World Bank in Talks to Double Turkey Exposure to $35bn

In a significant development within the realm of global finance, the World Bank is currently engaged in advanced discussions aimed at potentially doubling its financial commitment to Turkey, reaching a substantial figure of $35 billion. This move is designed to bolster the stability of the Middle East’s largest non-oil economy, according to insiders with intimate knowledge of the matter.

Sources privy to these confidential deliberations reveal that the discussions encompass a comprehensive strategy that includes a robust commitment from the World Bank, amounting to a staggering $18 billion, slated for deployment over the next three years. This monumental allocation is in addition to the already existing programs with a total value exceeding $17 billion. To shed light on the matter, these insiders have conveyed this information on the condition of anonymity, given the sensitive nature of the ongoing negotiations. It is imperative to note that the proposed funding package encompasses a combination of direct lending to the Turkish government and an infusion of capital to bolster the private sector.

When approached for commentary on these negotiations, officials from Turkey’s Treasury and Finance Ministry chose not to provide any official statements. Similarly, the World Bank has refrained from offering any remarks on the matter.

Market Reaction and Implications
The impact of these discussions has reverberated throughout financial markets, leading to discernible shifts. In response to the news, the Turkish lira experienced a partial reversal of losses, and credit-default swaps witnessed a decline. Furthermore, the banking index surged by as much as 4%, reflecting the optimism surrounding this potential financial commitment.

This prospective deal signifies a resounding vote of confidence in the economic leadership currently at the helm in Turkey, with Treasury and Finance Minister Mehmet Simsek and central bank Governor Hafize Gaye Erkan spearheading critical reforms. Their appointment in June marked a pivotal turning point for Turkey, heralding a departure from years of unorthodox and growth-centric economic policies championed by President Recep Tayyip Erdogan until his re-election in May. Simsek and Erkan have embarked on a mission to rein in rampant inflation and recalibrate the nearly $1 trillion Turkish economy onto a more sustainable trajectory.

Allocation and Objectives
The envisaged allocation of the $18 billion funding tranche is underpinned by the World Bank’s vision to direct two-thirds of this capital towards Turkey’s private sector. This commitment is expected to manifest through direct investments and guarantees, further invigorating the nation’s business landscape. A portion of the funds will be earmarked to provide short-term guarantees to facilitate trade finance and bolster Turkish exporters.

Reconstruction Endeavours
Notably, the funding program currently under scrutiny underscores the World Bank’s steadfast support for Turkish policymakers’ endeavours to reestablish macroeconomic equilibrium. This sentiment is substantiated by excerpts extracted from a draft document seen by Bloomberg. A significant milestone in these negotiations occurred when Simsek and Erkan held discussions with Ajay Banga, the president of the World Bank, during a meeting in India in July, as reported by Turkish state media.

The impending allocation of funds is expected to play a crucial role in the reconstruction of areas ravaged by two massive earthquakes that struck Turkey’s southeast on February 6, resulting in a tragic loss of over 50,000 lives. In response to this catastrophic event, the government pledged to construct approximately 200,000 residential units within a year to assist survivors, with an estimated reconstruction cost of around $100 billion. The World Bank has already extended a €910.5 million ($980 million) loan to Turkey for these reconstruction efforts, a part of its existing $17-billion commitment.

Closing the Financing Gap
In the aftermath of the earthquakes, Turkey experienced a widening of its current-account deficit, reaching approximately 6% of its gross domestic product. This phenomenon was primarily driven by disruptions suffered by exporters in the affected regions and the allure of ultra-low borrowing costs that incentivised increased imports.