For more information, see Turkey and the IMF

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.


Use the free Adobe Acrobat Reader to view MEP Tables (751 kb pdf file).

Ankara, May 3, 2001

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

Dear Mr. Köhler:

The letter of intent sent to you by Minister Dervis and Central Bank Governor Serdengeçti sets out the polices, programs and measures that Turkey's government will implement to overcome the financial and economic crisis affecting Turkey today and to steer the country to a strong economic recovery within a macroeconomic framework that aims at reducing inflation to less than 20 percent next year. In our program, growth, stability and structural reform are mutually reinforcing goals. The government is fully committed to pursue these goals and stands behind all the measures and polices detailed in the letter. As you know, we already have made impressive progress in the legislative agenda that constitutes the basis of very deep structural reforms, including in enhancing governance and transparency in both the public and the private sectors.

A key dimension of our national effort is a strong primary surplus in the budget. The fiscal adjustment, which will be of the order of 9 percentage points of GNP over 2000-2002 period, requires very tough measures. But we want to establish debt dynamics for Turkey that will reduce both domestic and foreign debt, free resources for private sector investment and allow us to channel public resources as much as possible into activities that crowd-in that investment and that protect the poorest and most vulnerable sectors of our population.

The program needs strong and timely financial support from the international community. We are grateful for the cooperation you are offering to our economic team and we trust that the positive evaluation of our program by the Board of the International Monetary Fund will help stabilize markets, restore confidence, and allow us to implement the structural reforms that will permit Turkey to achieve growth with stability and social justice.

Very truly yours,

Dr. Devlet Bahçel
Deputy Prime Minister


A. Mesut Yilmaz
Deputy Prime Minister
Bülent Ecevit
Prime Minister

Ankara, May 3, 2001

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

Dear Mr. Köhler,

1.  The attached Memorandum on Economic Policies (MEP) sets forth the economic program of the Turkish government for the balance of 2001 and for 2002. This program is a continuation of the one initiated in late 1999, with the support of a stand-by arrangement with the International Monetary Fund. It shares the same strategy: disinflate the Turkish economy, strengthen the fiscal accounts, and reform the structure of the Turkish economy as a condition for setting economic growth on a sustainable basis and moving Turkey closer to its goal of joining the European Union. However, the program's policies have been significantly strengthened, in response to the recent crisis that led to the float of the Turkish lira on February 22, 2001, including through increased emphasis on transparency, accountability, and good governance in both the private and public sectors. In support of our strengthened program, we request that the arrangement be augmented by the equivalent of SDR 6.3624 billion and that the purchases scheduled through end-2001 be rephased and would consequently be subject to reviews which are expected to be completed during May, June, July, September, and November 2001.

2.  We believe that the policies and measures described in the attached memorandum are adequate to achieve the objectives of the program, but we stand ready to take additional measures, if necessary, to keep the program on track, consulting regularly with the Fund. Purchases under the arrangement will be subject to reviews in June, July, September, November 2001, and quarterly reviews thereafter for the duration of the arrangement.

3.  With this letter we also request the completion of the sixth and seventh program reviews under the stand-by arrangement. Because of the severe financial distress in the run up to and immediately after the float of the Turkish lira on February 22, 2001, as well as some revisions in our policies we request the following waivers in the program's performance criteria:

  • the end-March 2001 performance criteria on net domestic assets (NDA) and on net international reserves (NIR) were not observed (Annex A of the attached Memorandum). We are hereby requesting waivers of these performance criteria.

  • We are also requesting a waiver of the structural performance criterion related to the approval of the Electricity Market Law. This waiver is needed because the law was enacted some two weeks after the program's revised deadline of February 15, and because in that law the deadline for reaching financial closure for the contracts involving the transfer-of-operating rights (TOORs) for generation and distribution electricity companies was set at end-June 2001 (against the envisaged end-March 2001 deadline). These small deviations do not diminish the scope of this important structural reform.

  • We request a waiver of the performance criterion related to the issue by end-March 2001 of final tender documents and invitation of bids for Turk Telekom. As discussed in the attached Memorandum, we have decided to improve the terms at which Turk Telekom will be privatized, including through legislative amendments allowing the divestiture of up to 100 percent of the company (excluding a golden share). However, the timing of the privatization will also depend on the conditions of the international telecommunication market, which are at present not conducive to a successful privatization operation.

Very truly yours,

Mr. Kemal Dervis
Minister of State for Economic Affairs
Mr. Süreyya Serdengeçti
Governor of the Central Bank of Turkey

Memorandum on Economic Policies

1.  This memorandum lays out our new economic policy framework following the float of the Turkish lira on February 22, 2001. The float requires a recalibration of economic policies and of short term policy goals. However, it does not alter our overall economic strategy, which remains anchored to our firm commitment to eradicate inflation, strengthen the fiscal accounts, and remove the structural distortions that have constrained for years Turkey's growth. To these ends, we will build on the considerable results that, in spite of the crisis, have been achieved since the beginning of the program: before the crisis inflation was brought down to about 30 percent, the primary position of the public sector was shifted to a level consistent with long term fiscal solvency, and major structural reforms were undertaken in banking, social security, and agricultural support. These results have considerably enhanced the underlying strength of the Turkish economy.

A.  The Decision to Float and its Implications for the New Policy Framework

2.  While our program envisaged from the beginning an exit strategy from the crawling peg system, unanticipated financial and macroeconomic developments led us to float the Turkish lira earlier than planned. Financial conditions had improved significantly after the November crisis, as highlighted by a decline in interest rates in the secondary government paper market to some 50 percent by mid-January. However, the situation remained fragile, owing to persistent concerns about the health of the banking system, an inflation rate still twice as large as the rate of crawl, and some slippages in policy implementation. Against this background, the perception by financial markets that the political situation was deteriorating led to a major attack against the Turkish lira on February 19-21. This attack was initially resisted through a tight liquidity policy. However, overnight interest rates skyrocketed to over 2000 percent, a level clearly unsustainable even for a few days. Thus, the government decided on February 22 to float the Turkish lira and to revise the macroeconomic and structural policy framework in light of that decision.

