Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-2614-TU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON PROPOSED LOANS TO TURKIYE SINAI KALKINMA BANKASI A.S. AND SINAI YATIRIM VE KREDI BANKASI A.O. WITH THE GUARANTEE OF REPUBLIC OF TURKEY FOR A PRIVATE SECTOR TEXTILE PROJECT August 9, 1979 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit Calendar 1978 July 19791/ US Dollar 1 = TL 24.28 TL 47.10 TL 1 = US$ 0.04 US$ 0.02 1/ Note: This Report and the Staff Appraisal Report have been prepared on the basis of the exchange rate of TL25 US$1.00, which prevailed until Turkey introduced a multiple exchange rate system in April 1979 which was again modified on June 11, 1979. 2/ Except for imports of crude oil, petroleum products and fertilizer raw materials, and exports of agricultural products benefiting from official price supports, for which it is TL 35 = US$1.00. FISCAL YEAR Republic of Turkey March 1 to February 28 TSKB January 1 to December 31 SYKB January 1 to December 31 ABBREVIATIONS CLAs Convertible Lira Accounts EEC European Economic Community LA Loan Agreement LIBOR London Inter Bank Offer Rate SEE State Economic Enterprise SYKB Sinai Yatirim ve Kredi Bankasi A.O. TSKB Turkiye Sinai Kalkinma Bankasi A.S. FOR OFFICIAL USE ONLY TURKEY - PRIVATE SECTOR TEXTILE PROJECT LOANS AND PROJECT SUMMARY Borrowers: Turkiye Sinai Kalkinma Bankasi A.S. (TSKB) Sinai Yatirim ve Kredi Bankasi A.O. (SYKB) Guarantor: Republic of Turkey Amounts: US$65 million and US$15 million in various currencies to TSKB and SYKB respectively Terms: TSKB loan (a) $60.1 million for equipment financing to be repaid substantially in conformity with the aggregate of the amortization schedules for sub-loans, with a maximum repayment period of 15 years. (b) $4.9 million for technical assistance (extension service and technology fund), research and training to be repaid over 7 years including 3 years grace. SYKB loan (c) $14.9 million for equipment financing to be repaid substantially in conformity with the aggregate of the amortization schedules for sub-loans, with a maximum repayment period of 15 years. (d) $0.1 million for training to be repaid over 7 years including 3 years grace. Interest at 7.9 percent per annum. Project Description: The key project objective is to rationalize and modernize the private textile sector by improving sectoral balance, while promoting essential expansion and value added by the sub-sector. Related objectives are to: improve productivity and product quality, lower costs to domestic consumers, improve export competitiveness, induce moderni- zation of equipment, promote exports and input sapply to enhance export quality, and improve the institutional and policy framework for the sub-sector. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - Major components are: (i) $75 million for sub-projects. (ii) $4.5 million for technical assistance ($1.2 million for an extension service providing training and consultancy services, and $3.3 million for a supple- mentary training, technical assistance and technology fund). (iii) $0.5 million for staff training for TSKB ($0.1 mil- lion) and SYKB ($0.1 million) and for TSKB textile research ($0.3 million). To achieve the project objectives, 35-45 firms will be assisted, creating about 5,000 jobs directly. Of these, about 3,000 will meet the urban poverty criterion for capital-intensity. Annual exports worth $25 million are expected to be generated. Up to 160 firms, representing one-third of the sub-sector's capacity, will benefit through technical assistance. The project will develop the DFCs' capability for lending in this sub-sector, and sensitize them and their clients, to environmental problems. For all sub-projects with fixed assets above $2 million and $750,000, respectively, TSKB and SYKB will calculate the ERR, which normally will be at least 15 percent. Project risks are minimal. Achievement of the targets for garments/making up investments and the export targets under the project will depend largely on market constraints abroad. Implantation of the extension service may prove slow. Full use of the technology fund will depend on successful promotion. Steps have been taken to minimize these risks, and the potential benefits justify taking those risks that remain. Estimated Disbursements: -----------$ Million------------ Bank FY 80 81 82 83 84 85 Annual 20.0 30.0 20.0 7.0 2.9 0.1 Cumulative 20.0 50.0 70.0 77.0 79.9 80.0 Procurement: Normal commercial channels, but with comparison of offers from more than one supplier, for the majority of contracts. Adequate international tendering for contracts over $2 mil- lion. Most projects will have allocations around $2 million, with a maximum of $6 million. Appraisal Report: No. 2525b-TU, dated July 27, 1979, issued by the IDF Division, EMENA Region REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON PROPOSED LOANS TO TURKIYE SINAI KALKINMA BANKASI A.S. AND SINAI YATIRIM VE KREDI BANKASI A.O. WITH THE GUARANTEE OF THE REPUBLIC OF TURKEY FOR A PRIVATE SECTOR TEXTILE PROJECT 1. I submit the following report and recommendation on proposed loans to Turkiye Sinai Kalkinma Bankasi A.S. (TSKB) and Sinai Yatirim ve Kredi Bankasi A.O. (SYKB) with the guarantee of the Republic of Turkey, for the equivalents of US$65 and US$15 million respectively, to help finance the rationalization and modernization of the private sector textile industry in Turkey. For the TSKB loan, amortization of US$60.1 million for equipment will conform substantially to the aggregate of the subproject amortization sched- ules, and will not exceed 15 years; amortization of US$4.9 million for tech- nical assistance (an extension service and technology fund), research and staff training will be over 7 years including 3 years grace. For the SYKB loan, amortization of US$14.9 million for equipment will conform substantially to the aggregate of the subproject amortization schedules, and will not exceed 15 years; amortization of US$0.1 million for staff training will be over 7 years including 3 years grace. The interest rate will 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 Executive Directors on 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 Report and Recommendation of the President on the Erdemir Stage II Steel P'roject, dated June 15, 1978.) It also describes the short and medium-term policy initiatives of the Ecevit Government which took power in early 1973, and cautiously assesses economic prospects. A special economic missioin visited Turkey 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 on its findings. Economic Structure and Causes of 1977 Crisis 3. In most respects, the record of Turkish economic development over the last two decades has been good. As the result of a strong commitment to rapid growth and modernization, real output has grown, on average, by more than 6 percent per annum. Laudable strides have also been made towards meeting basic needs in such areas as education, health care, water supply, and rural roads This impressive record has been punctuated (in 1958, 1970 1/ Part I of this Report is virtually identical to Part I of the July 1979 President's Report on the Thirteenth TSKB project. - 2 - and most recently in 1977) by severe balance-of-payments crises. The recent crisis has been the product partly of extraneous factors and partly of the Turkish development strategy itself, which paid insufficient attention to the structural weaknesses of the economy and perhaps exacerbated some of them. 4. The emphasis of successive governments on industrialization doubled the sector's share in total output between 1955 and 1977, but resulted in comparative neglect of agricultural development, already hampered by inappro- priate subsidy and pricing policies. Moreover, although some parts of Turkish industry are efficient, and more have the potential to become so, a strong emphasis so far on sophisticated capital-intensive technology has resulted in high-cost production in certain sectors. Unselective protection against competition from imports has also inhibited the development of an industrial structure well-suited to Turkey's comparative advantages in terms of location, natural resources and labor availability. One important con- sequence of this, has been that Turkey has so far been unable to develop a strong industrial export base, and has relied mainly instead on its tradi- tional agricultural exports (supplemented by workers' remittances) to finance the imports of materials and capital goods needed for its ambitious moderni- zation effort. This pattern of trade has been a fundamental cause of the difficulty which Turkey has periodically experienced in reconciling rapid growth with a viable external payments position. 5. During the world recession of the mid 1970s, unlike many other countries, the average annual real rate of GDP growth in Turkey was 7.2 percent. This includes 1977 when real GDP grew by only 4.4 percent, follow- ing the economic crisis that year and shortages of power, imported inputs and the like. Growth over this period was made possible by rising public sector activity, which provided a stimulus to aggregate demand that more than offset the depressing effect of sluggish exports and the increased outflow of payments for oil and other imports. The growth of output was therefore constrained not by demand, but by supply. Favorable weather and improved inputs led to an average annual rate of growth of agricultural output of about 4.1 percent in the period 1970-77, while industrial output grew at about 9.2 percent--principally as a result of the sustained high level of industrial investment. The general pace of investment in Turkey also did not slacken during the world recession of the mid 1970s. On the contrary, largely as the result of an intensified public investment drive from 1975 onwards, the share of fixed investment in GDP remained around 20 percent during 1973-78. 