republic of Turkey Oil Recovery 2.5 _ 2.2

Total 1635.5 178.5 762.1of which has been repaid 157.1 4.7

Total now outstanding 1478.4 173.8Amount sold 3.6of which hasbeen repaid 3.6 - 0 - - 0 -

Total now held by Bank and IDA /b 1478.4 173.8Total undisbursed 759.0 3.1 762.1

a/ Not yet effective.

b/ Prior to exchange adjustments.

-34-ANNEX IIPage 2 of 8

STATUS OF BANK GROUP OPERATIONS IN TURKEY

STATEMENT OF IFC INVESTMENTS

(As of April 30, 1979)

Fiscal Amount in US$ MillionYear Obligor Type of Business Loan Equity Total

1964 TSKB DFC - 0.92 0.921966 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 0.62 3.121970 ACS Glass 10.00 1.58 11.581971 NASAS Aluminum 7.00 1.37 8.371971 SIFAS III Nylon Yarn 0.75 - 0.751971 Viking II Pulp and Paper - 0.05 0.051972 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 0.44 4.041974 AY.SA Textiles 10.00 - 10.001975 Kartaltepe Textiles 1.30 - 1.301]975 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 1.22 26. ..1976 NASAS Aluminun 1.58 - 1.581976 TSKB DFC 25.00 - 25.r1976 Asil Celik Steel 12.00 2.18 14.181977 Borusan Steel Pipes - 0.16 0.161978 DOKTAS Steel - 0.27 0.271979 Ege Mosan Engines for Mopeds 2.15 - 2.1,1979 ISAS Motor Vehicles &

Accessories 8.00 1.40 9.401979 Asil Celik Steel - 1.8n 1.801979 Trakya Cam Glass 30.96 4.00 34.96

Total Gross Commitments 185.67 20.27 205.94Less Cancellations, Terminations,

Exchange Adjustments, Repaymentsand Sales 97.98 2.99 100.97

Total Commitments now held by IFC 87.69 17.28 104.97

Total Undisbursed 41.59 5.84 47.43

- 35 - ANNEX II

Page 3 of 8

C. PROJECTS IN EXECUTION 1/

Ln. No. 748 Education Project: US$13.5 million loan of June 9, 1971. Effec-tive Date: September 29, 1971. Closing Date: March 31, 1980.

The project was substantially delayed due mainly to initial diffi-culties in providing the project unit with adequate qualified staff andauthority commensurate with its responsibilities. However, implementation isnow proceeding well, with equipment procurement progressing satisfactorily.Training of teachers for technician schools, adult training centers andpractical trade schools has made considerable progress. The ManagementTraining Institute has been established on an interim basis pending passageof legislation formally establishing it, and its instructors are undergoingtraining. Sixty-seven locaL advisory committees for vocational and technicaleducation have been established, one in each province.

Ln. and Cr. Nos. 762/257 Fruit and Vegetable Export Project: US$10 millionloan and US$15 million credit of June 22, 1971. Effective Date: May 19,1972. Closing Date: June 30, 1979.

The project is nearing completion, with three of its four com-ponents, including refrigerated trailer and towing units, marketing facili-ties and a roll-on roll-off ferryship, fully implemented. A fourth component,comprising credit and technical assistance for citrus development, underwentinitial start-up delays, but is now well established and being implementedsatisfactorily.

Cr. No. 281 Irrigation Rehabilitation Project: US$18 million credit ofJanuary 25, 1972. Effective Date: April 27, 1972. Closing Date: April 30,1979.

Construction of irrigation and drainage channels and on-farm worksat Silifke and Tokat is nearly complete, but on-farm works are still behindschedule at Koprucay because of the extremely short annual work season.Arrangements to ensure use of remaining credit funds before the revisedclosing date were made by the implementing agencies, and project works notcompleted by the closing daLte will be carried out using Government funds.Agreements to reimburse have been issued for several letters of credit repre-senting remaining funds under the IDA credit, which are expected to be with-drawn by raid-June.

1/ These notes are designed to inform the Executive Directors regarding theprogress of projects in execution and in particular, to report any prob-lems which are being encountered and the action being taken to remedythem. They should be read in this sense, and with the understanding thatthey do not purport to present a balanced evaluation of strengths andweaknesses in project execution.

- 36 -

ANNEX IIPage 4 of 8

Ln. No. 817 Steel Mill Expansion Project: US$76 million loan of April 28,1972. Effective Date: August 4, 1972. Closing Date: June 30, 1979.

