The proposed expansion of the European Bank of Reconstruction and Development's (EBRD) operations to Turkey marks a significant turning point for the Bank and could provide the country with an additional source of international credit.
The issue of extending the bank's activities to Turkey is a controversial one. Some commentators view the move as a search for new meaning on the part of the development institution, which is facing questions about its future direction. Others point out that Turkey is already well served by international development banks. However, the EBRD still has a useful role to play and remains a plus for Turkey provided it can offer well targeted projects and competitive interest rates.
At the EBRD's annual meeting held on May 19 in Kiev, Turkey's entry was approved in principle by all 63 members of the organisation. Although the final decision is not expected until October, it is widely expected that the application will be approved and that Turkey will become the main focus of the EBRD's expansion plans.
The bank was conceived in 1991 mainly to help former communist countries rebuild after the end of the Soviet Union, with a mandate to "foster the transition towards open market-oriented economies and to promote private and entrepreneurial initiative in Central and Eastern European countries." The EBRD's policy is to leave operational countries once they "attract a sufficient level of private investment". As the original countries that formed the focus of the bank's work have adopted free market economies, attracted foreign direct investment in droves and in many cases joined the EU, the EBRD now finds itself at a crossroads. Hungary, Estonia, Lithuania, Latvia, Poland, Slovakia and Slovenia are expected to leave the organisation in 2010, and the EBRD has now extended its operations eastwards to Central Asia and the Caucasus.
Turkey has been a financing member of the EBRD since its foundation but has until now been located outside the bank's mandated area of operation. Turkey does not fall into the EBRD's geographical umbrella nor is it an ex-communist country. The fact that the EBRD is considering extending its activities to Turkey has thus prompted fears that its membership would lead to an erosion of the core business of the bank.
US Department of the Treasury Under Secretary for International Affairs David H. McCormick told international press, "The US and a number of other countries acknowledge the potential benefits of an expanded mandate but are concerned it would dilute focus from the EBRD's core mission in critical areas like the Balkans and Central Asia, where market economies are still weak and widespread prosperity remains elusive, weaken the EBRD's financial stability, and create redundancy with other multilateral institutions."
Some criticism is justified. The bank, which will seek to increase foreign investment across a wide spectrum of business - including banking, tourism, small and medium enterprises (SMEs), energy, real estate, agribusiness and health and education - will no doubt overlap with the European Investment Bank, the EU's long-term lending institution, which has been operational in Turkey since the 1960s, investing 2.1bn euros in the country in 2007, up from 1.8bn euros in 2006. In addition, Turkey has been one of the top borrowers from the World Bank in the past four years, receiving $6bn during this period of time.
However, as long as interest rates are set at competitive levels, there is no reason why the EBRD's relationship with Turkey cannot be a symbiotic one. Not only will it provide greater access to credit for Turkish development projects but it will also provide the bank with new business.
"Having Turkey as an operational country will certainly contribute to the EBRD's efforts to continue to expand its business volume, to diversify its portfolio, to overcome an existing over-concentration problem, and thus enrich the bank's operations," Turkey's Treasury undersecretary Ibrahim Canakci told delegates.
A number of EBRD lending programmes have already proved successful in Turkey, namely up to $250m in loans to the Baku-Tbilisi-Ceyhan (BTC) pipeline, a network that extends from Azerbaijan and Georgia to Turkey. The bank's current focus on energy efficiency and renewable energy projects would be particularly beneficial to Turkey, which has a high rate of emissions per unit of GDP and has recognised potential in areas such as windfarms.
With the government's recent announcement that it would revive the Southeastern Anatolia (GAP) project, which aims to invest $32bn in the construction of dams and irrigation systems, the EBRD's funds and expertise would also be welcome.
While details of the proposed EBRD programmes are unlikely to be known for several months, the potential for synergy appears great. Moreover, the EBRD's belief that Turkey can boost its own business provides a major sign of confidence in the Turkish economy.