3.  Our economic policies aim at minimizing the short-term macroeconomic impact of the recent crisis, while setting the stage for a resumption of disinflation and growth. While considerable uncertainty remains about short-term developments, the program's baseline scenario (Table 1) envisages the following macroeconomic targets:

  • We expect real GNP to fall by 3 percent in 2001. However, after a decline in the first half, growth is expected to resume in the second half of the year, reflecting the rebound of exports and the expected good performance of tourism. This recovery is projected to lead to a growth of GNP of 5 percent in 2002.

  • Owing to the depreciation of the lira after the float, inflation is expected to increase in the second quarter. However, reflecting the effect of the program policies, CPI inflation is expected to decline in the third quarter, and is targeted to fall to about 2 percent per month (on a seasonally adjusted basis) in the last quarter. For the whole year, we expect CPI inflation (December/December) to be 52 percent. CPI inflation is targeted to fall to 20 percent by December 2002.

  • The external current account balance is projected to improve significantly as a result of stronger competitiveness of Turkish products and the deceleration in economic activity. We expect the external current account to be close to balance in 2001 and 2002, after a deficit of almost 5 percent of GNP in 2000.

4.  These goals will be achieved through a three-pronged approach based on: (i) structural policies aimed at correcting the distortions directly underlying the recent crisis, including in banking, and at enhancing the transparency of economic management and the role of the private sector in the restructuring of the economy; (ii) fiscal and monetary policies geared towards restoring financial stability and resuming the disinflation process; and (iii) an enhanced social dialogue aimed at price and wage policies consistent with macroeconomic stability, growth, and the protection of the most vulnerable parts of the society.

5.  Policies will be explained and implemented in a transparent manner. A new communication and openness policy will be an integral and important part of our reform strategy, particularly in critical areas such as banking. We will develop a strategy aimed at explaining major policies and actions to market participants through regular press conferences, newsletters, seminars, and other events.

B.  Structural Policies for a Stronger Economy

6.  The recent developments have highlighted the difficulty of implementing tight monetary and fiscal policies aimed at disinflation while widespread structural weaknesses persist. The vulnerability of the banking sector, including the state banks, has involved sizable fiscal costs and distorted the functioning of monetary policy. These problems have resulted from underlying weaknesses, but also from insufficient transparency, particularly in the accounts of state banks, which have impeded public scrutiny and delayed the needed policy adjustment. Enhancing transparency in policy making is thus a priority. This will be achieved through administrative and regulatory steps and by improving the reporting required by public and private institutions. More generally, it will be achieved by increasing the role of the private sector in the economy, within the context of a proper regulatory framework. Our structural policy agenda, detailed below, in banking, public accounting, privatization and foreign direct investment is indeed unified by a common thread: that of improving the economic environment through enhanced transparency, better governance, and a strengthened regulatory environment. In implementing our structural agenda, we expect continued support from the World Bank.

Banking sector reform

7.  There is a need for far-reaching and decisive actions in the banking area. The structural weaknesses in the banking sector, especially in state-owned banks but also a steady erosion of solvency in private banks that has led to a growing number of takeovers by the Savings Deposit Insurance Fund (SDIF), have caused an accumulation of large losses to be borne by the government. The increasing funding needs to cover these losses have forced the state- and SDIF-owned banks into large-scale overnight funding, which has made them particularly susceptible to liquidity and interest rate shocks. This in turn has undermined monetary control. Exceptionally high overnight interest rates have made losses and funding needs grow exponentially in recent months.

8.  Fundamental reforms of the state- and SDIF-owned banks are of the highest priority for systemic stability, monetary control, and a lowering of interest rates. Excluding liabilities to the CBT, three state banks (Halk, Ziraat, and Emlak) and the SDIF banks on March 16 had overnight liabilities (repurchase agreements and deposits of commercial bank and nonbank customers) of some TL 13¾ quadrillion. In order to reduce the systemic vulnerability of these banks, their threat to monetary policy effectiveness, and shrink their balance sheets, our strategy is to eliminate fully this overnight position. More specifically, state- and SDIF-owned banks will receive government securities as part of their recapitalization (see below). These securities will be sold directly or through repurchase agreements to the CBT and the proceeds will be used to eliminate the overnight borrowing. SDIF and state banks' overnight position outstanding on March 16, 2001 will be reduced by at least two thirds (including the elimination of overnight positions vis-à-vis commercial banks) as a condition for the completion of the sixth and seventh reviews (Table 2). The remaining overnight position will be eliminated as a condition for the completion of the eighth review. The resultant excess liquidity in the financial system will be absorbed by the CBT through monetary instruments in close coordination with Treasury's debt management. Moreover, the stock of repurchase agreements of SDIF and state banks with the CBT will not exceed TL 7 quadrillion by end-May 2001 as a condition for completing the eighth review.

9.  In addition, all state and SDIF banks will be subject to maturity guidelines and uniform deposit rates for different maturity ranges. The maturity guidelines will be determined by the governing boards of the state and SDIF banks in consultation with CBT. These guidelines will include limits on the overnight borrowing from commercial banks and other market sources (these limits will be further discussed during the eighth review). Uniform deposit rates for all state and SDIF banks will be determined on a daily basis by the managements and treasuries of the state and SDIF banks in consultation with the CBT. These deposit rates will be kept below market rates for treasury securities to allow the state and SDIF banks to be profitable. Special arrangements have been set up for continuous coordination between the CBT, Treasury, the Bank Regulation and Supervision Agency (BRSA), and the treasurers of the state and SDIF banks.

10.  The two largest state banks (Ziraat and Halk) will undergo financial and operational restructuring to ensure their future profitability. More specifically:

  • Governance of Ziraat and Halk will be strengthened through the establishment of a common and politically independent governing board, reporting to the Treasury, and the appointment of new management (a condition for the completion of the sixth and seventh reviews) who will apply commercial criteria to operations and pricing policies that ensure profitability. The governing board will also formulate plans for the privatization of these banks.