The project started commercial production at the end of the year,three years behind the original schedule, due to delays in beginning procure-ment stemming largely from inefficient management.

Ln. No. 844 Istanbul Water Supply Project: US$37 million loan of June 30,1972. Effective Date: January 4, 1973. Closing Date: December 31, 1979.

Project construction was delayed about 2-1/2 years due mainly toproblems in the use of ICB procurement procedures and inefficient management.However, construction moved swiftly in 1977 and the two major water resourcesdevelopment programs are expected to be completed by end-1978. Substantialimprovements to the distribution system are required, however, to enable fullutilization to be made of the new water sources. Although a tariff increasewas implemented in March 1978, this was insufficient to enable ISI to generatesufficient funds for future ongoing investment in the distribution system, andthe Government has been requested to explore ways to resolve the lack of ade-quate local and foreign currency.

Cr. No. 324 Istanbul Urban Development Project: US$2.3 million credit ofJune 30, 1972. Effective Date: January 4, 1973. Closing Date: June 30,1980.

Consultants have completed Phase I of the general urban planning andurban transport/land use modelling studies as well as studies on wastewaterand bus/traffic engineering and control. Terms of reference for Phase IIstudies have been agreed and consultants' proposals sought.

Cr. No. 330 Second Livestock Project: US$16 million credit of September 28,1972. Effective Date: January 5, 1973. Closing Date: June 30, 1980.

The Fattening Subproject is progressing satisfactorily and all fundshave been committed. The Village Livestock Development Subproject, afterresolution of initial difficulties in recruitment of technicians and gainingfarmer confidence, is now progressing rapidly, with 95 percent of the fundscommitted. The project is expected to be completed on schedule.

Ln. and Cr. Nos. 883/360, Ceyhan Aslantas Multipurpose Project: US$44 millionloan and US$30 million credit of March 22, 1973. Effective Date: March 20,1974. Closing Date: December 31, 1981.

Construction of diversion tunnels has met with difficult rock condi-tions and several cave-ins, but diversion has now been completed with revisedtunnelling methods, about two years behind the appraisal estimate. After someinitial delays, progress in construction of the irrigation works has been

- 37 -

ANNEX IIPage 5 of 8

satisfactory, and the system was ready to deliver water to about 36,500 ha,nearly one-third of the projects target. On-farm works were progressingsatisfactorily although farn drainage was behind schedule. However, construc-tion of feeder roads has progressed faster than initially estimated. Althougha permanent director has been appointed, the extension consultant has resignedand is now being replaced. Full-time subject matter specialists have beenhired and recruitment of field staff is continuing.

Ln. No. 892 Istanbul Power Distribution Project: US$14.0 million loan ofMay 25, 1973. Effective Date: September 28, 1973. Closing Date:December 31, 1979.

The project has been delayed by about four years mainly by slow pro-curement action; however, this is now almost completed. Local costs haveincreased by nearly 300 percent over appraisal estimates, and foreign costsby 26 percent. Consultant studies of the Istanbul power market and of theproposed reorganization of the company's electricity and transport serviceshave been completed; a study of its gas operations is under review. IETT'stariffs were raised twice following the countrywide tariff adjustments made inSeptember 1977; additional steps are planned by the Government to help coverthe increased project costs and revitalize the company's finances.

Ln. No. 893 Turkish State Rtailways: US$47 million loan of May 25, 1973.Effective Date: August 28, 1973. Closing Date: June 30, 1980.

After initial deLays, physical progress, including track renewals,rolling stock, and locomotive production, the latter financed by the EuropeanInvestment Bank, is satisfactory. Nearly 80 percent of the loan has beendisbursed and procurement actions have been or are in the process of beingcompleted for use of the riemaining loan funds, although project completionwill only be in mid-1980. Despite two tariff increases since the loan wasmade, the Railways have continued to fall short of the financial targets inthe revised Plan of Action agreed with the Bank in mid-1975. However, it ishoped that further increases in passenger fares and freight tariffs averaging70 to 80 percent, which became effective earlier this year, will improve theRailways' financial situation. While the dieselization program is makingsatisfactory progress, other measures to improve operational efficiency, suchas appropriate manpower planning, have not been given sufficient attention.

Ln. No. 957 Antalya/Akdeniz Forest Utilization Project: US$40 million loan ofJanuary 28, 1974. Effective Date: May 26, 1976. Closing Date: June 30,1980.