6. In this period, employment was not at the forefront of development objectives. Unemployment and underemployment were relatively high, totaling about 11 percent of the labor force in 1970 and over 13 percent in 1977. The underlying causes, aggravated by a sharp reduction in the emigration rate since 1973, are a high rate (2.5 percent per annum) of population growth and the adoption of relatively capital-intensive methods of production in the modern sectors of agriculture and industry. The comparatively slow rate of growth of employment has also had an adverse effect on the distribution of income, although basic needs are largely met. The two main causes of this inequality, however, are the large gap between agricultural and non- agricultural labor productivity and the wide dispersion of farmers' incomes. - 3 - 7. During the mid 1970s, Turkey's external trading position deteriorated markedly due to rapid increases in imports of goods. These tripled, in value between 1973 and 1977, reaching $5.8 billion. About half this increase was due 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 was due to a steep rise in the volume of imports. 8. High import demand has been characteristic of Turkey in t:he 1970s, and may partly be a "catching up" phenomenon. In 1970, after a decade of 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 1977, after several years of liberalization of import restrictions, it reached 14 percent. This process was associated with increased imported inputs in agriculture and changes in industrial structure and technology, which rested growth on imported inputs. After 1973, the growth of imports was accelerated by: a fall in the local currency price of imported goods relative to domestic output, due to a rate of inflation which exceeded the international inflation rate by more than the rate of depreciation of the TL against other currencies; an absolute shortage of domestically produced goods; an increase in the share of fixed investment in total expenditure; and a tendency to build up imported stocks in anticipation of devaluation or import restrictions. 9. From 1970 to 1973, rising imports were more or less offset by rapid expansion of exports--particularly manufactured exports such as cotton yarn and fabric, leather products and processed food--and workers' remittances. In value terms, merchandise exports increased from $588.5 million in 1970 to $1,317 million in 1973, or 31 percent per annum. Manufactured exports increased 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 average annual 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 $1,183 million 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, when it reached $1.8 billion, mainly due to rising world prices; in volume terms, they showed no upward trend. Thus by 1977, merchandise exports were only one-third of the imports. 10. The poor showing of exports between 1974-77, is partly attributable to world recession. This not only affected industrial exports; it also depressed Turkish agricultural exports such as hazelnuts, raisins and tobacco, and industrial raw materials like cotton. The difficulties were aggravated by two other factors: (a) agricultural support prices bore little relation to world prices, and thus failed to provide incentives to farmers to increase production of exportable commodities; and (b) this was compounded by a general neglect of agricultural development, buoyant domestic demand for its produce and 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 in her trading partners, which was insufficiently offset by periodic small -4- devaluations of the TL. Consequently, exporting, which had been lucrative in the early 1970s, became less profitable, and potentially exportable production was diverted to a booming and profitable domestic market. 11. The current account balance moved from a surplus of $0.5 billion in 1973 to a deficit of $3.5 billion in 1977, because of a rapid deterioration 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 this has been the restrictions on immigration imposed by Western European countries in the face of growing domestic unemployment caused by the world recession. The rate at which earnings were remitted also fell substantially. This partly reflected the overvaluation of the TL, which induced workers to hold their savings abroad or remit through unofficial channels. 12. The large current account deficit was not matched by an increased inflow of medium and long-term external capital. Turkey had deliberately kept both foreign private investment and private long-term borrowing to a minimum. The gross inflow from official long-term borrowing during 1970-75 stagnated at about $300 million per annum. Initially, this was due to a manageable need for foreign finance, given the tremendous increase in workers' remittances in the early 1970s. Subsequently, it was because of a lack of experience and initiative on the part of successive governments to develop and tap new sources of external borrowing, when faced with a decline in multilateral and bilateral lending on concessional terms. While in 1976 and 1977, long-term loan commitments rose to over $1 billion per annum, disbursements continued to be slow because most loans were tied to specific projects, whose implementa- tion was slow. Consequently, the overall balance of payments moved from a surplus of $0.9 billion in 1973 to a deficit of $2.4 billion in 1977. It was financed by running down the foreign exchange reserves and by various forms of short-term borrowing, which by the end of 1977 totalled $6.5 billion. 13. An important source of short-term borrowing was the Convertible Lira Accounts (CLAs). It provided nearly $2 billion in 1975 and 1976. These are deposits placed with Turkish banks by foreign commercial banks and non- resident Turks, which were guaranteed until last year against exchange rate risk, by the Central Bank. Another major source of finance was short-term suppliers' 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 time deposits from Turkish workers in Germany, offered high interest rates, and made the proceeds available to Turkey. During 1977 however, foreign banks became reluctant to rollover the outstanding stock of short-term debt, and even more reluctant to make further substantial loans. The Central Bank was driven to delaying foreign exchange transfers on a large scale. The resulting substantial accumulation of arrears, made it even harder to obtain new credits. 14. The deterioration in the balance of payments position can also be viewed partly as a reflection of inadequate efforts at demand management and domestic resource mobilization, especially in the public sector. The public sector deficit rose steadily from TL 6 billion (2 percent of GDP) in 1973 to TL 77 billion (9 percent of GDP) in 1977. This occurred despite a creditable tax performance and was mainly due to a deterioration in the - 5 - financial position of the State Economic Enterprises (SEEs), and in particular of the operational SEEs which dominate the transport and energy sectors and account for half the output 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 suEficient purchasers for government bonds. 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 enough 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 t:he 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 oE 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-tenn 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 trade 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, petroleum products and sugar were increased by 80 percent. All price in- creases together were expected to add TL 54 billion to SEE revenues in a full year. The Government also substantially raised the stamp duty on - 6 - imports, and proposed to the Parliament, a number of other tax revenue mea- sures, including a large increase in motor vehicle, income, corporation and municipal taxes, as part of a broader set of measures designed to enhance the efficiency and equity of the fiscal system. To control public sector expendi- tures, especially investment, it decided to concentrate on the completion of existing projects and cut back on new projects, except in the bottleneck energy and ports sectors, and for exports and such basic imported commodities as steel and fertilizers. In these ways, the Government aimed to markedly reduce public sector deficits and public sector borrowing from the Central Bank. In conjunction with other limits on Central Bank lending agreed with the IMF, these were expected to reduce the rate of growth of the money supply and 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 stabilisation measures, the results were mixed. The consolidated budget deficit in 1978 is officially estimated at about TL 34 billion, compared with TL 48 billion in 1977. 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 sharply in 1978, even at the end of the year, the rate of inflation was around 50 percent per annum. Money wages also increased at an annual rate of over 50 percent, despite the Government's "social contract" with the largest trade union federation in July 1978. 19. To discourage imports and stimulate exports further, the TL was devalued against the dollar three times between September 1977 and March 1978, by a total of about 50 percent. In addition, it drifted downwards with the dollar against other currencies. The effect of this devaluation on imports was 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 give priority to imports of materials and spares needed to maintain, as far as possible, output from existing installed capacity. This, together with the shortage 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 $5 billion figure envisaged under the April 1978 Standby Agreement. 20. As regards exports, the effects of the devaluations were partly offset by a reduction in April 1978 of export rebates. In July 1978, these rebates were increased again. As an additional financial incentive, the Government accorded priority in the allocation of foreign exchange for the purchase of imported inputs for export production and that of essential goods for domestic sale. Exporters have also been given special permission to finance their import requirements through acceptance credits. The degree of priority accorded to exporters in the allocation of domestic credit through the banking system was increased, as were the interest rate rebates on domestic borrowing by exporters. An inter-ministerial Export Coordination Committee set up to resolve the problems faced by exporters, has succeeded in simplifying some export licensing and registration procedures. Export targets have been set for SEEs and Agricultural Sales Cooperatives. The Government took prompt steps to earn foreign exchange by disposing of large existing - 7 - stocks 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 improve competitiveness through exchange rate adjustments. In response, the value of exports rose by 28 percent in 1978 to around $2.25 billion. But this was below the $2.6 billion anticipated in the Standby Agreement. 