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The following item is a Letter of Intent of the government of Turkey, which describes the policies that Turkey intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Turkey, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
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January 30, 2001

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. The strict implementation of the strengthened policies described in our Letter of Intent (LoI) of December 18, 2000—together with the support of the international financial community—rapidly restored market confidence after the financial turmoil in late 2000. We remain fully committed to the strategy laid out in the December 18 LoI. That letter remains the main document outlining our policies for 2001-02, which are here updated in some specific aspects in light of recent developments. This update relates to: (i) monetary policy implementation within the existing framework; (ii) the reform of the tobacco sector; (iii) the rolling out of tax identification numbers (TINs); and (iv) banking. We hereby also request completion of the fifth review under the Stand-by Arrangement.

2. We will continue to manage monetary policy within the framework set forth in the December LoI. The preannounced exchange rate path will remain the main monetary anchor of the program. Within this constraint, the Central Bank of Turkey (CBT) will manage monetary policy with the goal of maintaining an adequate level of foreign exchange reserves, and, to the extent made possible by our exchange rate commitment, of keeping monetary conditions at a level supportive of our inflation target. The December LoI indicated that should capital inflows be stronger than envisaged at that time, NDA would be kept below its ceiling so as to avoid excessive money creation. This policy has been strictly implemented in January, thus helping to restore confidence. The CBT will continue to monitor developments in base money, and reduce NDA in response to higher-than-projected capital inflows, keeping in close consultation with Fund staff. Moreover, in light of the large margin of NDA with respect to its ceiling that is expected to be registered at end-January, we have revised downwards the NDA ceiling for the dates following January 31, so as to increase the predictability of monetary policy (Annex A). Correspondingly, the NIR floors have been revised upward (Annex B). The appropriateness of the NDA and of the NIR floors will be reassessed during the forthcoming program reviews, in light of developments in external accounts and inflation. NDA between test dates is not expected to exceed systematically, or by large amounts, the ceilings set for the test dates following January 31, except during the March religious holidays (for which a more detailed indicative path for NDA will be discussed during the February program review). In the event of significant deposit withdrawals and in accordance with the protocol between treasury, the Savings Deposits Insurance Fund (SDIF), and the CBT, the latter is committed to provide liquidity to the affected SDIF bank (banks), if needed to implement the guarantee. Should this lead to a breach of the NDA ceiling, the CBT will consult with the Fund staff to examine the factors behind the breach, and will be committed to move NDA back within the ceiling with open market operations immediately thereafter. Finally, in order to facilitate monetary management, state banks will be more prompt in adjusting their borrowing rates to money market conditions.

3. The reform strategy for the tobacco sector and the restructuring of TEKEL, one of the main component in our agricultural policy reform and in our privatization drive, is being strengthened with respect to the December LoI. We will transfer the state monopoly agency (TEKEL) to the Privatization Agency (PA), instead of transferring only its tobacco processing units. To this end, a law—which will also reform the tobacco sector and phase out support purchases of tobacco—will be enacted by end-February 2001 (a structural benchmark, Annex C).

4. As stated in the December LoI, strengthening tax administration is essential to improve efficiency and equity of the tax system. Among other steps, we have increased the number of TINs from 13 million at end-1999 to 15.2 million at end-2000. We intend to increase by 50 percent the number of TINs from the end-2000 level by end-2002. To that end, the necessary tax regulations will be enacted by end-September 2001 (a structural benchmark, Annex C).

5. Regarding banking, the resolution of the SDIF banks is proceeding according to schedule. The transition bank set up to reorganize the assets and liabilities of the five banks that will have their license revoked will be sold or otherwise resolved by end-September 2001 (a structural performance criterion). The strategy for dealing with the remaining two banks taken over by the SDIF after September 2000 is still being developed as information on these banks is being refined. SDIF intends to sell the larger of these two banks (Demirbank) using a "fast track" process, taking advantage of substantial investor interest already expressed in this bank. The bidding terms will be announced by end-January 2001 and will be followed by a brief due diligence process; after that we expect to complete a speedy sale. In the case of the remaining bank, the SDIF will follow the same sales process used for the banks taken over before October 2000 but with a two-month time lag. Regarding bank regulation, a new regulation meeting EU standards that defines direct and indirect ownership relationships in connected lending is still being discussed with the banking industry and is expected to be introduced by end-February 2001 (a structural benchmark).

