Stepwise progress is the right decision: The World Bank

“I am also aware that for some segments of society, this [high inflation] can be a really difficult, unbearable situation. But as I also said in September, Turkey needed to move forward step by step [in its macroeconomic stability program]. When we look at it since that day, we see that step by step, it has been the right way. If we had tried to find a solution all at once in June, we would not have reached where we are today.”

THE NEW PROGRAM OF THE WORLD BANK FOR TURKIYE SEEMS TO HAVE A FOCUS ON FURTHER STRENGTHENING THE PRIVATE SECTOR. WHAT DOES THE MODEL CONSIST OF? SO, THAT YOUR ANSWERS CAN PERHAPS PROVIDE SOME GUIDANCE TO POTENTIAL BENEFICIARIES…

LOPEZ: You are right, three weeks ago we had the opportunity to discuss the strategy for Turkey for the next years with the board of the World Bank. The program we have proposed is USD 18b for three years. Of USD12b this amount will directly be to support the private sector. The remaining USD 6bn will be sent through the public sector, in some cases to support the private sector. Let me give you an example. We confirmed a USD 600 guarantee to Eximbank that is going to be able to be mobilize up to USD 1bn. This is going to be used to lend to private sector companies. The target of the program is to facilitate the adaptation of Turkish private sector companies with The EU’s Carbon Border Adjustment Mechanism (CBAM). So, even if these resources are channeled through the public sector, they will be used by the private sector.

Another example is a loan that we assigned last week with the president of Development Investment Bank of Turkiye (TKYB) in Washington. It is an operation of USD 400m that will be used by TKYB to lend the resources to firms that want to reduce emissions. Once again, it is a way to provide long-term financing with good conditions. On May 23 we will sign an operation of USD 600m with Industrial Development Bank of Turkiye (TSKB) and

TKYB to facilitate the adoption of rooftop solar panels. International Financial Corporation (IFC), the arm of the World Bank, which works with the private sector, facilitates the private sector in different matters. After the earthquake, many of the companies had problems with liquidating; IFC came up with USD 600m for private sector banks to use to support the companies in the earthquake-effected areas.

THIS RELATES TO RECENTLY ANNOUNCED PROGRAM IN TURKIYE WHICH COVERS NEW INVESTMENTS AND NEEDS IN RENEWABLE ENERGY, PARTICULARLY SOLAR. WE KNOW THAT SUCH ACTIVITIES ARE A DEMAND AND SOME, PRELIMINARY LICENSES ISSUED BUT MANY COMPANIES, HAVE DIFFICULTY IN TERMS OF ACCESS TO FINANCE. SO, WILL THIS PROGRAM BE TARGETING THOSE PRIVATE SECTOR ENTERPRISES? WILL IT FUNCTION IN LINE WITH THE PROGRAM ANNOUNCED BY TURKIYE?

The program announced by Turkiye is large enough to reach USD 100bn in total, USD 80bn of which for generation, USD 10bn for transmission and USD 10bn for distribution. We are working with IFC on this. We are in contact not only with IFC, but also with the Asian Infrastructure Investment Bank (AIIB), the European

Bank for Reconstruction and Development (EBRD) and the Islamic Development Bank. When there is a need for USD 100bn, we, as the World Bank, together with other international institutions, can support the program more efficiently by creating a pool. We are totally committed to that plan of the government and working with the government to ensure that this is successful. I am not going to say that is easy. This is a big plan. Apart from plans in China and in India, very big countries, that plan is the most ambitious plan we have seen in an emerging country. And this is something that we always recognize and we know what needs to be done to achieve that. The World Bank Group is supporting renewable energy investments with a resource of USD 660m. It will take some time, but we are also working on an additional USD 750m for transmission investments. Not only the production capacity facility is not enough, but transmission lines also gain importance, whether solar or wind.

For some people, the energy transition plan is related to the challenges of climate change; there are many challenges. Today the installation of 1GW of solar costs

HUMBERTO LÓPEZ, Country Director for Turkiye, The World Bank

about USD 1bn and the installation of 1GW of wind costs USD 1.7bn. Once these are engaged, the operation cost of 1GW of solar or wind energy is close to zero. We have to understand that today renewables are competitive even with coal, which used to be the cheapest. So, this investment has a positive impact on climate change because it reduces emissions. However, it is also going to contribute in the energy security in the country. It is also going to contribute to the productivity of the country because the installation of these big plants will present an opportunity for the Turkish firms to enter into these industries. But it is also going to result in lowering price of energy which in turn going to support the productive sectors. This is a total win-win situation, where you are doing something good in terms of climate change and for the economy.