  • The financial restructuring will entail the elimination of remaining "duty losses," a recapitalization to cover any negative net worth, the replacement of existing government papers bearing below-market yields (where needed to improve the structure of their balance sheet), and an increase in the banks' risk-weighted capital adequacy ratio (CAR) to 8 percent (implementation of this financial restructuring is a condition for the completion of the sixth and seventh reviews). The instruments used for these purposes will be transferable government securities at market terms in a mix of maturities and currency denominations with interest paid quarterly to ensure that the banks have sufficient liquidity to operate and honor any deposit withdrawals. These securities will be held to generate income and liquidated only to cover the net withdrawal of deposits or other liabilities.

  • These actions will be accompanied by new risk management procedures to be applied by the governing board and the managements of the banks. To reduce operating costs, the operations of these banks will be streamlined as rapidly as possible.

  • After the above financial restructuring is completed, these banks will be required to fully comply with all BRSA regulations applicable to commercial banks. Treasury will immediately start monitoring more closely their cash flow, profitability and liquidity. The specific indicators for program monitoring of the state banks will be defined during the eighth program review.

  • The implementation of these reforms will be overseen by independent outside auditors in each bank, to be appointed in May.

11.  Among the remaining two smaller state banks, one is insolvent and unviable while the other one is in the process of privatization. The banking license of the insolvent bank (Emlak) will be withdrawn (the bank will be closed) and its liabilities and some assets transferred to Ziraat (implementation of this action by end-May 2001 will be a condition for the completion of the eighth review). Ziraat will be provided with additional capital to facilitate the absorption of Emlak. The launching by the other bank (Vakif) of an initial public offering in the Istanbul Stock Exchange has been delayed by the recent crises, but the privatization process will be resumed as soon as market conditions allow.

12.  The sharp increase in the losses of the SDIF banks, due to excessive recourse to the overnight market, has made a speeding up of their resolution a high priority. Thirteen banks have been taken over since 1997, of which 10 in the last two years. The operations of the five banks combined into the transition bank (Sümerbank) are being scaled down rapidly, with half of the branches already closed and half of the personnel already laid off. Another small bank (Ulusal) has already been scaled down to a shell and will be merged into Sümerbank in May. It should be noted, however, that the overall administrative costs count for less than 2 percent of total losses and that financial restructuring is what is called for with utmost urgency. Accordingly, Sümerbank will be recapitalized by the SDIF to cover the bank's negative net worth (a condition for the completion of the sixth and seventh reviews) using transferable securities similar to those used in the state banks and with a currency composition to provide cover for its FX deposit liabilities. Its nonperforming loans (NPLs) will be transferred to the Collection Department of the SDIF (COD) by end-July. Sümerbank will be put up for sale with bids to be received by end-September 2001. If no viable bids are received at that time, the bank will be liquidated. A liquidation plan involving transfers of deposits to other banks, together with matching portfolios of government paper, will be developed for the event that the bank has not been sold.

13.  At the same time, SDIF is stepping up its efforts to resolve the remaining seven SDIF banks--a difficult task in view of weakening investor interest and the deterioration in the economic environment. Banks in this group will also be recapitalized to cover their negative net worth (a condition for the completion of the sixth and seventh reviews). So far, bids have been received for only 2 banks offered for sale, the medium-sized Demirbank and a small bank (Ekspres). A third recently intervened bank (Iktisat) will be offered for sale in May. We consider these 3 banks to be the most attractive ones to sell and are making every effort to conclude an early deal. In the case of Demirbank, negotiations are under way with one domestic and two foreign bidders. In case these banks cannot be sold by end-2001, they will be liquidated. The remaining 4 banks will be organized into a second transition bank by end-May or put into liquidation (a condition for the completion of the eighth review). In sum, out of the 13 banks taken over by SDIF since 1997, 8 will be closed by end-May. The remaining banks will be sold, put into liquidation, or otherwise resolved by end-2001 (a condition for the completion of the twelfth review). In the future, in the privatization of any of the banks that have been taken over by the SDIF, we will disqualify all previous owners from participating in the bidding, directly or indirectly, including for a minority stake.

14.  The build-up of capacity in the Collection Department of the SDIF (COD) to deal with distressed assets has become a high priority. COD has experienced a very slow start and no NPLs have yet been transferred. We realize that capacity for loan and other asset sales, recovery and workouts has become essential for the bank resolution process. We intend to rapidly hire additional staff to make the COD ready to start receiving NPLs and other assets from the SDIF. Legal amendments to facilitate the operation of the COD (establishment of special commercial courts and special powers to SDIF for debt recovery) have been submitted to Parliament. As mentioned above, Sümerbank will transfer all its NPLs above TL 75 billion to COD by end-July, and other SDIF banks will have started their transfers by that time as well. These transfers will be completed by end-October this year. The COD will report on its performance to the public and markets. Operating rules and procedures for the COD will be approved, professional managers appointed, and recruitment of a substantial number of specialized professional staff initiated by end-May.

15.  In private banks, recapitalization is needed to counter the effects of high interest rates, the depreciation of the lira, and the slowing economy. Banks need to raise capital and several banks have already done so. All cash dividend distributions have been suspended until the capital adequacy ratios have been restored. The BRSA is requiring all capital deficient banks to present detailed capital strengthening plans by end-April (prior action for the completion of the sixth and seventh reviews) and will actively follow up on the implementation of such plans through time-bound commitment letters. Banks, especially those with common owners, are encouraged to merge. Tax laws will be further revised to make mergers of banks and their subsidiaries tax neutral. Any insolvent bank will be taken over by the SDIF. Loan loss provisioning rules will be strictly enforced. An enhanced monitoring system for the liquidity position and interest rates in all banks has been introduced to make sure that unviable banks are not allowed to engage in unsound practices and that corrective actions are taken early. While we feel confident that the full guarantee of depositors and creditors will continue to give the BRSA the protection it needs for resolving banks without concern for bank runs, we have strengthened it further by making its funding by the government legally explicit.

