WB on Turkish inflation: patience is hard but the alternative is worse

The World Bank has been on the agenda in Türkiye for two reasons nowadays. First, because it decided to provide Türkiye with US$ 18 billion in project financing for the period 2024-2028, and second, because of the news that half of this financing will be made available on the condition that Syrian refugees and LGBTQ+ communities will be employed. Despite the denials of the Ministry of Treasury and Finance, attention has turned to these allegations, and questions about whether the projects that the World Bank promised to support will be able to compensate for the earthquake damages of 2023, whether they will remedy income inequality, and whether they will lead to additional environmental pollution have fallen to the background.
I asked those issues to Humberto Lopez, the World Bank’s Türkiye Director, who is currently in Washington for the April 17-19 World Bank-IMF meetings. Let me start with the most curious topic on social media. Lopez denies the news that half of the 18 billion dollars, i.e. 9 billion dollars, for Syrian asylum-seekers and employment of LGBTQ+ individuals is conditional, “to put it mildly, not true”. He says the World Bank’s “support operations” for Syrian refugees are carried out through European Union (EU) funds.

Mehmet Simsek, World Bank and IMF

Four issues stand out in Lopez’s answers to YetkinReport’s questions.
1- The World Bank (WB) still believes that Türkiye is struggling with high inflation and the cost of living, which puts “disproportionate” pressure on the poor;
2- Lopez emphasizes that it is difficult for President Tayyip Erdoğan to tell low-income citizens to “be patient” to get out of the economic crisis, but “the alternative is worse”;
As it is known, Treasury and Finance Minister Mehmet Şimşek and Central Bank Governor Fatih Karahan are in Washington for the WB-IMF meetings and for the meeting of G20 countries’ economy ministers and central bank governors to be held today, April 18. In the meantime, they are having their first meetings with global investors in Washington and New York, in the wake of the the March 31st local elections.
3- Green projects to increase the WB’s export and thus production capacity
4- No projects proposed by the government have been rejected, i.e., the projects supported are those jointly identified between the government and the WB.
Humberto Lopez, World Bank’s Türkiye Director, responded to YetkinReport’s questions as follows:

Earthquake, clean energy, and transportation

1- The World Bank has been under media scrutiny recently, with allegations around the Bank giving half of the new 18 B US$’s funding to Türkiye to Syrian Refugees, and LGBTQ+ communities. Is that true and if so, how?
“I am happy that the Bank Country Partnership Framework (CPF) is contributing to lively economic and development debate, but it is both sad and unfortunate that the reporting has not been accurate, to put it mildly. The CPF is quite clear that of the $18bn planned for the coming years, approximately $12bn will support the private sector, with a heavy emphasis on exporters. The idea is that this support helps create jobs, realize the country’s development potential, and accelerate the path toward high-income status. The rest will be channeled to the public sector and our main thematic areas are: (i) the recovery and reconstruction from the 2023 earthquakes and we will be working on public infrastructure, social services provision, and economic recovery; (ii) energy security and more specifically support for the 12 year-60 GW renewable energy plan prepared by the government; and (iii) fighting the challenges of climate change both thorough mitigation measures such as the decarbonization of the transport sector, and adaptation measures including flood and drought management operations, forest maintenance, irrigation projects etc.
That being said, the World Bank is currently implementing operations using “grants” from the European Union to support the Syrians Under Temporary Protection Status (STuPs) in Turkiye, and in the CPF we explicitly recognize how the Turkish population had integrated part of this influx of refugees. And let me add that I personally admire the country for what it is doing which I see as intrinsic to the famous Turkish hospitality.”

Medium Term Program and green projects

2- What were the criteria for the World Bank support to Türkiye for the 2018-2023 period and what are your criteria for the 2024-2028 period?
“The Bank CPFs are typically based on three filters. One, which I would say is the main one, is the country’s priorities. No country borrows, even at attractive terms, for activities that are not a priority of the government. In the case of Türkiye, the priorities are contained in the 12th National Development Plan and the Medium-Term program. The second filter is that the financed operations need to be aligned with the Bank’s mandate of promoting economic growth, reducing poverty, and ensuring a livable planet. And the third is that we, as an institution, should have a comparative advantage in the interventions.
Beyond these general criteria, our program for 2024-2028 has been influenced by the needs associated with the February 2023 earthquakes, and by the significant improvements in the economic prospects in the aftermath of the general elections of May 2023. ”

No Turkish project was rejected

3- What are the Turkish projects to be supported until 2028? Were there any government suggestions that were not found appropriate by the WB?
“The detailed list of projects to be supported until 2028 is still to be determined, and we typically do not announce specific operations until the World Bank Board has approved them, a step necessary for all the operations. What I can tell you is that this year we approved the Green Fund Project, which creates an equity fund to support firms upgrade their technology and green their production; the Green Export Project provides a guarantee to Eximbank to support firms adjusting to the European Union Carbon Border Adjustment Mechanism, colloquially known as CBAM; the Emissions Reduction Project which relies on the financial sector to finance firms efforts to reduce pollution; and the Türkiye Socially Inclusive Green Transition Project, one of our inclusion oriented operations focusing on ensuring that nobody is left behind due to the technological impact of a greener economy. Türkiye is also part of two regional efforts to facilitate the energy transition and energy efficiency. These operations approved in the last few months amount to $2.5bn. And in the coming 6 months we plan to approve operations for a similar amount and we will make them public as they are approved.
On the second part of your question, since I arrived in Türkiye in 2022, I have not received any lending request that we could not accommodate. ”

