87171 ~vELOpA, CO~lAL, (~) ~ December 20, 2000 05:03:45 PM Statement by Abdulrahman Almofadhi Date of Meeting: December 21, 2000 Turkey: Country Assistance Strategy and Financial Sector Adjustment Loan and Privatization Social Support Project Let me begin by thanking staff for the briefings, which have placed the documents before us in the context of an evolving situation. I refer here to Mr. Linn's comments on December 7, and the more detailed supplementary material made available last Monday afternoon. It is to be hoped that the latest crisis has indeed been contained, and the swift expression of international support is encouraging. Nonetheless, we share the view that the Turkish authorities have no choice but to proceed with a systematic and sustained implementation of the agreed reform program, in a changed and in some respects riskier environment. This is not to deny that considerable progress had been made before the recent crisis. In such a challenging environment, international support can assist the government in achieving these objectives. We are pleased that the Fund and the Bank are playing well-coordinated roles within their respective mandates and responsibilities. Our remarks today will focus on some of the structural issues relating to the Bank's areas of interest. Before doing so, let me make it clear at the outset that we support the CAS as updated, and we hope that the actions of the authorities will make it possible to continue in a High Case, or an Accelerated High Case, mode. If further policy slippages were to occur, and the lending program reverted to a Base Case, this would signify a critical missed opportunity. In the present circumstances, we also support the proposed FSAL and the Privatization Social Support Project that are before us today, and they will, if successfully implemented, help underpin the renewed reform effort and demonstrate the Bank's strong support. Before turning to some of the underlying issues some comments on the recent crisis would be in order. We think the analysis presented by staff has been the correct one, and the Bank's advice has certainly been consistent, as Mr. Wolfensohn reminded us at the December 7 briefing. The key precipitating factors appear to have been the failure of the Government to fully prepare the public for its 2001 program, and the endemic weaknesses in the financial sector, which have been frequently remarked on in previous discussions at this Board. Indeed, this Chair, when reviewing the Economic Reform Loan last May, made a point of noting that weaknesses in the financial sector have had major adverse effects, and that the difficulties in this This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the consent of the Executive Director concerned. 2 regard of implementing effective and deep reforms should not be underestimated. Perhaps recent events have improved the prospects in this context. No doubt the forthcoming Bank paper on the Political Economy of Reform in Turkey, mentioned in Box 6 of the CAS as being currently under preparation, will shed some light on the issues involved from an economic rather than a political perspective. We turn now to some more specific comments, which we will mainly limit to three underlying issues we consider important. First, we would like to address the issue of employment. The theme of implementing reforms for growth and employment generation is rightly at the top of the Government's agenda as supported by the Bank. We noted from Box 1 in the CAS that a large share of the Turkish population is already vulnerable to falling into poverty through an event such as a job loss by the household's principal wage earner. Table 2 of the CAS includes a line with unemployment rate estimates drawn from the 8th Five Year Plan. The handout we got on Monday updating the Table did not however update this key indicator, although we were informed that the balance of macroeconomic risk is likely to shift from overheating to abrupt slowdown. In such a context, paragraph 66 of the CAS notes that recorded unemployment has in fact declined by one percentage point since the start of the reform program. Some comments from staff about the potential for increased unemployment under a slowdown, and its effects on the poverty situation, would therefore be appreciated. The efforts of the authorities, supported by the Bank, to ensure adequate funding of social safety nets are however noted in this connection. Our second comment relates to the current situation of, and potential for, Small- and Medium- Enterprises (SMEs). Paragraph 32 of Annex Al of the CAS, dealing with the private sector strategy, has a useful statement of the envisaged strategy, which seems well based. We also noted from IFC' s handout at the technical briefing that the Corporation will continue to support SMEs by providing term-financing through loans to leasing companies and selected banks. Our question to staff is to what extent these efforts may be made more challenging if there remains an environment of higher interest rates and lower growth. Some comments on the likely outcomes would be appreciated. We nonetheless continue to encourage IFC to keep up its focus on SMEs and supportive business infrastructure, especially in the less-developed regions of the country. Of course, the broader emphasis of IFC on developing mortgage finance and long-term contractual savings obligations, and development of venture capital and private equity funds will also be essential in helping sustain investor confidence. Our third and final comment is to place the recent crisis in the context of the longer-term efforts the Bank will be making to help strengthen social service delivery, and especially to improve the quality of education. Given the intention in the CAS to accelerate connectivity and te~hnological capabilities, the need to upgrade the delivery of educational services across the board assumes added priority. It is encouraging to read in paragraph 57 of the CAS that computer literacy and connectivity are improving rapidly, but the country has much catching up to do in this area to reach even the average for OECD countries. Looking at the upcoming generations, the Bank support for the authorities in the comprehensive reforms in basic education can be considered as an investment that will have a considerable future payoff. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the consent of the Executive Director concerned. 3 In conclusion, we have some very selective comments on some other important topics. We agree that the strengthened legislative, regulatory, and supervision infrastructure for banks being supported under the FSAL will be critical in addressing the long-standing weakness in this sector. Similarly, while further progress on the privatization front is also essential, the Privatization Social Support Project can play a very useful role in strengthening mechanisms for groups affected by the hopefully accelerated privatization process under the reform program. Finally, given the high seismic risk in Turkey, as events a year or so ago demonstrated, the economy remains vulnerable to natural disasters, and some flexibility must be allowed to accommodate a response to them. The discussion in paragraph 55 of the CAS is reassuring in this regard concerning a more pro-active approach to building up risk mitigation capacity. Having made these comments, Mr. Chairmen, we commend the staff for the work that has gone into preparation for today's discussion, and for their sustained dialogue with the Turkish authorities. We wish the authorities and their partners well in managing the current risks and above all in keeping up the momentum of the reform programs so as to enable the economy to capture its full developmental potential in the decades ahead. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the consent of the Executive Director concerned.