16.  The Banking Law will be amended in several respects to facilitate the resolution process and support the upgrading of the regulatory framework, including: (a) establishing special commercial courts and giving SDIF special debt recovery powers; (b) strengthening the protection of staff and management of the BRSA and SDIF against law suits arising from carrying out their official duties; (c) defining the concept of "own funds" to permit the application of new connected lending limits on a consolidated basis; (d) broadening the definition of credit exposure to include derivatives; and (e) providing for the full tax deductibility of specific loan loss provisions (see below). Parliamentary approval of these amendments will be a condition for the completion of the sixth and seventh reviews.  

17.  The ongoing strengthening of the regulatory framework will include the following measures:

  • To address the problem of connected lending, we have prepared a regulation defining related parties for purposes of limits on banks' exposures to owners and other parties. The legal amendment defining "own funds" mentioned above will allow consolidation and thus make the regulation fully consistent with EU standards. It will be adopted within one month after the amendment of the Banking Law (a structural benchmark). The new regulation will take effect on July 1, 2001. The BRSA will allow banks that initially exceed the limit a timetable for gradual convergence toward full compliance with the law.

  • Foreign exchange exposures will carry a capital charge under the recently issued market risk regulation that becomes effective on January 1, 2002. However, banks that cover foreign currency liabilities with forward purchases of foreign exchange face a counterparty exposure. To cover such credit risk, the Banking Law will be amended as mentioned above to include derivatives in the definition of "credit" to limit the overall exposure to individual (and related) counterparties.

  • Accounting standards for banks are being brought in line with international standards from the beginning of 2002 (a structural benchmark). This will include bringing all repurchase agreements on banks' balance sheets.

18.  The broader legal and judicial frameworks are being reviewed to facilitate the enforcement of credit payments and corporate restructuring. The government is reviewing foreclosure and bankruptcy laws, as well as judicial and administrative procedures, with the aim of ensuring that an efficient and speedy collection and restructuring of debt can take place. This review is being conducted in the context of broader reforms in the judicial framework, including the creation of intermediate regional civil courts of appeal, establishment of a Justice Academy to improve the specialized training of judges and lawyers and authorization of the Supreme Court judges to assign cases on subject matters, such as foreclosure and bankruptcy, to specific lower courts. Furthermore, the government is continuing to review taxation laws with the aim of removing impediments for debt and corporate restructuring.

Fiscal transparency and management

19.  Progress has been made under the program in improving fiscal transparency and management, but more is needed. The implications for the fiscal accounts of developments outside the central budget, particularly in financial and nonfinancial state enterprises, are highlighted by developments in 2000 and in early 2001, when increasing deficits have emerged in these sectors. While the program figures for the public sector included most of these fiscal costs, the reporting to the public and to Parliament needs to be improved, so as to enhance the accountability of fiscal management in its broader definition. Thus, in order to streamline further the fiscal accounts, and in addition to the steps described above regarding state banks, our program involves the following steps:

  • After closing 25 budgetary funds and two extra-budgetary funds (EBFs) in 2000, we have closed another 21 budgetary funds and four EBFs in March 2001, with effect in 2002. We remain committed to closing the 15 remaining budgetary funds (with the exception of the Support Price Stabilization Fund (DFIF), needed to channel the proceeds from World Bank loans) and two EBFs by June 2001 (a structural benchmark). As a result, all budgetary funds (with the exception of DFIF) will be eliminated in the 2002 budget, and the number of EBFs will be limited to five (the Social Aid and Solidarity Fund, the Defense Fund, the Promotion and Publicity Fund, the Savings Deposit Insurance Fund, and the Privatization Fund). No new budgetary fund or EBF will be created.

  • In addition, in order to improve budget control and transparency, we will channel all revenues provided by law no. 3418/39B (mostly from motor vehicle taxation), which are currently channeled directly to special accounts of spending ministries, into the budget (as provided by article 39A of the same law), with implementation in the 2002 budget.

  • We intend to at least halve by end-2001 the number of revolving funds (2,650 special accounts or institutions recording expenditures against revenues from the sale of public services amounting to some 1 percent of GNP) (a structural benchmark). After this sizeable scaling down, we will carry out a comprehensive financial and economic audit of their operations by end-May 2002. Based on the findings of the report, further steps will be identified by the end of June 2002.

  • We intend to submit to parliament by end-June 2001 a law on public finance and debt management that defines clear borrowing rules and limits for the public sector, and incorporates into the budget on-lending and debt guarantee operations of the treasury (a structural benchmark). As of May 2001, we will include in the monthly reports of the Treasury a "lending minus repayments" item following the IMF's Government Finance Statistics standards, thus expanding the coverage of the budget balance to include net treasury payments of guaranteed debt. This item will be included in the 2002 budget.

  • We will improve the transparency of budget documentation. The government agencies involved in fiscal management will enhance the contents of the Annual Program (the document to be submitted to parliament in October 2001 together with the budget to explain the government's fiscal policies and commitments and provide background information on the fiscal accounts). This document will be preceded by a mid-year Economic and Fiscal Update published in July 2001. The draft budget submitted to parliament for 2002 will be accompanied by the accounts and financial outlook for: (i) all EBFs and social security institutions (including a report on social security contribution arrears); (ii) revolving funds; (iii) contingent liabilities of the treasury; (iv) all SEEs, including state-owned banks; and (v) local authorities (a structural benchmark). Moreover, as of 2003, the budget will include the implications for projected medium-term current spending of public investment programs.

  • To improve expenditure management, we will complete by mid-2001 the implementation of a computerized accounting system that will allow a better monitoring of spending and costs in government units. Moreover, a new budget classification in line with international standards will be completed by end-June 2001 for initiation on a pilot basis for the 2002 budget. We also intend to initiate in 2001 the necessary studies to move toward accrual-based accounting.

  • A public procurement law in line with UN standards (UNCITRAL) will be submitted to Parliament by October 15, 2001 (a structural benchmark).