21. With these developments in foreign trade and a marginal decrease in worker remittances over the 1977 level, current account deficit dropped markedly 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 Standby Agreement. This substantial reduction, achieved mainly by severe curbing of imports, and vigorous efforts to raise fresh medium and long-term funds along with the rescheduling of existing debt (para. 23) led to an improved balance of payments position. Nevertheless, the overall 1978 deficit is estimated at about $900 million, some $150 million more than that envisaged in the Standby Agreement. On a net basis, it was financed by $180 million in IMF drawings (para. 22), $340 million in petroleum and Eurodollar loans, $145 million from the 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 Witteveen Facility was not in operation, Turkey was eligible to draw up to 150 percent of 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 renewed dis- cussions between the Government and the IMF concerning short-term economic developments and prospects. Further discussions with the IMF to revise the stabilization package in light of developments since April, prior to the release of the remaining tranches of about $252 million, took place in December. 23. Since April 1978, Turkey has taken steps to cope with its large stock of short-term debt ($6.5 billion at the end of 1977). The exchange rate guarantee on new CLAs with a maturity under one year was removed, stemming new inflows of these deposits. It also secured, from the members of the OECD Consortium for Turkey, a rescheduling of approximately $1.2 billion in interest and principal payments falling due between January 1977 and June 1979, on public bilateral debt and private debt guaranteed by bilateral export finan- cing agencies. The terms were 2 years grace followed by 4 years to repay for short maturities, and 3 years grace with 5 years repayment for longer-term maturities; the interest rates were to be negotiated bilaterally. Bilateral agreements 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, to consolidate about $3.0 billion of outstanding short-term liabilities (includ- ing most of the CLAs, arrears on CLAs, reimbursement credits and banker's credits) into obligations with a maturity of 7 years, including 3 years of 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 ongoing - 8 - discussions with the IMF have been completed. While all these efforts have eased the debt servicing burden for 1978 and 1979, it will cause a substantial bulge in debt service payments in the early 80s. 24. Concurrently, the Government pursued new sources of medium and long-term external finance, including the Middle East. In response to this initiative: Germany provided program credits of $75 million and project credits of $72 million; the US, Austria and Belgium provided program loans totalling $70 million; Libya provided a program credit of $100 million and another $300 million spread over five years to finance oil imports; Iran provided a short-term credit of $150 million for oil imports; an agreement was also signed with the Saudi Fund for $250 million in project aid; Austria, Norway and Finland provided project credits; trade agreements were signed with Romania, Bulgaria and U.S.S.R. Another indication of Turkey's change of direction in seeking external financing vigorously, is the engagement for the first time of internationally-reputed investment firms to assist in the rescheduling exercises and the tapping of new sources of private capital in Europe and U.S. As a first step, in conjunction with the commercial bank rescheduling, a fresh loan of about $400 million from a group of banks was envisaged, with disbursement contingent on a new Standby Agreement. 25. The discussions begun in December 1978 between Turkey and IMF on a revised stabilization program were interrupted because of difficulties in reaching agreement on certain important policy issues. They have since been resumed (see para 27). The discussions focussed on the need to continue the austerity measures initiated in early 1978 and to strengthen efforts to cope with excessive monetary growth, sagging SEE finances and the high inflation rate. It is evident that progress in these areas is complementary to stricter control of imports, tight control over short-term borrowings and the growth of arrears, and the continuation of foreign trade policies and measures directed to improve the balance of payments position further. 26. Against this background, adopting the pattern followed in early 1978, the Government announced its revised stabilization program in mid-March 1979 and amplified it further in early April. To improve the financial position of SEEs, increased prices of sugar (34 percent), iron and steel (41 percent), cement (63 percent), gasoline (84 percent), fuel oil (80 percent), diesel fuel (82 percent) and kerosene (110 percent), were announced. These prices 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 significantly reduce the SEE deficits, despite inflation in costs and wages (although the latter 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 6-12 months, to 24 percent for those between 3-4 years; in addition, the repatriated savings of migrant workers will receive an interest premium of 10 percentage points (15 points for deposits above 3 years). The interest rates for medium and long-term loans have been considerably increased: in the - 9 - agricultural 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 in industrial and other sectors from 16 to 20 percent. There is no ceiling in respect of loans extended by development and investment banks using funds acquired 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 Til 26.5 = US$1. Pari passu, a multiple exchange rate regime was introduced for the first time, under which a more favorable exchange rate with a premium of 40 percent (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 took place 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 officially sanctioned, but still limited, parallel market in respect of manufactured and mineral exports. Specifically, Turkish industrial exporters could retain 50 percent of their foreign exchange earnings and either use this to finance their own import requirements or transfer it to other industrialists, at what- ever price it fetched. All these measures announced in April went in the desirable direction, although it was clear that further adjustments in the exchange regime would need to be introduced in due course to correct the over-valuation of the official exchange rate. Following a meeting in Zurich between the IMF Managing Director and the Turkish Finance Minister, an IMF mission visited Turkey between late April and mid-May, and then resumed talks in Paris in early June following the OECD-sponsored pledging session there on May 30. Agreement on a new Standby Arrangement has since been reached with the IMF, and it was approved by the IMF Board on July 19. Under that Arrangement, the IMF will provide a total of $329 million, $92 million of which has been released following the Board approval, and three further tranches of $79 million each in late November 1979 and late March and late June 1980. 28. The above-mentioned pledging session was also a successful one. Subject to an early standby arrangement with the IMF (previous paLra.), various Governments pledged a total of $661 million special aid, and $245 million in special export credits, and agreed to consider a further rescheduling of official bilateral debt and guaranteed export credits, to ease the debt service burden in the coming years. The OECD Consortium for Turkey met from July 23 to 25 for the latter purpose. Debt service up to July 1980 on official bilateral debt and guaranteed export credits totaling some $800 million has been rescheduled, on terms of 7 years, including 3 years grace on short-term debt and 9 years, including 4 years grace on medium-term debt. Meanwhile, the agreement with the IMF triggered the signing on July 12 of new commercial bank loans of $406 million (para. 24), to be followed in August by an agreement rescheduling the outstanding short-term liabilities owed to the commercial banks. On June 11, Turkey again revised the multiple exchange rate system introduced in April, and devalued the TL further to TL 47.1 - US$1, with a rate of TL 35 = US$1 for imports of crude oil, petroleum products and fertilizer raw materials, and exports of agricultural products benefiting from - 10 - official price supports. Other complementary measures have been and will be taken in accordance with the Government's program being supported by the Standby Arrangement. 29. For 1979, projections of the balance of payments can only be tenta- tive. However, based on cautiously optimistic assumptions concerning exports, worker remittances and capital inflows, and taking into account the recent increases in international oil prices, the realization of a volume of imports similar to that achieved in 1978 would entail a foreign exchange gap of about $1.5 billion. Medium-Term Policies and Prospects 30. The Fourth Plan was approved by the Turkish Parliament in November 1978. Its important feature is the strong emphasis on the balance of payments and in particular, on the promotion of exports. The export thrust is one of the cornerstones of Government's medium-term development strategy, whose success will be crucial to the restoration and maintenance of Turkey's credit- worthiness in the medium-term future. 