New projects for the earthquake zone

4- Will there be any more earthquake-related development projects that the WB is planning to support? If so, what are those?
“Yes, additional projects are coming to support the earthquake-affected areas. We are preparing one to support micro small and medium enterprises which lost their facilities (ie workshops, etc.). In June 2023 we approved a $450 million operation, providing support to affected firms in the form of working capital so that they continue operating. The operation was very well received by international development partners and both the Japanese Cooperation, and the Spanish Cooperation have added resources from their bilateral engagement. Additionally, the International Finance Corporation has launched a $600 million initiative to provide unsecured loans to five private banks to support job creation, disaster resilience, and competitiveness. But what we have seen while implementing the projects is that these firms will need to restore their production in a permanent way and for that physical facilities are critical. And the new operation will focus on that. In a second operation, we will be looking at the agricultural sector which is quite relevant in the earthquake-affected areas.”

Risk of losing the EU market

5- How will the Green Deal connect projects that the WB is planning to support to change Turkish lives? Will there be any investment-wise limitations?
“Türkiye’s strategic location is crucial as global value chains shift towards nearshoring, but to stay competitive, especially in EU markets, it must accelerate the decarbonization of its power sector. The EU’s CBAM, effective from 2026, presents an additional incentive, as Türkiye’s carbon-intensive manufacturing could lose EU market share if decarbonization lags. Conversely, early investment in green technologies could position Turkish firms to lead internationally, boost exports in competitive sectors like solar energy, create jobs, and outperform more emissions-intensive producers. For this reason, we are already implementing operations like the already mentioned guarantee to Eximbank, the Green Fund, or the Emissions Reduction.
We are also looking at ramping up support to improve energy efficiency, particularly in buildings, and enhance renewable energy through distributed PV, battery storage, grid updates, and hydropower systems. It will also support the development of city climate plans, GHG reduction in municipal infrastructure, green the financial sector, and refine policies for climate mitigation, including emissions trading.”

Polluting projects?

6- Do you support any mining or energy projects with the potential to cause further pollution? If there are any, what are your criteria for supporting those projects, considering that some mining and dirty energy projects have triggered environmental disputes and protests in society so far?
“Currently we do not have any mining operations in Türkiye, but we do have them in other countries. In all cases, the Bank sticks to its Environmental and Social Management Policies to ensure that interventions are sustainable over time.”

Regional development projects

7- What kind of projects did you support to ease regional disparities in 2018-2023 and plan to support in the 2018-2028 period?
“It is quite interesting that even though regional disparities are still significant in Türkiye, over the past few years spatial inequality has declined. In the past, we have done analytical work such as “Understanding the Drivers of Regional Disparities in Turkey” which focused on understanding the causes of regional disparities and designing the relevant policies. The new CPF will try to improve the institutional capacity of regional administrations to manage effective and resilient rural infrastructure investments and to harness economic development potential. We are also working on an operation that upgrades the railway between Kars and Sivas, part of the middle corridor upgrade efforts, in an area having levels below the country’s average. And finally, we cannot forget that the 2023 earthquakes affected areas with income levels below the country’s average so any intervention in these areas will support a more equitable Türkiye.”

Disproportionate impact on poor

8- Income distribution injustice is a problem in Türkiye. Do you have any programs to fight that?
“Let me pick on my reference in the previous question to the declines in spatial inequality. This has been accompanied by two other inequality-reducing forces such as the decline in labor informality and the increase in female labor participation. So, there are positive trends in several areas. And yet, we also see that as the country modernizes the agricultural sector and the construction sector, which typically employ workers with lower skill levels, are losing jobs whereas the manufacturing and service sectors which require more skills are increasing jobs. This is a challenge because to respond to this we will need to focus on building human capital and this is a medium-term endeavor. We are discussing with the government what can be done to upgrade the quality of education to ensure that lack of skills which is a problem for all in the country.
And yet, I need to also refer to the impact of the high inflation in recent months and years as it disproportionately affects the poorer segments of society. ”

Alternative is worse

9- Do you think any of the projects you plan to support will help Türkiye fight against high inflation and cost of living?
We are having a fluent dialogue with the Government on several topics including macroeconomic sustainability. And I have already recognized publicly that I do think that the Government is on the right track to address the high inflation in the country. I know that for many people this is not easy and asking for the needed patience and perseverance can be tough. But I honestly think that the alternative to this would be much worse. If we want to create jobs sustainably, we will need to ensure that economic resources are allocated efficiently in the country, and this is very difficult to do when inflation is high. And as inflation declines and the economy picks up again this will further help in the fight against inflation and will help create jobs.