  • We will adopt a more systematic approach to enhance governance in the public sector, with a view to defining and implementing any needed legal and ethical measures. To this end, we have formed a steering committee consisting of representatives of Treasury, the Prime Minister's Inspection Board, the Anti-Money Laundering Unit at the Ministry of Finance, the Ministry of Justice, and the Ministry of Interior. This committee, in collaboration with the World Bank, will design a plan to identify areas where the Government and civil society can work together to combat corruption and improve governance. We expect the committee to complete this plan by end-September. The plan, together with the findings of Public Expenditure and Institutional Review (PEIR) could form a basis for a Public Sector Adjustment Loan (PSAL) from the World Bank to address structural issues related to governance in the medium term. To increase the public awareness of our efforts, we are planning to launch a series of international conferences on "Effective Government" in the months ahead. In the short run, we are concentrating our work on improving the code of conduct of government officials, including relevant legislation which we will submit to Parliament before the summer recess.

Increasing the role of private domestic and foreign capital in the Turkish economy

20.  Policies aimed at increasing the role of private capital in managing the Turkish economy, including through privatization, have been part of our program from its outset. While the ambitious privatization agenda of 2000 has been only partially implemented, privatization policies are especially needed now to reduce the stock of public debt and improve the efficiency of the economy. Moreover, it is imperative, over the medium term, to attract more foreign direct investment so as to reduce the stock of external debt, which is sizeable, and to further modernize the economy. As discussed above, private capital is expected to participate in restructuring the banking sector. In addition, the following steps are envisaged.

21.  While the timing of privatization operations will depend on market conditions, our goal is to remove all obstacles to a successful privatization policy, so as to be in the best position to act quickly as soon as market conditions allow. Actions for the remainder of 2001 will focus on completing all preparatory work for privatization of majority stakes in key state-owned enterprises including Turk Telekom, TUPRAS (petroleum refineries), Turkish Airlines (THY), ERDEMIR (steel), TEKEL (tobacco and spirits), SEKER (sugar), and electricity generation (TEAS) and electricity distribution (TEDAS). The Privatization Administration (PA) will also continue to divest its portfolio of small- and medium-sized companies. These operations could bring very high cash receipts to the budget, but their specific timing will depend on market conditions. Thus, we have lowered the expected yield from privatization receipts to US$1 billion for the balance of 2001 (in addition to the US$2 billion already cashed from operations concluded in 2000). In 2002, privatization proceeds are expected to rise to US$3½ billion. More specifically:

  • In the telecommunication sector, the government intends to adopt legislation to: (i) authorize divestiture of up to 100 percent of Turk Telekom, excluding a golden share which will remain with the government (as in similar privatization operations in other countries, the golden share will cover security and protection of national interests); (ii) reserve 5 percent of the shares of Turk Telekom to employees and small investors; (iii) allow foreign ownership of the shares of Turk Telekom of up to 45 percent , while not excluding majority foreign participation in a strategic investor consortium that could acquire a majority share; (iv) revise the composition of the tender committee, which takes decisions by simple majority, as follows: two representatives from the Privatization Agency, two from the Ministry of Transportation, and one from the Treasury; (v) remove the monopoly of Turk Telekom on fixed lines and other telecommunication services effective from the date the government shareholding falls below 50 percent; (vi) transfer all licensing authority for telecommunication services and infrastructure to the Telecommunication Regulatory Authority; and (vii) give Treasury, as owner, the authority to amend Turk Telekom's Articles of Agreement without the approval of the Ministry of Transportation and to appoint the board and management team of Turk Telekom. Parliamentary approval of this legislation will be a prior action for completion of the sixth and seventh program reviews. In accordance with the new law, the PA will submit a revised privatization plan for Turk Telekom to the Council of Ministers for approval. In order to ensure full commercialization of the company, the members of the new professional board and management team appointed by the general assembly of Turk Telekom will have recognized qualifications and experience. The board and management team will have members with relevant private sector experience (appointment of such a board and management team will be a condition for the completion of the eighth review ). Moreover, the board of directors of Turk Telekom will adopt a comprehensive corporatization plan. The corporatization plan will: (i) introduce international standards, financial controls, and management procedures, adequate to ensure unqualified audit opinions; (ii) bring staffing levels in line with the real operational requirements of the company; and (iii) address the need to expand both internet and rural access. Preparatory work will also be initiated for speeding up the sale of third generation mobile phone licenses.

  • To further deregulate the civil aviation industry and attract foreign investment, Parliament has passed a law liberalizing domestic airline fares.

  • With regard to TUPRAS, the PA intends to carry out a further public offering which will increase the private sector stake in the company to 51 percent.

  • The law to reform the sugar market was approved in April. The Tobacco Law--which liberalizes the tobacco sector, phases out the support purchases of tobacco, and allows for the sale of TEKEL assets--is expected to be approved by Parliament in May (a condition for completing the eighth review). Following the approval of this law, the privatization of TEKEL and SEKER, which is expected to be completed by end-2002, will be coordinated with other components of the agriculture reform program that we expect to be supported by a loan from the World Bank.

  • ERDEMIR will be privatized through a merger with ISDEMIR and additional sale of shares on the Istanbul Stock Exchange.

  • The government intends to privatize those thermal electricity generation and electricity distribution assets remaining in state hands after the June 30, 2001 deadline for the transfer of operating rights stipulated in the electricity market law. The PA will engage investment advisors to conduct these transactions under a timetable consistent with the market reform strategy set forth in the law.

  • Parliament has approved a law to reform the gas sector. This legislation includes a framework for privatization of the gas distribution assets of BOTAS (the natural gas company).

  • We intend to initiate a program for the sale of land owned by the state. This program will be defined in May 2001 and may potentially yield, over the medium term, sizable receipts.

22.  Foreign direct investment (FDI) can play a critical role in the years ahead. FDI in Turkey has remained low despite Turkey's advantageous location, large domestic economy, and skilled and cost-effective labor force. In this regard, success in achieving the program's goals of attaining macroeconomic stability, advancing the privatization program, and establishing a continuous and predictable policy reform process should greatly increase the attractiveness of Turkey to foreign investors. In addition, while there are no major legal impediments to FDI, the government is taking steps which should improve the investment environment for all investors. Among these steps:

  • A law fully implementing the constitutional amendment on international arbitration will be passed before the Parliament's summer recess (a structural benchmark).