31. The Government's objective is to increase the volume of merchandise exports by a factor of almost two and a half between 1978 and 1983. This implies a real export growth rate averaging around 18 percent per annum during the Plan period. This is expected to be achieved broadly, in the following manner. The volume of agricultural exports is expected to grow at an annual rate of 6 percent, and that of manufactured products by an average annual rate of over 30 percent starting from about $700 million in 1978. About 40 percent of the latter is expected to come from food and beverages, textiles and clothing, and leather products; another 40 percent from intermediate goods such as rubber and plastics products, chemicals, cement, glass and ceramics, and basic metals; the remaining 20 percent is expected to consist of consumer durables, capital goods, and other products of the metal-working industries. 32. Preliminary Bank projections suggest that the share of unprocessed agricultural and mined products in total exports is likely to be higher than envisaged in the Plan, and that the overall export target, though ambitious, is feasible, provided that the present widespread commitment to export growth continues to be translated into appropriate policies. In addition, the Government intends to study the effects on export incentives of the existing system of protection, with a view to making appropriate changes when the balance of payments situation permits; and it has already begun to bring the relative support prices of different agricultural commodities more closely into line with relative world prices. There will also be a drive to increase invisible exports, particularly earnings from transportation, tourism and civil engineering contracts abroad. 33. The other Plan targets include an average annual real GDP growth rate of 8 percent, which seems overly optimistic, especially in view of the 3-4 percent growth rate achieved in 1978, and the prospect of a similar performance in 1979. Efforts not to allow unemployment to increase over the 1977 level, is now - for the first time in any Plan - a specific development - 11 - objective. Real fixed investment is expected to grow at an average annual rate of 12 percent (27 percent allocated to industry, 27 percent to energy and transportation and 12 percent to agriculture). Gross domestic savings are expected to rise from 16 to 22 percent of GNP, implying a marginal savings ratio of 35 percent, which seems over-optimistic in view of the experience of the last two Plan periods, in which the realised marginal savings ratio was only 12 percent, largely due to poor savings performance in the public sector. Significantly, in the Fourth Plan, the main contributor to the rapid growth of savings is expected to be the public sector, whose revenues are expected to increase in real terms at an average annual rate of 12 percent, compared with a real growth rate of 9 percent for public consumption. Possible Outlook for the Future 34. If the export drive is successful and imports are appropriately restrained, and assuming significant growth of workers' remittances as a result of the recent exchange rate changes and interest rates for remittances, it should be possible, despite the increasing burden of interest charges on rescheduled debts, to keep the balance of payments current account deficit to an average of about $1.5 billion dollars per year during the Plan period. To finance such deficits and amortize the considerable external debt, it will also be necessary for Turkey to continue its efforts to achieve a much higher level of medium and long-term borrowing than in the past, both in commitment and disbursement terms. But this depends on the assessment of Turlkey's creditworthiness, which in turn hinges on a successful export effort and careful debt management. 35. The extensive short-term borrowing of 1975-77 greatly increased Turkey's external debt, adversely affected its previously rather attractive maturity structure, and caused a sharp rise in debt service payments. At the end of 1978, total external indebtedness amounted to approximately $13 billion. Of this, $5.5 billion was medium and long-term debt. About one- fourth of it was held by international organizations, mainly the Bank ($836 million, 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 various sorts. If the consolidation arrangements finalized with the commercial banks and creditor countries are fully implemented, about $4.1 billion of short-term debt will be converted into medium and long-term debt. To summarize, these consolidations consist of: (a) about $3.0 billion to be rescheduled by commercial banks (para. 23); (b) guaranteed suppliers credits of about $700 million 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 CMEA countries; and (d) refinancing of $350 million of oil credit owed to Iraq. 36. Turkey's debt management initiatives should help restore a more attractive maturity structure to the external debt, by transforming a good portion of the short-term liabilities into medium-term obligations. However, a relatively high debt service ratio over the medium-term must be anticipated as a result of the large short-term debts and the rather hard terms available - 12 - to Turkey. In 1977, debt service payments, including interest on short-term debt, amounted to 20.2 percent of exports of goods, non-factor services and workers' remittances. In 1978, after making allowance for the rescheduled service payments, this ratio is estimated to have risen to around 25 percent. In subsequent years it will increase further, since Turkey has to take on new borrowings to maintain sound economic growth. Taking these factors into account, the debt service ratio is likely to peak in the early 1980s to a high level of about 40 percent, before it begins to decline. This, however, should represent the culmination of the financial consequences of the present crisis and 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, Turkey continues to have a substantial capacity to service long-term borrowing, and remains creditworthy for such financing. PART II - BANK GROUP OPERATIONS IN TURKEY 37. Prior to 1970, Bank Group assistance was limited and intermittent. However, the success of Turkey's 1970 stabilization program, permitted larger and continuing lending. To date, the Bank/IDA have lent $2,034 million for 57 projects. Agriculture accounts for 29 percent of the funds lent, indus- try and DFCs for 36 percent, power for 19 percent and urban development, transportation, education and tourism for the rest. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of June 30, 1979, with notes on the execution of ongoing projects. 38. Implementation of private sector projects has been satisfactory. But in the public sector, political uncertainty, limited coordination among agencies and staffing problems have resulted in uneven and delayed project implementation. Therefore, a system of joint project reviews between Turkey and the Bank was instituted in June 1975. Since up to end 1977, these resulted in 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 Bank projects. This team set up procedures for monitoring and achieving realistic implementation and disbursement targets, and reviewed possible changes in sector policy covenants which because of Turkish laws and practices con- strained effective project performance. As of January 31, 1979, disbursements increased to 72 percent of appraisal estimates against 51 percent in June 1975. A further successful implementation review was held in April. The encouraging progress and constructive cooperation which has now become mani- fest allow cautious optimism that performance will gradually improve further, permitting expansion of the Bank's lending. 39. Bank lending is now aimed at supporting Turkey's efforts to improve its: (a) capacity to earn or save foreign exchange, through promotion of industrial and agro-industrial exports; (b) income distribution, employment - 13 - opportunities 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) infrastructure posing bottlenecks for development. The Bank has begun discussions with the Government on how its lending can best contribute to the new Plan's objectives, especially export promotion, without being handicapped by past policy and institutional obstacles. Meanwhile, agriculture and industry remain the key sectors for lending. In agriculture, projects emphasize livestock,, exports, and rural development; in industry (including DFCs), the emphasis iLs on promotion of exports and employment, as also the gradual strengthening of the SEEs. Projects for urban development, public utilities and transportation supplement these efforts. 40. A thirteenth TSKB project was approved by the Executive ])irectors on July 12, 1979. Other projects likely to be presented this fiscal fear include an engineering loan to assist the alleviation of air pollution in Ankara, public sector textiles modernization, a fifth livestock and second fruit and vegetables projects, besides a second import program loan. Projects being processed for later consideration include: the first livestock products, rural development, and fertilizer production projects, besides those for transport and sewerage development in Istanbul, pilot secondary oil recovery, employment generation in selected cities, pulp and seed production. 41. At the end of 1978, the Bank Group's share of Turkey's medium and long-term external debt (outstanding and disbursed) was 15 percent. Its share of estimated total external debt (including short-term obligations) was about 7 percent. The gradual conversion of much of the short-term debt into medium and long-term debt, will cause the Bank's share of medium and long-term debt to fall sharply to around 10 percent by 1980. Thereafter, assuming the cur- rently projected increase in Bank lending, the share would increase. The Bank's share of service payments on medium and long-term debt is expected to follow a similar path, dropping from 12 percent in 1977 to about 8 percent in 1980, but rising thereafter. 