Following the approval by the Executive Directors of needed changesin the agreements arising from relocation of the pulp and paper mill, the loanwas declared effective. Construction at the new site is underway, and theproject is expected to be completed by mid-1981, two years behind the revisedschedule. Some cases of sub-standard civil works construction have occurred,but a corrective program and strengthened supervision by SEKA have producedsome improvement. The cost overruns were to be met by the Government and

- 38 - ANNEX IIPage 6 of 8

the State Investment Bank. The Government has recently been unable toauthorize the foreign exchange transfers needed to permit continued procure-ment for the industrial part of the project, except for certain criticallyneeded items, and is seeking additional external financing. Local currencypayments for the Akdeniz establishment are also behind schedlule, resulting ina high debt-equity ratio.

Ln. No. 1023 Elbistan Lignite Mine and Power Project: US$148 million loan ofJune 28, 1974. Effective Date: June 1, 1976. Closing Date: July 30, 1982.

Engineering and contracting are proceeding, but project implementa-tion has been delayed by critical problems, including insufficient staff,inefficient management, inadequate coordination among various agencies andunsatisfactory performance of civil contractors. Following Bank and co-lenderreviews of the situation with the Turkish authorities in early 1977, the reme-dial measures initiated by Turkey have resulted in some improvement of projectcoordination and physical aspects of project implementation. Financing, bothdomestic and foreign, remains a serious problem. The Government is reviewingpossible actions to overcome these and other remaining implementation problems.

Ln. No. 1024 DYB (State Investment Bank of Turkey): US$40 million loan ofJune 28, 1974. Effective Date: September 30, 1974. Closing Date:December 31, 1979.

The loan was fully committed in February 1977, with eleven sub-projects approved by the Bank. Project implementation is satisfactory.

Ln. No. 1078 TSKB (Industrial Development Bank of Turkey): UJS$65 millionloan of January 22, 1974. Effective Date: April 24, 1975. Closing Date:December 31, 1979.

The loan is fully committed and project implementation is satis-factory. Disbursements are nearly complete, although somewhat behind originalappraisal estimates, as a result of difficulties with a few subprojects.

Ln. No. 1130 Corum-Cankiri Rural Development: US$75 million loan of June 23,1975. Effective Date: January 2, 1976. Closing Date: December 31, 1981.

The project is progressing satisfactorily. The project extensionservice and credit components are operating successfully and consultants arebeing engaged. Corum dam has been completed. Kumbaba pumping station andthe associated irrigation networks are nearly completed. Construction of theremaining village centers will be delayed until 1979 while a plan for the useand maintenance of the centers already built is being drawn up. Other civilworks are well underway.

Ln. No. 1194 Second TEK Power Transmission Project: US$56 million loan ofJune 14, 1976. Effective Date: April 21, 1978. Closing Date: December 31,1979.

Procurement action is complete, somewhat behind schedule, and almostthe entire loan is committed. Some deliveries have also been delayed because

- 39 -ANNEX IIPage 7 of 8

of foreign exchange shortages, but this situation is expected to improve, andoverall project implementation and the rate of disbursement should alsoimprove in the coming period.

Ln. No. 1248 Agricultural Credit and Agroindustries: US$54.2 million loan ofMay 5, 1976. Effective Date: May 11, 1977. Closing Date: September 30,1981.

The ferryship component has been implemented, and the two roll-onand roll-off ships purchased under this project and the Fruit and VegetableExport project, are now operating a regularly scheduled service between portsin Turkey and two ports in Italy. Selection of agro-industries sub-loans hasbeen delayed, but some have recently been approved. The Agricultural Bank(TCZB) has introduced improved lending procedures for its ongoing supervisedcredit program, and this component is being implemented satisfactorily. Termsof reference for consultants to carry out the study of TCZB's structure andprocedures are being finalized after considerable delay. At the Borrower'srequest, a cattle-fattening component of the Project, and US$7.7 million ofthe original Loan amount of $63 million, allocated for this purpose, werecancelled on May 5, 1977. Also, as provided for in the Loan Agreement, $1.04million for training was cancelled on December 22, 1977, following approval ofUNDP funds for this purpose.

Ln. No. 1258 Balikesir Newsprint: US$70 million loan of May 21, 1976.Effective Date: October 15, 1976. Closing Date: December 31, 1980.

The project is now proceeding satisfactorily, but due to delays incivil works and procurement is expected to start production in mid-1980,eighteen months behind the appraisal schedule. Erection of machinery andequipment is expected to begin in early 1979 and trial runs about one yearlater.

Ln. No. 1265 Livestock III: US$21.5 million loan of May 26, 1976. EffectiveDate: February 25, 1977. Closing Date: March 31, 1982.