  • A comprehensive study on administrative barriers to investment will be completed by end-June 2001 with the assistance of the Foreign Investment Advisory Service of the International Finance Corporation/World Bank. Based on this study, an action plan--containing deadlines and institutional responsibilities--to streamline procedures that a company must undertake to establish and operate a business legally in Turkey, will be submitted to the Council of Ministers by end-July 2001. Specific actions to be taken under the program from this plan will be identified during the tenth program review.

  • An extensive review of the commercial law, the land development law, and other laws affecting the investment environment will be completed by September 2001. In addition, the government will review the tax laws, and will identify, if necessary, legal steps to rationalize investment tax allowances, improve the structure of incentives, and streamline statutory rates, while safeguarding tax revenues.

23.  The above steps are expected to facilitate not only FDI, but also the business environment more generally. To the same end, we will maintain close contacts with the main business organizations and we will explore with them further measures that the government could undertake over the next few months.

C.  Macroeconomic Policies for Financial Stability and Growth

24.  The structural steps described above will provide challenges for macroeconomic policies aimed at financial stability and growth. In the immediate future, the major costs shifted to the budget and the related need to increase the supply of treasury paper will make financial management more difficult in 2001. In response to this, we have intensified the pace of adjustment in the primary fiscal balance, in spite of the decline in economic activity observed recently. This was necessary to contribute to the financing of the additional burden of public debt arising from the crisis. The availability of international support, together with the strengthening of our macroeconomic and structural policies, should restore confidence and facilitate the decline in interest rates. This, together with a rebound in exports and continued good performance of tourism, should counter the contractionary effects of the fiscal tightening and make possible a recovery of output in the second half of 2001.

25.  There will also be key opportunities. First, the strengthening of the banking system will allow more flexibility in monetary policy. Second, the medium-term developments of fiscal accounts will eventually benefit from the program's structural policies, including privatization. This will enhance the credibility of the fiscal adjustment and facilitate sustainable interest rates.

Fiscal policy and public debt management

26.  Fiscal policy will remain focused on the process of fiscal adjustment initiated in 2000, a precondition for the resumption of growth on a sustainable basis. The floating of the Turkish lira requires a reassessment of the fiscal targets for 2001 and 2002. The revision in the GNP growth rate in 2001 from about 4 percent indicated in the December LoI to the current -3 percent involves a sizable fiscal loss of some 2½ percentage points of GNP. However, because of the high borrowing requirement of the government this year, as well as the need to service over the medium term the additional public debt arising from the crisis, we intend not only to fully offset this loss, but also to increase the primary surplus of the public sector to a level higher than in the program formulated in December 2000. We have enacted in April a supplementary 2001 budget law authorizing the issue of the securities needed to recapitalize the banking system, reflecting the additional interest costs, and allocating resources for some temporary credit subsidies (see below). Other expenditures continue to be limited, for the moment, to the appropriations of the original budget.

27.  The main fiscal targets for the public sector in 2001 and 2002 are the following (Tables 3 and 4):

  • The primary surplus of the public sector (including the consolidated central government, extrabudgetary funds (EBFs), nonfinancial state enterprises, social security funds, the unemployment insurance fund, and local governments), which was close to 3 percent of GNP in 2000 and which the December 2000 LoI targeted at 5 percent of GNP in 2001, is now targeted to reach 5½ percent of GNP this year and 6½ percent of GNP in 2002.

  • The net public debt-to-GNP ratio including the net asset position of the CBT (Tables 1 and 4) will rise sharply this year, from 58.4 percent at end-2000 to 78.5 percent at end-2001. However, this increase reflects one-off factors: first, the effect of the devaluation on the value of external debt expressed in domestic currency; second, the exceptionally high level of interest rates during the crisis, which led to an explosion of the borrowing costs of the public sector, particularly state and SDIF banks; third, the taking over and the cover of the losses of insolvent private banks; fourth, the fall in GDP. Moreover, the above figures include a contingency for possible additional costs of bank restructuring that may eventually arise. The fiscal costs arising from the need to recapitalize state banks and the take-over of private banks are estimated to amount to TL 44  quadrillion (24 percent of GNP) at end-April 2001 (Table 5). As a sizeable portion of these costs was already included in the estimate of public debt at end-2000, the total increase in public debt from bank restructuring amounts to TL 22 quadrillion.

28.  In spite of the large increase in public debt registered in 2001, the dynamics of public finances remain inherently stable, given the level of the primary surplus, and the expectations that real interest rates will decline from their current abnormally high level. Indeed, the public debt ratio is expected to fall sharply already in 2002 (Tables 1 and 4), and to edge down further in 2003 (although this partly reflects privatization receipts).

29.  The primary surplus of the consolidated central government (excluding privatization proceeds, transfers of profits from the CBT, and interest receipts) is targeted at 5.1 percent of GNP in 2001 (against 4.6 percent of GNP in 2000) and at 5.6 percent of GNP in 2002. The primary revenue ratio will decline slightly (from 25.4 percent of GNP to 25.0 percent of GNP) but the primary expenditure ratio will decline more rapidly (from 20.8 percent of GNP to 19.9 percent of GNP), in spite of the inclusion of the Public Participation Fund in the budget as of 2001.

30.  To achieve these goals, we have, along with the approval of the 2001 budget, implemented significant tax and nontax revenue measures. In addition, we will:

  • Increase the petroleum consumption tax (PCT) by 15 percent in early May (after a 20 percent increase in April).

  • Increase VAT rates, excluding the reduced 1 and 8 percent rates, by one percentage point.

  • Increase, as of April, the minimum contribution base relevant for social security payments in line with the existing regulations.

