Foreign Relations of the United States, 1951, The Near East and Africa, Volume V

NAC Files: Lot 60 D 137

Memorandum by the National Advisory Council Staff Committee to the National Advisory Council

confidential
NAC Document No. 1227

[Washington,] December 6, 1951.

Subject: Proposed Additional Release of TL 81.5 Million in Turkish Counterpart Funds and Reprogramming of TL 71.4 Million from Previously Approved Programs.

Problem

It is proposed to release an additional TL 81.5 million for military production, construction, equipment, and matériel and to shift TL 71.4 million to this purpose within previously approved programs for the period ending 29 February 1952.

Discussion

Explanation of Proposal

The most recent NAC action with respect to Turkish counterpart was taken March 28, 1951,¹ when a program was approved for the release of TL 165 million to finance Turkish investments through the close of Turkey’s FY 1951–52. ECA has however considered it essential to cover out of counterpart during this Turkish fiscal year certain supplementary extra-budgetary military programs, totalling TL 72.9 million. Moreover, the Turkish Government has now requested the use of an additional TL 80.0 million in counterpart to finance military production, construction, equipment and matériel included in the current Turkish budget. It has proposed, however, that this latter amount be obtained in part by changing the composition of the previously approved counterpart program for the current Turkish fiscal year, of which a substantial portion has not yet been carried out.

The following plan has accordingly been developed.

a) The existing TL 165 million counterpart program will be scaled down to TL 93.6 million. The TL 71.4 million thus released would be applied to the TL 80.0 million program for military production, construction, etc. in the current Turkish budget.

b) The balance needed for the TL 80.0 million budgeted military program (TL 8.6 million) and the sum needed for completing the supplementary military program (TL 72.9 million) would be covered by an additional counterpart release of TL 81.5 million. This release would bring total releases for the present Turkish fiscal year to TL 246.5 million, and would substantially exhaust anticipated counterpart deposits.

Allotments of grant assistance requiring counterpart plus drawing rights requiring counterpart amounted to $155.9 million through 30 October 1951 (95% counterpart equivalent would be TL 414.7 million). If the presently planned minimum of $45 million ECA aid were provided this year entirely in the form of grant, total cumulative U.S. aid requiring counterpart would amount to $178.9 million (excluding Technical Assistance) of which the 95% counterpart would total about TL 476 million. The total of the first release approved by the National Advisory Council (TL 125.4 million) and the presently proposed amended release (TL 246.3 million) is TL 371.7 million. There will thus be accruals, additional to the total actual and proposed releases, from expected grant aid through June 1952, of TL 104.3 million. TL 100 million has been tentatively earmarked for supplementary military programs for the Turkish fiscal year 1952–53. NAC approval of this tentative release is not however being requested at this time.

The Turkish Government will give assurances that the most essential projects eliminated from the counterpart program previously approved for FY 1951–52, will be provided for from other funds. The Turkish Government will also agree to include in its budget for Turkish FY 1952–53 an additional TL 30 million for military production.

Table 1 shows the changes which will be made by this proposal, Table 2 shows the cumulative total of proposed counterpart uses before and after this change, and Table 3 shows the cumulative total of expected specific releases through 29 February 1952.²

Financial Situation

Public financial operations during this Turk fiscal year will unquestionably involve a substantial excess of expenditure over tax revenue and other receipts from the public, though the precise amount is somewhat obscure. One approach to appraisal of public financial operations relates estimated consolidated General budget and Annexed budget expenditures plus counterpart releases not reflected in these budgets to known receipts from the public, including the surplus of the State pension funds and net borrowing from the public but excluding counterpart releases. This estimate indicates an uncovered deficit of about TL 470 million for the Turkish fiscal year ending February 29, 1952.^* This balance is expected to be financed by use of loan and grant counterpart and central bank advances resulting in increased money circulation. It is clearly a major inflationary influence. The comparable figure for the previous year would be about TL 280 million.^*

However, it appears that up to the present the inflationary influence of the public account deficit has been offset. Prices in Turkey have been astonishingly stable (see Table 4). Internal price indexes have risen very moderately over the last year and materially less than import and export price indexes.

It is not possible to determine precisely the relative importance of the factors making for this result, but it seems probable that the chief items are, first, the surplus of imports of current goods and services financed by foreign aid and by the use of foreign exchange reserves and, second, the increase in production and business activity in the country. There is no indication that there has been any private disinvestment, or reduction of the rate of private investment, though no comprehensive information as to this rate is available.

The Government of Turkey has furnished figures which would indicate that, during U.S. FY 1951, the import surplus as measured by the current payments deficit may have been about TL 165 million and estimates that in US fiscal 1952 it will be about TL 220 million. Turkish deficits with EPU this year from July to October totaled about TL 102 million compared to a cumulative surplus of almost TL 30 million for the same months last year, but this striking shift is certainly at least partly the result of the fact that seasonal exports moved very early last year and have tended to lag this year.

The increase in production and business activity has been substantial. All-time Turkish records were established this year by grain and cotton production, and output of coal, chromite, copper and iron and steel will probably also reach new highs. The principal increase was in grain production which rose in value by about TL 350 million at present prices. Quite aside from this large increase in national production, there is probably a secular increase in the amount of money required in Turkey as the peasant subsistence farmers are more and more drawn into the market economy.

It seems likely that those two stabilizing factors have between them offset the inflationary pressure of the public financial deficit. It may be noted, however that no basis for complacency exists, for a recent joint study by the U.S. Embassy, ECA Mission and JAMMAT indicates that the prospect is that financial pressures are likely to increase somewhat in the next two years. Nevertheless, for the current Turk fiscal year it does not seem that the expenditures for which the additional counterpart releases are now proposed will produce important inflationary consequences.

Conclusion

Release of additional TL 81.5 million for military production, construction, equipment and matériel and a shift of TL 71.4 million to this purpose within the previously approved programs should be approved. This subject has been considered by a working group which concurs with this conclusion.³

1. See telegram Torep 2145 to the U.S. Special Representative in Europe, March 30, p. 1134.
2. Tables not printed.
3. Debt service for Turkey’s fiscal year 1951/52 is given as TL 215 million as contrasted with TL 117 million in 1950/51. Under the assumption that the TL 98 million difference between these figures represents refinancing as opposed to interest payments, the TL 98 million has been added to the 1950/51 figure for comparability. [Footnote in the source text.]
4. Debt service for Turkey’s fiscal year 1951/52 is given as TL 215 million as contrasted with TL 117 million in 1950/51. Under the assumption that the TL 98 million difference between these figures represents refinancing as opposed to interest payments, the TL 98 million has been added to the 1950/51 figure for comparability. [Footnote in the source text.]

3. According to the NAC Files, in Action No. 506, December 4, the NAC had unanimously approved, via a telephone poll, the proposed release of LT81.5 million in Turkish counterpart funds and the reprogramming of LT71.4 million from previously approved programs. According to the records, the action occurred 2 days prior to the promulgation of Document No. 1227. The text of Action No. 506 was as follows:

   “The National Advisory Council advises the Administrator for Economic Cooperation that it perceives no objection to the release of an additional TL 81.5 million for military production, construction, equipment, and matériel and a shift of TL 71.4 million to this purpose within previously approved programs for the period ending February 29, 1952.” (NAC Files: Lot 60 D137)