42. IFC has invested in the production of synthetic yarns, pulp and paper, glass, aluminum, iron and steel products, motor bicycle engines, piston rings and cylinder liners, and tourism. It has also invested in TSKB. As of June 30, 1979, gross IFC commitments totalled $206 million, of which $102 million were still held by IFC. Additional investment opportunities are being pursued. PART III - THE TEXTILE AND CLOTHING INDUSTRY Past Performance 43. Textiles and clothing has always been the largest manufacturing industry in Turkey. Value added has grown by a rapid 10 percent annually until recently. Over 90 percent of output goes to meet domestic demand. In 1976, the organized sector (establishments with 10 or more workers) accounted - 14 - for 20 percent of manufacturing investment, 16 percent of production and value added, 24 percent of employment and 45 percent of exports. Sumerbank, a SEE, controls 28 large plants producing 15-20 percent of the industry's output. The balance 80 to 85 percent is in the private sector, of which about 82 percent in cotton textiles. The organized private sector includes 1,400 establishments employing 200,000 workers, 73 percent in some 200 large plants. In addition, 8,000 establishments in the unorganized private sector employ another 100,000 persons. 44. The industry's main raw material--cotton--accounts for two-thirds of fiber consumption, and is in adequate domestic supply for the foreseeable future. The wool segment, which uses local and imported merino wool, has recently been hampered by shortages of imported inputs. Man-made fiber production is small, protected, inefficient and expensive. The range and supply of local fabrics of acceptable price and quality for use in exports is limited. Local accessories need significant quality upgrading for use in exported goods. Some textile machinery is produced in Turkey. 45. Despite its essentially domestic orientation, textiles and clothing has also become Turkey's largest export industry. Exports have expanded ten- fold since 1970, to $266 million, or 15 percent of merchandise exports, in 1977. Cotton yarn earned $160 million, grey cloth $20-25 million, and garments $60 million. Since 1977, however, exports have stagnated due to continued growth in domestic demand, uncertainty about export opportunities (para. 51), and pricing problems. The EEC imports about 80 percent of the total. Turkey's share of EEC imports ranges from 22 percent in cotton yarn to about 1 percent in cotton fabrics and garments. Turkey's share of Middle Eastern textile imports is small, mainly because of the concentration hitherto on yarn exports. 46. Private sector textile investment increased tenfold in real terms between 1965 and 1974, particularly in spinning, tripling the capital/labor ratio and labor productivity in the industry. Subsequent adverse economic developments, excess capacity in spinning and later, the general scarcity of foreign exchange, have reduced investments to negligible levels since 1977. Profitability fell sharply after the early 1970s, because of over-capacity in spinning and declining prices for yarn exports. It has improved somewhat since 1976, as the investment pause has allowed some increase in capacity utilization. 47. The industry needs rationalization, balancing, increased efficiency, and capacity expansion in some segments, to continue its leading role and increase its competitiveness abroad. The over-investment in cotton spinning has led to unnecessarily low capacity utilization and sectoral imbalance, and the only additional such investment required is for higher quality (combed and doubled) finer yarns and sewing thread. Some cotton looms need to be replaced and, with demand growth, weaving capacity is becoming a bottleneck. Some 25- 30 percent of dyeing, printing and finishing equipment also requires replace- ment; in printing, perhaps as much as 70 percent. There are regional shortages of finishing capacity, and a national shortage of drying machine capacity. The knitting segment must meet the growth of demand and its shift from woven - 15 - to knitted fabrics. Woolen spinning has stagnated; it needs modernization, as does wool weaving. Garments/making up is relatively undeveloped. Sub-Sector Strategy 48. Turkey has a comparative advantage in textiles, given its energetic private sector, proximity to the EEC, Middle Eastern and African markets, substantial domestic cotton production, and established textile industry. Wage levels were only 20-40 percent of EEC levels in 1977, offsetting lower productivity. In garments, where highly productive labor-saving t:echnology has not yet been developed, Turkey's advantage is even more pronoumced. 49. A broad view of sub-sector strategy involves the market prospects, investment requirements, technical assistance needs and the policy and orga- nizational framework. The Fourth Plan document's strategy for thle industry is generally sound. In the public sector, it emphasizes modernization, reorga- nization and specialization. A separate Bank project, under preparation, will assist Sumerbank. For the private sector, the strategy is to discourage spinning expansion, promote the production of textile inputs and textile machinery, and increase exports. The Plan's quantitative targets; are optimistic, but realistic output growth should permit continued self-sufficietncy as well as increased exports. It will require both new investment and irmprovements in efficiency in the private sector. The major objective is to rationalize and balance this part of the industry, to increase its productivity and encourage exports as much as market constraints permit. Future Demand Prospects 50. Based on past trends, the Fourth Plan projects a 9.5 percent per annum increase in the value of production. However, the proposed project is based on the more realistic assumption of 5-6 percent per annum growth, reflecting current constraints on demand and resources. Over 80 percent of the increase in demand will be met by the organized private sector. Domestic demand growth will continue to provide the main opportunity for efficient expansion of the industry. 51. The Plan also projects that textile exports can nearly triple by 1983, and garment exports grow by 24 percent per annum. However, this fails to reflect recent EEC agreements with over 30 countries, to limit its textile and clothing imports for five years. Cotton yarn and fabrics are classified by the EEC as "highly sensitive" products and imports are restricted to roughly the 1976 level. Almost all Turkey's garment exports are classified as "sensitive" or "highly sensitive", and more than half have been restricted. Exports of restricted items will grow between 1.5 and 4 percent per annum through 1980. It is however assumed that the EEC will relax its restrictions after its review in 1980, with particular benefit to countries such as Turkey with which it has preferential relationships. Nevertheless, Turkey's large share of EEC cotton yarn imports makes it unlikely that its exports can grow much. On the other hand, fabric exports can grow at 5-6 percent per annum. Exports of the restricted garment items can grow at 6 percent per annum after 1980. Exports of unrestricted items (in which - 16 - Turkey's EEC market share is less than 1 percent) are projected to grow at 14 percent per annum throughout the period. Turkey should also be able to find export outlets elsewhere. The value of garment exports to Middle Eastern and African markets can grow by 15 percent per annum through 1983, and thus total garment exports by 13 percent. Total textile and clothing exports are pro- jected to grow at 8 percent per annum, from an estimated $240 million in 1978 to $345 million in 1983. Investment Needs and Financing 52. Investment requirements for 1980-82 for the organized private sector are estimated at over $800 million, about half in foreign exchange. This assumes some increase in the productivity of existing equipment and a catching-up element, given the investment hiatus since 1977. The largest requirements are in weaving (45 percent), dyeing/printing/finishing (22 percent), and garments/ made-up articles (17 percent). About one fifth is for modernization. 53. The local currency portion is expected to be financed by sponsors, commercial banks and the two project intermediaries (para. 62). The latter will provide $75 million in foreign exchange from the proposed loans, and around $15 million from other resources. The remainder is expected to come from sponsors, commercial banks and supplier credits. The identification of external financiers is necessarily tentative in Turkey's present economic situation. However, the proposed project addresses the sub-sector's priority needs and does not depend on all desirable investments being made. Technical Assistance Needs 54. Even the few larger garments firms with modern equipment, have productivity only some 40 percent of European levels. This is due to short production runs, unsuitable premises with poor layout, organization and work methods, and no cost control. Garment firms are inexperienced in export marketing. Except for a few well-run mills, even textile firms with modern equipment have a lower productivity than in Europe. While the booming and protected domestic market provided little incentive for improvement hitherto, and input shortages were beyond management control, other problems involve production management and engineering, preventive maintenance, and cost and quality controls. They arise primarily from inadequate training of super- visors and middle managers. 