Local Government and the National Economy

Local Government and the National Economy

2. 
   Local authorities’ share of the economy has grown over time. Revenues for all three kinds of local authorities - municipalities, provinces and villages - grew from 1.24% to 4.75% of GNP between 1980 and 2000 (Table 2.5). The municipalities claim by far the biggest share of the total revenues available for local authorities. Their share increased more than three times between 1980 and 2000 while the size of the urban population roughly doubled, indicating a significant real increase in the share of public spending on the urban sector. SPA revenues have grown considerably, but remain a small fraction of the total.
   

2. 
   The municipal sector, without most of the major municipal enterprises, represents about 4% of the GNP and is smaller than in many other countries at similar income levels. However, the sector’s responsibilities are also less than elsewhere since central government in Turkey has retained the responsibility for funding and provision of many expensive services, i.e. health, education and social security. The municipal sector is financed from three sources: (i) central government transfers which account for 50% of the revenues; (ii) locally generated – but mainly centrally controlled – revenues which represent about 39% of the resources; and (iii) borrowings which amount to about 11% of the funds available to the municipalities.
   

2. 
   As a share of GNP, central government transfers to municipalities grew significantly during the 1990’s – from 0.85% to 2.21% of GNP by the year 2000 (Table 2.6). Pressures for funding public investments in urban Turkey resulted mainly in increases in the central government funding allocations to the municipal sector. During the same period the locally generated revenues grew only slightly relative to the GNP indicating the continuing reliance of the municipalities on central funds for services delivered locally. Borrowed funds form only a small part of the cash inflow, reflecting the absence of a stable source of long-term financing for the municipalities.
   

2.21 Turkey suffered a financial crisis in February 2001 due to chronic fiscal deficits over a decade. The pre-crisis environment was characterized by a volatile macro-economic environment with high chronic inflation, high and volatile interest rates, falling and unpredictable exchange rates, and a growing fiscal deficit and public debt. Lack of a clear economic strategy, fragmented banking regulation and supervision, deficient accounting standards, and politically directed and subsidized lending in a number of state banks had aggravated the situation

2.24 Municipal expenditures are reported under three main headings: current expenditures, investments, and transfers (Table 2.7). The table below shows the breakdown in the three categories between 1990 and 2000. In relative terms, investment expenditure has increased; current expenditures, especially staff costs, have fallen; and transfers have increased slightly. A notable feature is that expenditure per resident has increased between 1990 and 2000 due to an increased level of financing from the central government to public institutions such as Iller Bank and the Social Solidarity Fund. Aggregated sectoral data on the distribution of expenditures, i.e. water, transport, solid waste management, is not available. The ongoing project to establish a performance monitoring system for local authorities will enable comparisons to be made across municipalities on expenditures for various services.

2.25 There are several factors that require significant strengthening of financial management systems at the local level: there is a high volume of resources, representing more than 4% of the GNP, that is managed at the local level; local financial management capacities are often low; the current audit and financial controls are not adequate to change fiscal behavior at the local level; and as part of the macro-economic reforms, the Government has adopted measures to strengthen financial management for the public sector (including public procurement, financial management and control, budget classification). While these measures are being implemented centrally, work has not yet started in the municipalities on this matter.