Approval of the above revenue measures will be a prior action for the completion of the sixth and seventh reviews. Furthermore, as of June 2001, we will raise the PCT every month by at least WPI inflation; this, together with the increases in the PCT mentioned above, will raise the yield of this tax by 0.4 percent of GNP with respect to 2000. We will also increase health premia and co-payments as part of the reform of social security institutions now in parliament, before the summer parliamentary recess. Finally, as part of the amendments to the Banking Law (see above), we will allow, effective as of the second quarter of 2001, the full deductibility of the specific loan loss provisions that banks are mandated to make based on bank supervision regulations. At the same time the tax deductibility of general provisioning will be eliminated.

31.  On the expenditure side, we will aim at keeping the growth rate of primary expenditure well below that of GNP. Real spending, adjusted for the transfer of the Public Participation Fund to the central government, will be cut by about 8 percent between 2000 and 2001. To this end, the following policies will be implemented:

  • We will save some 1½ percentage points of GNP by adjusting current expenditure, transfers, and investment by less than the revision in the inflation target. While the savings in the area of investment spending this year will arise from slowing down investment projects, we intend to rationalize our public investment policies through a more structured approach in the 2002 budget. More specifically, the number of projects will be decreased gradually to a sustainable level, in accordance with sectoral targets and available financial resources. The State Planning Organization (SPO) and the line ministries will take the necessary measures to optimize the existing project stock in the preparation of the 2002 budget. For this purpose, they will prioritize their investment plans and will not propose new investment projects, except emergency projects based on sound feasibility reports.

  • In addition, savings of 0.3 percent of GNP will be generated during the implementation of the budget by cuts in "other current expenditure," covered by Article 53 of the budget law, as already envisaged in the December 2000 LoI.

  • We have allocated 0.2 percent of GNP to finance--in a transparent manner--the temporary credit subsidies extended by state banks in 2001 as a result of the crisis. These subsidies will cover the cost for the state banks of financing the loans outstanding before the February crisis at a rate of 55 percent (simple interest). New lending will be charged interest rates in line with the borrowing costs of banks. Credit subsidies will be eliminated as of January 2002.

  • As the level of civil servants' wages was low by historical standards at end-2000, our goal is, in spite of the recession, to maintain civil servants' wages constant in real terms during 2001 with respect to end-2000. Civil servants' salaries were raised by 10 percent in January, and will be adjusted further during the first half of 2001 by the difference between the CPI inflation rate and 10 percent. As stated in the Budget Law, a 2 percent adjustment has been granted during the first half of the year to compensate for the one month lag in salary adjustments existing under this system. Salaries will be raised in July 2001 by 5 percent. However, should cumulative CPI inflation exceed the salary increases granted up to July, salaries will be adjusted by that difference before end-2001. Halting the trend registered during the 1990s, the number of civil servants will not increase in 2001 in spite of the need to raise employment in key social sectors (mostly health and education).

Approval of a supplementary budget in line with the above expenditure figures will be a condition for the completion of the eighth review.

32.  A major improvement is expected in the primary position of the state enterprises, which is projected to move from a deficit of 1½ percent of GNP in 2000 to a broad balance in 2001. To this end, we will, in addition to implementing prudent wage policies, take the following measures: (i) increase SEEs' tariffs and prices in line with their increased costs due to the depreciation of the lira and the revised inflation target; (ii) reduce SEEs' operating expenses, including their wage bill, in real terms; (iii) cut sugar beets quotas from 12½ to 11½ million tons, and increase the support price of sugar beets by no more than targeted inflation; (iv) limit the volume of support purchases of cereals and offload additional grain stocks; (v) in parallel to the introduction of direct income support to farmers, keep support price increases in 2001 at most at targeted inflation (the margin for the support price for wheat over world prices will be further reduced to at most 20 percent by June 2001 subject to the provision that the increase will not exceed targeted inflation; the tariff on grain imports will be lowered to at most 45 percent); (vi) maintain the average price of electricity sold by TEAS at US$4.5 cents/kwh and increase accordingly fees and tariffs of TEDAS, allowing the latter to cover the cost of purchasing electricity from TEAS; (vii) discontinue the policy of subsidizing LPG; and (viii) eliminate all discounts and exemptions on SEE products and services by June 2001. In addition, we will continue to implement the policy of replacing up to a maximum of 15 percent of retiring personnel in the SEEs in the Treasury's portfolio, in the PA portfolio, in Turk Telekom, and in public banks. Personnel transferred from one SEE to another will be treated as replacements. In all cases, new hiring is subject to approval by Treasury. Before applying to Treasury for new employment, SEEs will transfer their employees among their regional units, and retiring personnel will not be re-employed by SEEs. No workers will be transferred from the companies in the PA portfolio, funds and revolving funds to the SEEs or to the consolidated budget. Overtime payments will be strictly limited.

33.  Savings are also expected in the EBFs, in particular by slowing down new expenditure programs. This will reduce their primary deficit from ½ percent of GNP in 2000 to ¼ percent in 2001. The primary surplus of the unemployment insurance fund is projected to increase by ¼ percentage point of GNP, as benefits will start being paid only in mid-2002. The deficit of social security institutions will, as during the previous years, be financed by budgetary transfers so as to maintain a balanced overall position. Local governments are expected to continue to run a small primary deficit. The taking over of their liabilities by Treasury in the case of guaranteed loans will be included as central government expenditure in the 2002 budget (see paragraph 19).

34.  In addition to the above fiscal measures, which will have an immediate effect on the fiscal accounts, we are also taking steps that would allow us to strengthen the tax base and achieve a better distribution of the tax burden over the medium term. There is a need, in particular, to reduce tax evasion. We plan to significantly broaden the effective taxpayers base by doubling the number of tax identification numbers (TINs) issued by the end of 2002, starting from 15.2 million at end-2000. Among other measures, the rolling out of the TINs to owners of bank accounts, users of banking services, and participants in financial transactions will begin in September 2001 and will be gradually extended through June 2002 by lowering the threshold for mandatory tax registration. To that effect, the necessary tax regulation will be enacted by end-May 2001 (a condition for completing the eighth review). To better exploit the potential offered by the recently completed computerization of operations, and to improve the processing and sharing of taxpayer data (including third-party information), we will merge and reorganize the three data processing centers of the tax administration. Moreover, by strengthening tax collection and enforcing all tax regulations, we intend to reduce by end-2001 the stock of private sector tax arrears, which stood at 2 percent of GNP at end-2000 (including interest and penalties) (a structural benchmark). As to tax and social contribution arrears of state-owned enterprises, they will be eliminated by the end of 2002. We will adjust promptly the interest rates on late payment of tax and social security arrears to keep them sufficiently above market interest rates.