55. The available sources of technical assistance are inadequate. Formal educational institutions include the textile faculty of Ege University in Izmir, a school for textile technicians, and a recently established school for garment operatives. Sumerbank's Textile Training and Research Center has so far been of limited help to the private sector. TSKB provides practical advice to its clients. For garments, most training is on-the-job. Foreign marketing partners usually limit their assistance to meeting buyer specifica- tions. Equipment suppliers provide important, but limited, services, while few foreign consultants have been employed because of the lack of market incentives, high costs and the foreign exchange shortage. - 17 - Policy Framework 56. Until 1978, virtually all segments of the textile industry quali- fied for Certificates of Encouragement, which provided for accelerated depreciation, exemption or deferral of customs duties on equipment, conces- sional interest rates and reduced income tax. The Certificates have recently been used to help mitigate regional disparities and foster exports. However, they have not effectively guided investment. Also, by reducing the cost of capital, they may have favored capital-intensive technology. The incentive schedule for 1979 substantially limits eligibility for customs duty conces- sions and accelerated depreciation, which should correct much of tbhe capital- intensity bias. It also encourages modernization and emphasizes exports. These changes, in line with macroeconomic policy, will reduce the profit- ability of most domestically-oriented investment, and could therefore curtail total sector investment somewhat. However, its composition is expected to correspond more closely to current priorities. 57. The industry benefits from the general export incentives described in Part I. The most effective specific incentive is the export rebate, which ranges from 5 percent of export value on cotton yarn to 20 percent on garments. 58. Several related understandings were reached to ensure a consistent future policy framework. The Government will inform the Bank annually of the prevailing investment incentives affecting the private textile indlustry. In light of the information provided by the Government, it and the Bank will exchange views on the adequacy of the incentives, at the request of either party. TSKB will estimate semi-annually the impact of the prevailing export incentives on at least four representative garment products currently exported. The dialogue on incentives will also include the prevailing export incentives, mainly as they apply to garments. PART IV - THE PROJECT Project History 59. The rationalization and export potential of the private textile in- dustry was identified in the Bank report entitled "Export-Oriented Industries and Small-Scale Industries in Turkey" (No. 1359-TU, dated August 17, 1977) distributed to the Executive Directors. The proposed project was thereafter identified in depth in November 1977, prepared by TSKB and SYKB with Govern- ment participation, and appraised in October-November 1978. Negotiations were held in Washington in July 1979 with a delegation including Mr. 0. Eroguz, General Manager of TSKB, Mr. 0. Altan, General Manager of SYKB, and Mr. A. Yoruk of the Embassy in Washington representing the Government. Project Objectives and Description 60. Since 1971, the Bank has provided about $30 million for private textile subprojects accounting for about 20 percent of loans to TSKB, and IFC, - 18 - a further $11 million. The proposed FY80 projects for private and public sector textiles involve a unified and consistent approach to rationalize the industry for the first time. The proposed project for the private subsector aims to: (i) rationalize and improve the structural balance of the industry, to promote viable expansion and value added; (ii) improve productivity and quality, to reduce costs and improve overall competitiveness; (iii) induce modernization of equipment; (iv) promote exports and ensure a domestic supply of inputs for exports of adequate quality; and (v) improve the institutional and policy framework. This is however the first project of its type in the Bank and hence its design and detailed arrangements are somewhat unusual. 61. The proposed project will channel $80 million in foreign exchange to private sector textile firms, through two direct loans to financial intermediaries (DFCs): $65 million to TSKB and $15 million to SYKB. From this total, $75 million will finance high priority subprojects in different segments of the industry, especially weaving, garments, knitting, and dyeing/ printing/finishing, submitted by December 31, 1982. Another $4.5 million will finance two technical assistance programs administered by TSKB: (i) $1.2 million for an extension service in industrial engineering and assistance in export marketing; and (ii) $3.3 million for complementary training, technical assistance and technology transfer from abroad. The remaining $0.5 million will finance TSKB and SYKB staff training, and TSKB's textiles research (para. 66). Project details are provided in the Loans and Project Summary and Annex III to this Report, and in the report entitled "Turkey - Staff Appraisal Report on a Proposed Private Sector Textile Project" (Report No. 2525b-TU, dated July 27, 1979) being distributed separately to the Executive Directors. Role of the Financial Intermediaries (DFCs) 62. Since direct Bank lending and technical assistance to a large number of firms are impractical, intermediaries are needed. Such intermediaries, dealing extensively with textile enterprises, are available in Turkey, namely, TSKB and SYKB. Their lending for subprojects will be integrated wherever possible with technical assistance. Agreed procedures will ensure that both DFCs' clients, as well as other firms, benefit from technical assistance. The objectives, structure and interdependence of the project components will require TSKB and SYKB to cooperate closely. They therefore agreed to sign a protocol satisfactory to the Government and the Bank, outlining their coopera- tion in the textile subsector, as a condition of effectiveness of the proposed loans; an understanding was reached on the main elements to be included, and the DFCs agreed to consult the Government and the Bank before amending the protocol (TSKB LA 3.11 and 6.01, SYKB LA 3.10 and 6.01). Such consultation is considered necessary given the first-time nature of this project, to retain room for flexibility and to learn from experience gained. 63. TSKB has become a leading authority on textiles through past lending (16 percent of commitments in 1975-78) and extensive research. Its staff includes 10 textile specialists. It is capable of undertaking the planning, appraisal and technical assistance roles proposed for it. It is a sound financial institution. However, the sizeable recent devaluations have caused large increases in TSKB's foreign debt when expressed in Turkish lira. This, - 19 - in turn, has carried its debt-equity ratio well beyond the 10: 1 maximum agreed under the recently approved TSKB XIII project. TSKB's shareholders have there- fore advanced the ongoing capital increase from TL 425 million to TL 1,500 million. TSKB has invited subscription (which under Turkish law requires 25 percent to be paid-in), and intends to complete it by September 15, 1979. IFC is seeking its Board's approval to participate. Agreement was reached that the capital increase will be fully paid-in by December 31, 1979 (TSIB LA 4.07); and that the debt-equity ratio will not exceed 10:1 on and after December 31, 1980 (TSKB LA 4.06). An understanding was also reached that, if the demand for TSKB's loans is such that the ratio will not be restored by December 31, 1980, TSKB would take steps, in consultation with the Bank, to increase its equity base further as needed. 64. The latest OED report on TSKB is the Project Performance Audit Report on TSKB IX and X (SecM77-92, dated February 11, 1977). It drew atten- tion to the negative spread on TSKB's domestic borrowings, due to the interest rate structure which constrained resource mobilization. This problem was resolved under TSKB XIII, through agreement that TSKB will review its local currency lending rate annually with the Bank, and adjust it as permitted by prevailing legislation, so as to achieve a positive spread on average between the cost of borrowed local currency funds and local currency lending rates, to the satisfaction of the Bank. 65. SYKB, an experienced DFC with new dynamic management, will receive its first Bank loan through the proposed project. It has also financed textiles extensively (25 percent of approvals through 1978). Its clients are firms smaller than those of TSKB. It is capable of carrying out the planning and appraisal roles proposed for it. Its institutional and financial situa- tion is currently satisfactory. SYKB agreed to submit its consolidated Statement of Policies by December 31, 1979 for Bank approval and promptly adopt it thereafter (SYKB LA 3.12). Also, in view of the projected growth of its operations and their changing nature, SYKB agreed to: (i) increase its present paid-in share capital of TL 100 million by at least TL 300I million by January 1, 1980 (SYKB LA 4.11(a)); (ii) prevent its debt-equity ratio from exceeding 7:1 (SYKB LA 4.06); and (iii) allocate 5 percent of annual net income to build up provisions, hitherto low because of a conservative lending policy, to 2 percent of portfolio (SYKB LA 4.11(b)). 66. Despite the DFCs' textile expertise, their staff need training in the export aspects of textile sub-projects. TSKB has therefore agreed to add to its general export training program under TSKB XIII, the specific require- ments for textiles (TSKB LA 3.01(a)(v)). The estimated foreign exchange cost of $100,000 will be financed from the proposed loan to TSKB. SYKB has agreed to a similar program (SYKB LA 3.01(a)(ii)). Its estimated foreign exchange cost of $100,000 will be financed from the loan to SYKB. An understanding was reached that the DFCs will cooperate closely on training and combine programs and facilities where feasible. TSKB has also agreed to continue its textile research (TSKB LA 3.01(a)(iv)), focussing on: (i) productivity; (ii) export markets; and (iii) the impact of export incentives (para. 58). An understanding was reached that studies of the manufacture of textile dyes and textile machinery in Turkey will also be eligible. The estimated foreign - 20 - exchange cost of $300,000 will be financed from the proposed loan to TSKB. Agreement was reached that Bank approval would be obtained for: (i) detailed outlines of the training programs and an outline of the studies; (ii) technical assistance agreements with collaborating institutions; and (iii) the qualifica- tions, experience and terms of reference of technical assistance staff, prior to disbursements on these programs (TSKB LA 3.09 and SYKB LA 3.08). Project Financing and Eligibility Criteria 67. The $75 million equipment component will finance nearly 20 percent of the private textile industry's projected foreign exchange requirements for investment, during the expected commitment period (1980-82). It will be divided 4:1 between TSKB and SYKB, reflecting the relative sizes of their current and projected overall and textile operations. The DFCs agreed that any additional textile projects they may finance in 1980-82, will meet the same eligibility criteria (paras. 