New Country Director for Turkey - Ulrich Zachau

World Bank Turkey Country Director Ulrich Zachau's interview with Burcu Goksuzoglu from NTV-MSNBCE on March 2, 2007.

Burcu Göksüzoğlu: Welcome to Turkey, Mr. Zachau. After Andrew Vorkink, it was said that Mr. Wolfowitz’s favorite candidate was you. You were considered as a successful candidate for improving relations with Turkey. Mr. Wolfowitz also gave the message World Bank wants more cooperation with Turkey. In light of all this, can we say that relations between Turkey and the World Bank will be more active during your time? What is the drive behind this? Does the fact the program with the IMF will end in 2008 have any role in this?

Ulrich Zachau: Turkey and the World Bank have had a good and strong relationship. Between 2003 and 2006, the World Bank made available close to $5 billion in new loans to support Turkey's reform program and investments in education, health, infrastructure, energy and many other sectors of the economy. I expect this good and strong relationship to continue. And I think not only of new projects financed by the World Bank or sharing the experience of other countries with our Turkish counterparts in finding the best development solutions, I also think of learning from Turkey's development experience for the benefit of other countries where the World Bank is active.  We collaborate with the IMF on macroeconomic issues. However, the nature and scale of our partnership with Turkey is guided foremost by what Turkey wants from the World Bank and is not as such related to the presence or absence of an IMF-supported program.

BG: Will there be new country assistance strategy for Turkey in your period?  What may be the priorities of the new strategy?  In the old one, top priority was public sector reform, can this change? When will the  new strategy be shaped?

BG: In the new period, should we expect an increase in project and program credits to Turkey? The total number was 4.5 billion dollars between 2004 and 2006.  Shall we expect more?

UZ: We will determine the amount of new World Bank financing jointly with the authorities, based on Turkey's external borrowing requirements, financing plan, the availability of good project ideas, and several other factors.  I expect that Turkey will continue to have a significant program comparable to the levels in past years.

BG: 2007 is an election year for Turkey.  Do you foresee a slowdown in the Turkish government’s operations in this year due to elections? How may this affect relations with the World Bank?

UZ: In Turkey, as in other countries, there are both opportunities and risks before and after elections.  In all democracies, markets and the public closely follow elections, and normally they expect some slowdown in an election year.  Turkey now has a strong four-year track record, the government has indicated its determination to continue advancing its policy and reform agenda during 2007, and I expect continued good and close collaboration between Turkey and the World Bank through the year. 

BG: What are your expectations about Turkish economy in 2007? What is the biggest risk Turkish economy faces in 2007?

UZ: The Turkish economy has grown by more than 7 percent per year since 2001, and fiscal discipline and tight monetary policy have lowered inflation and improved debt sustainability. Turkey has also made much progress in financial sector restructuring, privatization, and social security reform. I expect continued growth in 2007, if the strong economic policies continue. 

One important risk I see is the uncertain external environment—related, for example, to interest rates in international markets, or to investors’ sensitivity to global and regional events. Also, the current account deficit is high and deserves attention. Investors help finance that deficit, and a possible change in their risk appetite could affect all emerging markets, including Turkey, which still has a comparatively large rollover of public debt. Continued positive investor perceptions will depend on continued strong economic policies.

BG: There are worries about presidential elections in Turkey. What is the atmosphere about this in the World Bank?

UZ: The statutes of the World Bank, our “constitution” if you will, require us to focus on economic and social development.  We do not have a political mandate. This helps us concentrate on what we do best and where we can add most value.  

BG: In your first interview, you said you expect powerful growth in Turkey for this year. What is your numerical expectation about this and what will be the driving force behind this powerful growth? 

UZ: As I mentioned, if strong policies continue, I expect continued economic growth in 2007.  Growth might moderate a bit and be somewhat below the 7-8 percents levels of the past two years, but I expect would still be substantial.

BG:  In the same interview, you said that a Turkey display a healthy growth. But                            unemployment rate is still high. Don’t you think it’s a dilemma? And what will be the concrete suggestions and projects of World Bank in order to decrease unemployment in Turkey?  