WITH REGARD TO THE EU’S CARBON BORDER ADJUSTMENT MECHANISM (CBAM), TO WHAT EXTENT SUCH A PROGRAM COULD CONTRIBUTE TURKIYE’S PERFORMANCE IN ACHIEVING CBAM OBJECTIVES?

Since I arrived in Turkiye, one and a half years ago, I am impressed by the speed, dynamism and the resilience of the private sector. What I have been saying from the very beginning with the CBAM is that you can look at it two ways. One is that the European Union (EU) is imposing a tariff on us, and it will be difficult for us to export there. If Turkey is the first to adjust to the CBAM not only we are going to be able to export, but we are also going to absorb the exports of other countries. Because CBAM is not only for Turkiye; it is for every country. So, if you are first mover, not only you are going to sustain your current export volume, but also you are going to be able to take market from others. This is the reason why we are supporting the private sector. CBAM will initially affect six sectors, the big emission producers of which are cement, aluminum, and iron. By 20230, the mechanism will be expanded to other sectors as well. So, we will continue our support for the private sector to prepare them for 2030.

WHAT IS YOUR GENERAL ASSESMENT ON THE TURKISH ECONOMY? IN PARTICULAR TO THE FOLLOWING ONGOING DEBATE THAT PEOPLE ARGUE THAT MONETARY AND FISCAL POLICIES SHOULD FURTHER BE TIGHTENED.

The package we announced three weeks ago, the USD 18bn, counting on top of the USD 17bn that we are implementing, is a significant package is the result of three things. One is earthquake needs that I am not going to deny that we mobilized quickly. Second is the efforts of the country on the energy transition, climate change. Third is our belief that the approach of the Turkish Republic to the economic administration was right in this particular context. A team of us came here in September last year after the presidential elections. They [the government] started taking actions to normalize the economy particularly paying attention to the high inflation. There were multi objectives and some of them were conflicting. As an example, in June last year the Turkiye had high inflation on the one hand, very low interest rates and an overvalued Turkish Lira on the other. Exporters were suffering from this situation. One of the objectives was creating problems in another objective.

The evidence we have today is that the program is working. If you look at the credit default swap (CDS) of the country is around 300 basis points. One of the credit agencies increased the rating of the country, the other two have moved to country outlook to positive. Yesterday we heard that JP Morgan and Citi Group were advising their clients to invest in Turkiye.

You have a number of things that are moving in the right direction.

The imbalances we had in June were too many. Since then, there has been progress in works. At the same time, I am very conscious that for many people this is a difficult moment because the inflation is still high, interest rate is also high and this hurts. Asking for patience from the citizens in this context is tough. But I am confident that alternative would be worse. I am also aware that for some segments of society this can be a really difficult unbearable situation. But as I also said in September that Turkey needed to move forward step by step. When we look at it since that day, we see that step by step has been the right way. If we had tried to find a solution all at once in June, we would not have reached where we are today.

WHAT WOULD YOU SAY ABOUT THE PRODUCTIVITY OF THE TURKISH ECONOMY?

Turkey needs a holistic program for development that includes structural reforms. This is only possible by ensuring macroeconomic stability. In a country where inflation is hovering around 60% to 70%, economic productivity will not be a very realistic estimate. However, this progress can be achieved after the macroeconomic arrangements and strengthened with the energy transformation, which is clearly stated in the report we presented to the Board of Executive Directors. Turkey’s total factor productivity growth has declined, and this needs to be reversed for growth and prosperity. A program can be implemented across a broad range of areas, including training for the skills required by the new economy, and not limited to sector-specific solutions, with a shared consensus of government and citizens. I am confident that the current economic team has the skills to move Turkey in this direction. We at the World Bank will continue to support Turkey’s steps in this area, but I would like to emphasize that we are not in a position to impose anything, as we are now. We are just on Turkey’s side, and we will continue to support Turkey in its steps as long as it wants to do so.