69 and 70) (LAs 2.03(a)(iii) and (b)(i) and Schedule 3, TSKB LA 3.10 and SYKB LA 3.09). 68. The agreed minimum targets for financing in each segment of the industry (LAs 3.07(b)) emphasize: (i) garments and knitting, which are undeveloped and have important urban employment, as well as export, potential; and (ii) weaving and dyeing/printing/ finishing, which require modernization and expansion to overcome bottlenecks and imbalances. An unallocated amount of $13 million will provide flexibility in implementation. TSKB SYKB Total Share -------$ Million------- % Garments/Making up and Knitting 14.0 3.0 17.0 27 Weaving 16.0 4.0 20.0 32 Dyeing/Printing/Finishing 13.5 2.5 16.0 26 Spinning 4.5 1.5 6.0 10 Accessories and other 2.0 1.0 3.0 5 Total Allocated 50.0 12.0 62.0 100 Unallocated 10.1 2.9 13.0 TOTAL 60.1 14.9 75.0 69. Investment financing and technical assistance will be linked. The DFCs agreed to appraise the efficiency of the existing operations of all proj- ect sponsors. They have also agreed that they will require these sponsors to achieve reasonable improvements which the DFC identifies and judges feasible according to a timetable, and to obtain technical assistance if the DFC judges this necessary (LAs 3.02(a)(vii), TSKB LA 3.10(b) and SYKB LA 3.09(b)). Bor- rowers may use the technical assistance component for this purpose. Priority in equipment financing will be given to firms that have used the extension service (paras. 77-80). 70. Agreement was reached on the following eligibility criteria for sub- projects reflecting the needs described in para. 47 (LAs Schedule 3). In - 21 - garments and knitting, priority will be given to directly exporting projects, but any viable project in these undeveloped areas will be eligible. Spinning projects will only involve: (i) modernization or bottleneck removal in wool; (ii) quality and product upgrading projects that are export-oriented (as defined in para. 72); or (iii) export quality inputs to garment exports. Weaving projects will not just increase capacity, but also involve: (i) modernization or bottleneck removal; (ii) forward integration of an under- utilized spinning mill; (iii) export-orientation as defined; or (iv) export quality fabrics for garment exports. Dyeing/printing/finishing projects are likely to be associated with weaving projects and will meet analogous criteria. Projects providing commission finishing facilities, either for knititing or in regions with a shortage of capacity, will also be eligible. Any project pro- viding adequate quality accessories to garments/making up will be eligible. 71. The DFCs have prepared action plans, listed projects meeting the above criteria and specified the further preparation and promotion effort needed (mainly in garments and knitting). An understanding was reached that they will be updated semi-annually. The Bank has reviewed the initial action plans. They will permit smooth commitment of the equipment component. 72. In view of the industry's potential for gradual increases in exports and the importance of exports to Turkey's economic resurgence, the DFCs have agreed to targets of 80 percent of their garments and knitting approvals, and 30 percent of their total textiles approvals, in foreign exchange in 1980-82 for export-oriented projects (LAs 3.07(a)). Related provisions were made identical to those under TSKB XIII. Agreement was reached to regard sub- projects as export-oriented, if it is estimated that at least 40 percent of project output in the case of expansions or improvements, and 30 percent in the case of new projects, will be exported by the time they are expected to reach full capacity (TSKB LA 1.02(1) and SYKB LA 1.02(i)). Agreement was also reached that the DFCs' subloan agreements for these sub-projects wLll specify minimum export targets (LAs 3.02(a)(v)). Understandings were reached that the DFCs' appraisal reports thereon will demonstrate their bona fide export potential, using evidence of competitiveness and an adequate marketing stra- tegy; also that the DFCs will satisfy themselves that sponsors obtain avail- able incentives in accordance with their export targets. 73. The DFCs agreed to calculate the ERR, including 'shadow' pricing of labor where appropriate, for all projects with fixed assets above $2 million (for TSKB, as under TSKB XIII), and $750,000 (for SYKB); and that the ERR will normally be at least 15 percent, again as under TSKB XIII (LAs 3.06). 74. Annex IV provides details of proposed relending terms, free limits, spreads, disbursements and monitoring arrangements. Procurement 75. The DFCs have considerable experience in textile equipment selection and actively advise their client firms in procurement. Most private textile firms are also well acquainted with the availability, performance and prices of equipment. Procurement on the usual DFC basis is therefore generally - 22 - efficient and economic. However, for contracts above $2 million an understand- ing was reached that the DFC's will normally require their sub-borrowers to use an appropriate form of international tendering which the Bank will review on an ex-post basis; that the DFCs will monitor such tendering; and that use of any other procedures will require Bank approval prior to disbursement. Most projects will have allocations around $2 million, with a maximum of $6 million. Technical Assistance 76. The technical assistance component, which is necessarily detailed and experimental, will help significantly improve the industry's efficiency at low cost, through assistance in industrial engineering and financial control, and improve export marketing. It comprises an extension service and a comple- mentary fund (TSKB LA Schedule 3, B(1) and C). 77. Extension Service. This will involve short plant consultancy visits and in-plant courses. For garments, the service will be more comprehensive than for textiles, and export marketing assistance will also be provided. In the first two years, the service is expected to reach about 40 firms, and in five years up to 160. Most are expected to be DFC clients, although all firms will be eligible. 78. TSKB has agreed to administer the service for at least 3 years from the effectiveness date (TSKB LA 3.01(a)(iii)), which will cover the commitment period for equipment loans. This is appropriate, given its proven manage- ment ability, experienced staff, and industry contacts. TSKB has also agreed to consult SYKB and representatives of the industry, in carrying out these services (TSKB LA 3.13). An understanding was reached that TSKB will estab- lish, in consultation with SYKB and the consultants (para. 79), a mechanism, satisfactory to the Government and the Bank, for the selection of beneficiary firms. Since the service is outside TSKB's main lending activities, agreement was reached on a review within 2 years of effectiveness, by the DFCs, the Government, industry representatives and the Bank, to evaluate progress and propose successor institutional and financial arrangements satisfactory to the Government and the Bank (TSKB LA 3.15 and SYKB LA 3.11). An understanding was reached that TSKB will recommend successor arrangements to the review meeting. 79. TSKB will select individual consultants (TSKB LA 3.09(a)), to provide an estimated 128 man-months of services at an average foreign exchange cost (salary and benefits) of $6,400 per man-month. These consultants will train fourteen Turkish counterparts. The appointment of: (i) an experienced con- sultant to assist TSKB in starting up the service; and (ii) consultants in weaving/knitting, and for industrial engineering assistance to garments/ making-up, will be conditions of effectiveness of the proposed TSKB loan (TSKB LA 6.01(a)). Agreement was reached that (i) the detailed description of the program; and (ii) the qualifications, experience and terms of reference of the consultants, will be approved by the Bank prior to disbursements on this service (TSKB LA 3.09(b)). An understanding was also reached that TSKB would secure the Government's and the Bank's approval before changing the program. 80. TSKB will use $1.2 million from its proposed loan to meet the esti- mated foreign exchange cost. The local currency cost is mainly counterpart - 23 - salaries. TSKB agreed that the service will be free for no more than two years, but thereafter, increasing fees will be charged with a view to its being self-supporting after five years (TSKB LA 3.14). To meet the deficit of the first three years, TSKB will retain a 1 percent per annum spread for 7 years, plus amounts sufficient to service the Bank loan portion (TSKB LA 4.11). 81. Training, Technical Assistance and Technology Fund. The extension service will cover only a portion of the industry's needs in five! years, and will necessarily be limited by its staff's size and relative lack: of speciali- zation. The proposed project therefore includes a $3.3 million loan fund for additional and more specialized assistance in industrial engineering, financial controls, research and development, pollution control, and export: marketing. It will finance the foreign exchange costs of training abroad, hiring foreign consultants, and the purchase of auxiliary equipment. 