    Very truly yours,
    Mr. Recep Önal
    Minister of State for Economic Affairs
    Mr. Gazi Erçel
    Governor of the Central Bank



Table 1. Turkey: Performance Criteria on the Net Domestic Assets
of the Central Bank of Turkey


(In trillions of lira)

Outstanding NDA as of January 11, 2001:



January 31, 2001 (performance criterion)1
February 28, 2001 (performance criterion)1
March 31, 2001 (performance criterion)1
June 30, 2001 (performance criterion)1
September 30, 2001 (indicative ceiling)1
December 31, 2001 (indicative ceiling)1


1 The compliance with the performance criterion (indicative target) shall be based on the average of the stocks prevailing during the five working days immediately preceding each of these dates.

1. The net domestic assets (NDA) of the Central Bank of Turkey (CBT) are defined as base money less the net foreign assets of the CBT valued in Turkish lira at end-month actual exchange rates.

2. Base money is defined as currency issued by the CBT, plus the banking sector's deposits in Turkish lira with the CBT.

3. Net foreign assets of the CBT are defined as the sum of the net international reserves of the CBT (as defined in Annex F of the Letter of Intent (LoI) dated December 18, 2000), medium-term foreign exchange credits (net), and other net foreign assets (including deposits under the Dresdner scheme of original maturity of two years or longer). As of September 30, 2000, net foreign assets of the CBT amounted to TL 6,776 trillion.

4. The cumulative net change in the devaluation account from its balance at end-1999 (excluding any distribution—in cash or through the write-off of government paper held by the CBT or by any other mean—of unrealized foreign exchange profits) will be subtracted from the end-period NDA stock as calculated above.

5. NDA ceilings will be adjusted for any change in the definition of the aggregate to which the reserve requirement applies according to the following formula:

NDA = R*B,

where: R denotes the 4 percent reserve requirement plus the 2 percent liquidity requirement coefficient and B denotes the change in base generated by a change in the definition of the reserve aggregate. Neither this coefficient nor the averaging period will be changed during 2001.

6. The NDA ceilings will be adjusted downward for any waiver of reserve requirements for any additional bank intervened by the BRSA. The adjustment will be equal to the existing reserve requirement coefficient times the amount of liabilities at these banks subject to reserve requirements.


Table 2. Turkey: Performance Criteria on Net International Reserves


(In millions of U.S. dollars)

Outstanding stock as of January 11, 2001:



January 31, 2001 (performance criterion)
February 28, 2001 (performance criterion)
March 31, 2001 (performance criterion)
June 30, 2001 (performance criterion)


September 30, 2001 (indicative floor)


December 31, 2001 (indicative floor)


1. Net international reserves of the Central Bank of Turkey (CBT) comprise its gross foreign assets excluding encumbered reserves less its gross international reserve liabilities plus the net forward position of the central bank, denominated in U.S. dollars. Encumbered reserves are reserves that are not readily available.

2. For the purpose of the program, gross foreign assets are all short-term foreign (convertible) currency denominated claims on nonresidents, monetary gold valued at the November 30, 2000 average London fixing market price of US$269.05 per troy ounce, foreign bank notes, balances in correspondent accounts, and any reserve position in the IMF. At present encumbered reserves consist of foreign asset holdings in accounts of the Turkish Defense Fund (amounting to US$426 million on November 30, 2000). The special Dresdner portfolio (amounting to US$898 million on November 30, 2000) is also encumbered, but is not subtracted from foreign reserves given the overlap with one-year foreign currency denominated liabilities (see below). Reserve assets as of November 30, 2000 amounted to US$19,428 million.

3. Gross international reserve liabilities include all foreign currency-denominated liabilities to nonresidents with an original maturity of up to and including one year, reserves against foreign currency deposits of the banking sector, claims from central bank letters of credit, overdraft obligations of the central bank, and liabilities arising from balance of payments support borrowing irrespective of their maturity (including liabilities to the IMF). On November 30, 2000 reserve liabilities thus defined amounted to US$8,331 million.

4. The net forward position is defined as the difference between the face value of foreign currency-denominated central bank off-balance sheet (forwards, swaps, options, and any future contracts) claims on nonresidents and foreign currency obligations to both residents and nonresidents. As of November 30, 2000 these amounts were zero.

5. All assets and liabilities denominated in foreign currencies other than the U.S. dollar will be converted into U.S. dollars at the program cross rates specified in Annex J in the Letter of Intent dated December 18, 2000.

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