After a slower than anticipated start-up, project implementation isnow satisfactory. Project area offices have been established and are virtuallyfully staffed, with all three consultants on post. Preparation of farm devel-opment plans has been slower than expected; however, substantial numbers ofsub-loan applications have been approved and include a higher proportion thanexpected of small farmers.

Ln. No. 1.310 South Antalya Tourism Infrastructure: US$26 million loan ofJuly 9, 1L976. Effective Date: March 1, 1978. Closing Date: December 31,1982.

Implementation of most project components is satisfactory, withprogress being made in preparation of specifications and project design work.The Project Unit has now been established in the Project Area and appointmentof key staff is being accelerated.

- 40 -ANNEX IIPage 8 of 8

Ln. No. 1379 DYB (State Investment Bank of Turkey): US$70 million loan ofMarch 23, 1977. Effective Date: July 21, 1977. Closing Date: March 31,1981.

Almost half of the loan has been committed, and the remainder isexpected to be committed by mid-1979. DYB has experienced management changesand still has severe staff constraints, which it has in part overcome byrecruitment of additional junior staff. It hopes improved contract termswill enable it to fill more senior positions as needed.

Ln. No. 1430 TSKB XII (Industrial Development Bank of Turkey): US$74.0million loan of June 3, 1977. Effective Date: August 29, 1977. Closing Date:June 30, 1981.

Progress is satisfactory and two-thirds of the loan has been com-mitted. In 1977 and 1978, TSKB essentially reached an agreed target by allo-cating 39 percent of its resources to projects in less developed regions, andexceeded another in its assistance to small and medium-scale labor-intensiveenterprises. TSKB has so far been unable to raise resources in internationalcapital markets as expected because of Turkey's economic difficulties, but theinterest of several financing sources is anticipated once conditions permitrenewed efforts.

Ln. No. 1585 Northern Forestry: US$86.0 million loan of June 5, 1978.Effective Date: October 30, 1978. Closing Date: March 31, 1986.

Project implementation has begun and procurement is underway.

Ln. No. 1586 Livestock IV: US$24.0 million loan of June 5, 1978. EffectiveDate: October 31, 1978. Closing Date: June 30, 1985.

Recruitment of technical specialists for the project and selectionof consultants for the milk industry study are underway.

Ln. No. 1606 Erdemir Stage II Steel: US$95.0 million loan of June 30, 1978.Closing Date: June 30, 1983.

This loan is not yet effective.

Ln. No. 1627 Import Program: US$150.0 million of November 8, 1978.Effective Date: November 16, 1978. Closing Date: June 30, 1980.

In accordance with Schedule 1 of the Loan Agreement a satisfactoryreview of Turkey's export policies and performance was made by the Bank inApril and a determination made to continue disbursements after April 30. Asof June 6, disbursements totalled $53.9 million.

Ln. No. S-13 Bati Raman Engineering: US$2.5 million of November 30, 1978.Effective Date: February 27, 1979. Closing Date: February 29, 1980.

This loan has just become effective. Consultants have beenappointed for the comparative feasibility study, which is under way.

- 41 -

ANNEX III

SUPPLEMENTARY PROJECT DATA SHEET

Section I:: Timetable of Key Events

(a) Government and TSKB Request: September 1978

(b) Appraisal: October 16-27, 1978

(c) Negotiations Completed: May 17, 1979

(d) Loan Effectiveness Planned: October 1, 1979

Section II: Special Bank Implementation Actions

None.

Section III: Special Conditions

1. During 1979 and 1980, TSKB will approve financing of not less than:

(a) $115 million in foreign exchange for export-oriented projects(para. 64 and L.A. 3.07(a)(i));

(b) $90 million in foreign exchange for projects in the lessdeveloped regions (para. 70 and L.A. 3.07(a)(ii));

(c) $50 million in ioreign exchange for projects in the semi-developed regions (para. 70 and L.A. 3.07(a)(iv)); and

(d) $35 million in foreign exchange, and TL 500 million in localcurrency, for SMLI projects (para. 72 and L.A. 3.07(a)(iii)and (b)).

2. $0.7 million of the loan will finance (i) a training program for TSKBstaff in the export aspects of projects, (ii) studies of Turkey'sindustrial export potential, and (iii) TSKB's ongoing program ofresearch studies and project promotion (paras. 66, 67 and 88, andL.A. 2.02(a)(ii), (iii) and (iv)).

3. TSIB will increase the effective cost of its local currency loans asneeded to ensure thaLt its total local currency lending operationsyield a positive spread over the cost of its local currency borrowings(para. 81 and L.A. 3.08).

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