82. TSKB agreed to administer the fund (TSKB LA 3.01(a)(ii)). It has already identified sufficient demand to use 30 percent of it. It agreed to: promote the fund according to a plan to be submitted by March 31, 1980 for Bank review (TSKB LA 3.12); give priority to firms aiming to increase the productivity and efficiency of existing equipment, especially previous users of the extension service, and those entering, expanding, or upgrading exports; and use a first-come-first-served criterion to give equal consideration to SYKB's clients (TSKB LA Schedule 3, B(2)). Appraisal will be silmple and involve creditworthiness of the firm, eligibility of the expenditure, and its appropriateness to the firm's objectives. Environmental Impact 83. The Government intends to revise its environmental standards for textile plants shortly. Pending this, several related agreements were reached. The DFCs will require new sub-projects to meet guidelines reflected in Schedule 3 of the Loan Agreements. Firms modernizing or expand- ing dyeing/printing/finishing facilities, the most serious polluters, will be required to provide data on existing and projected effluent discharges, and to prepare and carry out plans for reasonable improvements, if in the DFCs' judgment these are feasible and necessary (LAs 3.02(a)(vi)); any such sub- project worsening the impact of effluent discharge will not be financed (TSKB LA Schedule 3 A.(d), SYKB LA Schedule 3, II.(4)). TSKB and SYKE already provide relevant advice to their clients and have sufficient capability to administer the agreed measures. Benefits and Risks 84. The proposed project will help rationalize the structural balance and performance of the industry, and aims to institutionalize technical assis- tance for it. Firms operating about one-third of the subsector"s capacity will be directly assisted. The project will also help generate about: $25 million of exports annually, strengthen the export capability of the industry, and directly create about 5,000 jobs, of which 3,000 will meet the urban poverty criterion for capital-intensity of investment. It will also limait potential environmental damage. Individual sub-projects will have an economic rate of return of at least 15 percent. - 24 - 85. This is the first Bank project using private DFCs to help develop a specific manufacturing sub-sector, and is necessarily experimental. The extension service is an unusual new activity for TSKB. Its implantation may be thwarted by industry resistance and recruitment problems despite provisions for industry participation and attractive salaries. Full use of the technology fund will require further promotion. The targets for garment firms may not be achieved, either because of the small industry characteristics of this segment, or because export market restrictions may be extended. But all these risks are relatively minimal and well worth taking in the larger macro-economic perspective. PART V - LEGAL INSTRUMENTS AND AUTHORITY 86. The draft Loan Agreement between TSKB and the Bank, the draft Loan Agreement between SYKB and the Bank, the draft Guarantee Agreement (TSKB Loan) between the Republic of Turkey and the Bank, the draft Guarantee Agree- ment (SYKB Loan) between the Republic of Turkey and the Bank, and the Report of the Committee provided for in Article III, Section 4(iii), of the Articles of Agreement are being distributed separately to the Executive Directors. 87. Special conditions of the project are listed in Section III of Annex III. Besides, the additional conditions of effectiveness are of particular interest: For TSKB: (i) the appointment of a consultant to assist TSKB in the start- up of the extension service, and of the first two resident consultants (TSKB LA, Section 6.01(a)); and (ii) the signature of a protocol between TSKB and SYKB for coopera- tion in the textile sub-sector (TSKB LA, Section 6.01(b)). For SYKB: The effectiveness of the TSKB Loan Agreement (SYKB LA, Section 6.01). TSKB could thus fulfill its effectiveness conditions before SYKB and begin project operations alone. This is reasonable since it will handle about 80 per- cent of the Bank funds and administer the extension service and technology fund. 88. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 89. I recommend that the Executive Directors approve the proposed loans. Robert S. McNamara President Attachments August 9. 1979 Washington, D.C. - 25 - ANNEX I TABLE 3A Page 1 of 6 TURM - SOCIAL INDICATORS DATA SHEET REFERENCE GROUPS (ADJUSTED AVERAGIS TURKEY LAND AREA (THOUSAND SQ. KH.) - HOST RECENT ESTIMATE) _ TOTAL 780.6 SAME SAME NEXT HIGHEIR AGRICULTURAL 558.4 MOST RECENT GEOGRAPHIC INCOME INCOME 1960 Lb 1970 Lb ESTIMATE /b REGION /c GROUP /d GROUP /e GNP PER CAPITA (USS) 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 STATISTICS TOTAL POPULATION, MID-YEAR (MILLIONS) 27.8 35.6 42.2 URBAN POPULATION (PERCENT OF TOTAL) 31.9 38.7 42.6 43.0 46.2 52.2 POPULATION DENSITY PER SQ. KM. 35.0 46.0 54.0 81.4 50.8 27.6 PER SQ. 1i. 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 56.0 65 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 1.6 URBAN 5.1 /f 4.9 R 4.2 2.2 4.7 3.4 CRUDE BIRTH RATE (PER THOUSAND) 44.8 40.6 39.4 19.2 37.8 27.0 CRUDE DEATH RATE (PER THOUSAND) 16.9 14.4 12.5 9.0 10.8 9.9 GROSS REPRODUCTION RATE 2.9 2.6 2.3 1.3 2.5 1.9 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 65.6 66.6 USERS (PERCENT OF HARRIED WOMEN) 5.3 8.2 38.0 38.0 20.0 19.3 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1970-100) 91.5 100.0 111.2 113.7 107.3 103.8 PER CAPITA SUPPLY OP CALORIES (PERCENT OF REQUIRENENTS) 110.0 112.0 113.0 127.4 105.3 110.4 PROTEINS (GRAMS PER DAY) 78.0 78.0 75.7 92.8 63.0 77.7 OF WHICK ANIMAL AND PULSE .. 22.0 .LI 24.7 39.3 21.7 22.2 CHILD (AGES 1-4) MORTALITY RATE 16.0 /h 14.7 L .. 1.6 8.0 1.9 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 49.3 54.4 56.9 68.9 57.2 63.0 INFANT MDRTALITY RATE (PER THOUSAND) 187.0 /f. 153.0 /k .. 34.5 53.9 38.2 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 52.0 68.0 68.3 56.8 67.7 URBAN *- 51.0 74.0 74.3 79.0 83.5 RUIIAL .. 53.0 64.0 64.4 31.8 41.5 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TMTAL .. .. 8.0 94.0 30.9 70.3 URBAN .. .. 13.0 94.0 45.4 90.7 RURAL .. .. 5.0 93.0 16.1 38.3 POPULATION PER PHYSICIAN 3000.0 L 2250.0 1830.0 686.5 2706.8 1310.8 POPULATION PER NURSING PERSON 3260.0 1880.0 1520.0 339.0 1462.0 849.2 POPULATION PER HOSPITAL BED TOTAL 590.0 L1 490.0 460.0 178.0 493.9 275.4 URBAN 190.0 /j 200.0 210.0 70.0 229.6 129.9 RURAiL .. 5890.0 5750.0 1770.0 2947.9 965.9 ADMISSIONS PER HOSPITAL BED .. 20.0 20.0 15.3 22.1 18.9 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.7 5.9 .. .. 5.2 3.9 URBAN .. .. .. .. 5.0 RURAL .. .. .. .. 5.4 AVERAGE NUMBER OF PERSONS PER ROOM TMTAL .. 2.2 .. 0.9- 2.0 0.9 URBAN 2.0 1.9 .. 0.8 1.5 0.8 RIIRAL .. .. .. 1.0 2.7 1.0 ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 29.0 40.0 57.0 57.5 64.1 59.2 UREAN .. .. .. 99.0 67.8 79.0 RURAL 2.0 18.0 .. .. 34.1 12.5 - 26 - ANNEX I Page 2 of 6 TAIILU 3A TOzUT - SOCIAL. INDICATORS DATA SWEET REFZRENCE GROUPS (ADrUSTED AVERAGES - MOST IECET EST I2UAT SAh4 SAHE ihUT NIGCZ MOST UCZN GEOGWOIC INCm1 INCOMK 1980 /b 1970 lb ESTMSATZ a IZCION j CROUP /d CRoUP L EDUCATION ADJUSTED UROLL1M IATIOS PKINART: TOTAL 75.0 109.0 104.0 108.0 99.8 97.6 FU*LL 58.0 96.0 96.0 99.5 93.3 87.4 szEONDAR: TOTAL 1.0 28.0 30.0 6Z.8 33.8 '7.8 TWAT 6.0 16.0 18.0 63.6 29.8 42.6 VOCAXIO.L nrCENT o0 SzCOrAI7) L8.0 14.0 15.0 28.2 12.8 22.7 Pq1?I-TIACKUl RATIO PRIMARY 46.0 38.0 34.0 24.9 36.9 25.4 S1o0DAxr 19.0 28.0 27.0 17.3 22.2 24.9 ADULT LITZACT 8.RAT (PERCENT) 40.0 s 55.5 a .. 88.3 71.8 96.3 CONUSI9TTLOU PASS%NrZZ CARS PU TIDUSAND POPUIATIO 2.0 4.0 9.0 90.4 12.4 32.3 RADIO ECZIVERS PER TWUSAND POPULATION 49.0 89.0 107.0 199.0 104.3 20t.9 TV RECEIVES PZ1 TNOUSAIID POPMATION .. 3.0 12.0 132.5 28.1 91.7 NEWSPAPE (-DAILr zunuL fITZURIST CICUIATIO PU rTOUSAhD POV0LATIIO 51.0 41.0 .. 97.1 45.2 70.9 CINOI A "L ATrNDAXC2 PE CAPITA 1.1 6.7 .. 6.6 4.6 4.4 TOTAL LAO O0 FORCZ (THOUSANDS) 13000.0 / 14500.0 16400.0 /a FIAL (PERCENT) 40.2 37.2 37.3 32.4 2s.1 117. AGRICULTURE (PERCNT) 71.7 63.4 52.5 /o 32.8 46.2 38.4 INDUSTlI (PZRCUNT) 10.5 L2.1 .. PAATICIPATION tATZ (PEENT) TOTAL 50.1 44.3 42.8 39.1 33.8 33.7 WALZ 58.7 56.9 53.2 56.7 48.1 50.8 FUHALE 41.2 33.4 32.1 29.7 17.3 12.6 eCONGIUC D0PEDENCT UATIO 1.0 1.1 1.2 0.9 1.4 1.4 INCQ1Z DISTRI3IUTION PERICIT OF P11VATS INCOME RECEIVED BY aIGUST 5 PE1RCEN OF bO1U51LDS 33.0 /h 32.8 /v 28.0 31.9 23.6 20.2 d7i5nsr 20 PCDIT Op WuDs .6I.0 /b 60.6 /v 56.0 59.7 52.3 47.9 L.0ST 20 PhRCENT OP1 .Iglum.s 4.2 / 2.9 LE 3.5 4.0 4.3 3.2 LUZST 40 PtmT OF _SE.3S 10.6 g 9.4 la 11.5 12.9 13.1 13.7 ?OVERTY TARGET GROUPS ESTIMATED ARSOLUTE POVERET ICOMZ LEVNL (USS PUl CAPITA) tUlAN ' .. .. 91.9 . RMRAIL .. .. 162.0 194.8 193.1 157.9 ESTmATU ULATIVE PoVyTT IrCO -EVIL (US$ PU CAPTTA) AN .. .. 291.0 295.1 319.8 448.8 RA .. .. 218.0 309.2 197.7 313.1 ESTINATED POPU16CTI BZIDW POS1? 1NCQIE LEVU (PZCZ25) DUIAN .. .. 18.0 18.2 19.8 23.2 MDXAL .. .. 25.0 24.2 35.1 54.5 Noc avitlable Not applicable. NOTES /a The adjusted group averages for each indicator are population-weighted geomtric smans, excluding the extreme values of the indicator and the most popuiated country in each group. Coverage of countries asong the i.dicacors depends o availability of data and is not oniform. 'b inlass otherwise aoted. dact for 1960 refer co any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Iecent Estimate, betveen 1973 and 1977. ic Zurmps; /d Intermdiate Middle Incom (5551-1135 per capita, 1976); /e Upper Middle Income (S1136-2500 per capita. 1976); /f 1955-60; / ,965-70; /h 1963; /t 1967-68; 1 Rased on samle survey escticas of 9.700 households; night he andresctimtad; /k 1967; /I 1962; /m Six years and above; ir 1965; /o 1977; IV 1968. May 1Q70 - 27- NE DEF1INITINS O SOCIAL INDICATORS :age 3 of S=ig The adjusted grop avrages fo ech dnic.t-r are popultion-.ighted geowetric ne-n, excluding th. exrm aue.ftecd, - rec populad outry in. ea.h group. C-vr.ge ofcutie mn the indicators depends on availability of data ad i. not u-llo-. :uic gropaeags or Cspital Surpica Jil ExPorters and indicators of access to ae and ...cr.ta disposal, housing. Itn utiuino. r am.ple onalo- gtdgemtiaeans withou the eatluaton of ..trsms au. LAND AREA (th ... nd sq. ho) population par hospital ha n oa, ihr and rural - rcain tutal, otal - Total earr- v area ...prii.g loaed area cod inland w-trs. urban, and rural) divided by thei r r ..p.aciyvo nnnt _t-cpital h-ds Agricu1tura1 Ho Mt recant .stiet. t oagricultural area uaed tamporaclly -vilabla in pablic nod pri-r.St genra an d ap-oticco