UZ: You are right. Unemployment in Turkey is high, especially among young people, and overall participation in the labor market is low, especially among women. There is broad agreement that generating more and better jobs is a top priority for Turkey. How can this be done?  One critical shift will be away from policies to protect jobs, toward policies to protect workers; away from rigid job security rules, toward an improved unemployment benefits system, and toward effective training programs. In addition, raising educational outcomes for all young people will be crucial in the long term, so that Turkey’s young and growing population can compete successfully in global markets.  The World Bank has collaborated with Turkey in recent studies of education (Education Sector Study) and of labor markets (Labor Market Study), and joint work has begun on possible World Bank support for a program of policies generating employment.

BG:  What are your expectations about interest rate levels and inflation in Turkey for this year? Real interest rates are still high in Turkey. Do you think steps should be taken about that? 

It is a bit early to say much about 2007 inflation and interest rates this year. In the short term it will be crucial to maintain interest rates at a level to contain inflation expectations. In the long term, if policies continue, and if there are no unanticipated shocks, I would expect interest rates to fall gradually, as expectations of future inflation come down, and as the efficiency gains from restructuring work themselves through the financial system. 

BG: What are the weaknesses of Turkish economy?

BG: According to you, in which areas Turkey needs World Bank assistance mostly?

UZ: Improving Turkey's competitiveness, increasing employment opportunities, especially for women and young people, investing in human capital, and continuing the reform of the public sector, including the system of social protection, are important priorities for Turkey where World Bank assistance might be helpful.

BG: How did you find Turkey’s performance on structural reforms? Do you see a slowdown in that? Would you evaluate delay in social security reform and what may be the effect of it? 

UZ:The important structural reforms in Turkey over the past few years, including privatization and financial sector reform, have helped produce a remarkable increase in investment and strong economic growth, with lower inflation. The social security reform passed by the parliament last spring would bring lasting benefits to the Turkish population in terms of universal health insurance and a sustainable pension system. The government is considering what changes may be needed in the law because of the decision of the Constitutional Court, and I welcome the authorities’ commitment to start implementing social security reform on July 1, 2007.

BG: Turkey faces problem in European relations.  Who do you think is responsible for this? How do you see the future of the relations? 

UZ: Both the European Union and Turkey have highlighted EU accession as a long-term goal, and over the years toward accession there will be some faster and some slower periods. I agree with those who believe that this process, regardless of the outcome in ten or fifteen year's time, will be beneficial for Turkey. And I also believe that accession will be beneficial for EU countries and that the process toward it will help reduce some of the concerns within the EU about further expansion of membership.  .

BG: Did you analyze Turkey’s new budget? Do you find it realistic?

UZ: The budget approved by parliament reflects a prudent fiscal stance, as it aims at primary surplus of 6.5% of GNP. A key question concerns the composition of spending: what is the mix of current and investment spending, and are expenditures going to the highest priority areas? This is an issue for the medium term, although growing fiscal pressures make it important to begin tackling it soon.

BG: There was a huge amount of foreign direct investment to Turkish banking sector in  the last two years. Do you think the banking sector is more stable due to that? 

UZ: Yes. The recent large amount of FDI inflows reflects confidence in the banking sector, which has improved substantially since 2001. Turkey’s financial system today is in a much stronger position than in 2001. Banks now enjoy higher capitalization and profitability, weak banks have exited from the system, and foreign banks have started to enter. Supervisory functions have been consolidated and improved.

BG: What may be the foreign direct investment to Turkey this year? Shall we expect an upward or downward trend? 

UZ: Foreign Direct Investment reached historical highs of $ 8.7 billion (2.4 percent of GNP) in 2005 and about $19 billion (4.7 percent of GNP) in 2006. I expect continued high foreign investment in 2007, at broadly similar levels. 

BG: Most of the privatization and electricity distribution tenders were suspended because of elections and postponed. How do you evaluate this? Do you think Turkish government credibility was shaken?

UZ: Regarding privatizations in general, some are moving ahead and some depend on market conditions. I believe it is important to consider the context of a large number and high volume of successful privatization transactions in Turkey over the last two years. 

