*This Article was originally published in Legal Industry Reviews
Volume 5 N'1 | March 2024 | Türkiye
Introduction:
In recent years, significant increase has been observed in the amounts of financing obtained by municipalities from abroad, aiming at meeting the need for financing large-scale projects developed by and growing financial needs of, local administrations. In line with this, municipalities access external financing directly in their name or through companies affiliated with the municipality. In certain cases, credit institutions may also require the municipality to act as a guarantor for the affiliated company. In this framework, to ensure budget discipline and to monitor public expenditures, municipalities are subject to certain procedures and restrictions regarding their ability to use foreign currency-denominated loans from abroad.
General Restrictions Appliable to External Financing by Municipalities:
As per Article 68(a) of the Municipality Law, external borrowing can only be made for the financing of projects included in the municipality’s investment program, by the provisions of the Public Financing and Debt Management Law. Furthermore, there is a limitation on the total amount that can be borrowed as specified in Article 68(d) of the Municipality Law. The total debt stock, including interest, of municipalities and companies fifty percent of the capital of which is owned by municipalities cannot exceed the amount of the total of the latest finalized budget revenues increased by the revaluation rate to be determined pursuant to the Tax Procedure Law. This amount is applied as one and a half times the total of the most recent finalized budget revenues for metropolitan municipalities.
Additionally, as per Article 8 of the Public Financing and Debt Management Law, external financing to be obtained by municipalities is subject to the approval of the Ministry of Finance. Nevertheless, granting this permission does not imply a treasury guarantee.
Foreign Exchange Requirements Applicable to External Financings by Municipalities:
Foreign exchange regulations of Turkey, namely, Decree No. 32 on the Protection of the Turkish Lira (“Decree No. 32”) and the Capital Movements Circular dated 2 May 2018 (“Capital Movements Circular”) also govern financings obtained by public institutions including municipalities. Under Decree No. 32, for financings obtained by such entities from abroad, having a maturity of more than one year, the loan agreement is required to be submitted to the Ministry of Finance to obtain an external debt number, within thirty days following execution. On the other hand, the Capital Movements Circular provides that public institutions are not required to have foreign currency income to obtain loans from abroad, which is otherwise a general requirement for foreign currency borrowing.
Further, as a general matter, under Decree No. 32, legal entities residing in Turkey are entitled to extend guarantees for the loans obtained by other resident entities. Nonetheless, such guarantees issuedby legal entities other than banks for the benefit of persons resident abroad are required to be notified to the Ministry of Finance within 30 days of issuance. Therefore, a guarantee issued by a municipality in favor of its affiliated company to guarantee an external loan must be notified to the Ministry of Finance within 30 days of issuance of the guarantee.
In addition, any utilization/drawdown and repayments in connection with the borrowings, or the provision of guarantees or performing the guarantee obligations, are required to be notified to the General Directorate of Public Finance of the Ministry of Finance by (i) intermediary banks or financial institutions, and (ii) municipality within 10 days.
In light of the above, municipalities are required to adhere to the obligations arising from various legislation when obtaining financing from abroad.
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