Investors and markets have raised questions about the delay in the electricity tenders.  As such, the delay could be either positive or negative. It depends on the reasons for the delay and on how the additional time is used. The delay can allow the market to develop further, and if the time is used well, to address questions by investors, this can increase the likelihood of success and improve the quality of the eventual privatization transactions. Of course, clarity about the process and timing of privatization transactions is important, and in this respect I welcome the government’s confirmation of its plan to proceed with the privatizations in due course. 

BG: What may be the solution for huge amount of loss in state energy enterprises in Turkey?

UZ: Losses in state energy enterprises are the result of several factors. These include: (i) an inefficient electricity distribution network, with high technical losses and leakage rates; (ii) unpaid debts by the state, especially municipalities, and (iii) tariffs that do not cover increasing operating costs.  Some of the solutions will likely involve: (a) increased private sector involvement in electricity generation and distribution, and also in natural gas import and distribution; (b) more competition; (c) resolutions of old debts and measures to ensure that users pay and payments cover operating costs; and (d) rehabilitation investments. The government is considering many of these measures.

BG: Turkish government decided public offering for Halkbank’s 25 percent shares. This decision was criticized by most of the economists in Turkey. What will you say?

UZ: The government has made clear that the 25 percent IPO is a first step and that it will be     followed by a block sale to a strategic investor. This option was considered by the government's privatization advisors based on an assessment of current market conditions. The World Bank supports privatization of Halkbank, and the initial IPO, to be followed by a later block sale, represents progress in that direction.

BG: Do you foresee turbulences in financial markets this year? Do you think Turkey will be among countries that will be affected the most by turbulences?

UZ: There are vulnerabilities in emerging markets. Over the past several years Turkey has been improving its economic fundamentals and building credibility with investors. In May and June 2006, Turkey was affected somewhat more than other markets because this process is still ongoing.  Turkey weathered this challenge because of good economic management and because significant credibility has now been built. We are pleased to see how well the financial system performed under stress during May and June 2006. I do not feel a crisis in Turkey is likely this year, but fluctuations in the world economy cannot be ruled out due to global imbalances.

BG: According to you, what are the deficiencies of Turkish education system? What should be done?

UZ: The key deficiencies for Turkey are uneven quality of education, limited access to secondary and tertiary education, and poor relevance to the labor market. What can be done? The goal is high quality, relevant education for all young people. Some important steps might include:

• implementing a new curriculum and introduction of new teaching methods, with an emphasis on language and computer skills, and with more problem solving and less memorization;
• making community-based pre-school education available at low cost to vulnerable groups; and
• modernizing vocational education, reforming the university entrance examination, and creating good tertiary alternatives for vocational and technical education.  

BG: Can you evaluate Turkey’s combat with corruption?

BG: Do you think Turkey should continue with IMF? 

UZ: The macroeconomic program of the Turkish government over the past six years has produced substantial benefits for the Turkey and its citizens: it has brought down inflation and interest rates, it has reduced debt as a proportion of GDP, and investment and growth have been high. This government program has been supported by the IMF. The current IMF arrangement runs until April 2008 and it will be up to the government to decide what form of cooperation between it and IMF will take place after that.

BG: Will the World Bank finance projects regarding global warming in Turkey? Do you      have an allocation for this?

UZ: Ongoing Bank support includes support for increased efficiency and reduced pollution in the energy sector, renewable energy projects, as well as sustainable natural resources, land and water management. All of these contribute to fighting global warming.

BG: What did the former director advise you about Turkey?

UZ: He suggested that I watch my weight carefully because of the delicious Turkish cuisine! 

BG: Washington Posts comment about Wolfowitz’s socks was this: Would you take financial advise from someone who does not spend 3 dollars for new socks. What is your comment on that?

UZ: Well, as you may have seen, Mr. Wolfowitz commented on that picture to Mehmet Ali Birand and admitted that he was not “your average banker.” 

The interview was aired on NTV and CNBCE on March 4 & 5, 2007.