35.  The attainment of the 2001 fiscal targets will be monitored through a set of performance criteria and indicative targets:

  • Performance criteria on the primary surplus of the consolidated government sector (CGS, as defined in Annexes B-D) (Annex B).

  • Performance criteria on the non-interest expenditure (excluding tax refunds) of the central government (Annex C).

  • Indicative floors on the overall balance of the CGS, excluding privatization receipts, so as to monitor the developments not only in the primary balance, but also in interest payments (Annex D).

36.  We believe that the above fiscal measures are sufficient to achieve the program's goals. However, we would introduce additional fiscal measures promptly should it be necessary for the attainment of the key macroeconomic targets. In particular, additional fiscal measures--the need of which will be examined during the program reviews-- would be enacted if nominal interest rates, on a sustained basis, failed to decelerate in line with the program's baseline. Such a policy tightening would be needed to ease pressures on interest rates as well as to support the medium-term fiscal adjustment process.

37.  Public debt management will face major challenges in 2001. The securitization of the duty losses of the state banks, the replacement of the securities issued in the past to these banks, and the recapitalization of the SDIF banks will increase the amount of marketable securities in the system, and raise the stock of debt that has to be serviced in cash. These new commitments are fully taken into account in projecting our interest burden for 2001 and the following years. It needs to be stressed that, to a large extent, the issue of these securities related to the bank restructuring, which will be completed by early May, and its subsequent servicing does not represent an addition to public debt in the system, but merely its securitization. For example, the payment in cash of the interest on the securities issued to state banks will allow state banks to reduce their borrowing requirement, thus relieving pressure on the money market and facilitating the placement of the government securities needed to service the higher stock of treasury debt.

38.  The availability of foreign financing from official sources will facilitate the rollover of external debt. Nevertheless, the external borrowing program of the treasury has been based on conservative assumptions on our international bond issues (which has been scaled down to US$ 2½ billion, of which US$ ¾ billion has already been issued). Developments in this area will be monitored through the performance criteria in Annexes G and H.

39.  Domestic debt management will aim at reducing borrowing costs, facilitating the roll over of government paper, and broadening the potential investor base. The maturity of public debt has shrunk during the crisis. However, the outcome of the most recent treasury bill auctions indicate the return to more normal market conditions and the markets' willingness to invest at longer maturities. The elimination of the overnight position of the state banks--in itself a positive step forward--has, in the short run, been matched, by borrowing by the CBT from commercial banks. However, the maturity at which the CBT has been borrowing has also increased. In the period ahead, the maturity of the debt instruments issued by public institutions is expected to lengthen further, as the conditions in the government securities markets improve, and the CBT reduces its stock of reverse repurchase agreements (partly reflecting its strong profit position, partly the possible early repayment in cash by Treasury of the securities acquired by the CBT from state and SDIF banks). To facilitate this process, and create a smoother borrowing and repayment schedule over time, the domestic borrowing schedule for 2001 has been revised. The government's total financing needs, including the securitization of its obligations to the SDIF and state banks, will be fully and transparently disclosed to the public. Beginning in April, the Treasury has moved from monthly to weekly securities auctions. The amount of securities sold at each auction will be determined flexibly, according to market conditions, and will not be solely determined by the Treasury's immediate financing needs. The primary dealer system will be enhanced, and consideration is being given to introducing some additional methods of trading. The Treasury is also exploring the possibility of lengthening the maturity of public debt through voluntary debt swap operations. Finally, we are considering changes in the structure of the taxation of financial instruments that would facilitate the direct purchases of government securities by individuals, thus reducing the dependence on demand from banks. Possible further steps in this area will be discussed during the eight program review.

Monetary Policy Under the Float

40.  The economic program launched in December 1999 contained an exit strategy from the crawling peg regime with a view to reducing the vulnerability of the monetary framework to real and financial shocks. The monetary framework would gradually shift from one where the exchange rate played the role as key nominal anchor to one in which the central bank would focus more directly on its final goal of controlling inflation. The December 2000 LoI indicated more specifically the intention of eventually managing monetary policy under a formal inflation targeting regime. However, the implementation of this preannounced gradual shift was overtaken by the float of the lira. The abandonment of the exchange rate anchor makes it necessary to reorient the monetary framework.

41.  In the context of a strengthened banking sector and floating exchange regime, monetary policy will be able to play a more active role and, will be used first and foremost to contain the inflationary impact of the depreciation of the Turkish lira and then to bring inflation down over the next few months. The monetary policy institutional framework has been strengthened by the approval of amendments to the CBT law granting autonomy to the central bank and with a view to a shift towards a full-fledged inflation targeting framework, as early as possible.

42.  As a key first step in setting up a formal inflation targeting framework, an amendment to the central bank law has been approved to give full operational independence to the central bank in pursuing its primary mandate of maintaining price stability. This legislation includes several crucial provisions, such as: the establishment of price stability as the primary goal of the central bank; formal reporting to government on the progress in the pursuit of this target; fixed terms of office not only for the Governor and Board members of the central bank (as in the previous legislation), but also for the Deputy Governors; and the creation of a Monetary Policy Committee, which would advise on the design and implementation of monetary policy. The amendments also prohibit any form of new direct lending from the CBT to Treasury (including purchases of government paper on the primary market), following a transition period expiring in early November 2001. The central bank intends to strengthen the technical infrastructure needed to implement inflation targeting, including the improvement in inflation forecasting techniques and in procedures to enhance the monitoring and accountability of monetary policy.

43.  In seeking to resume disinflation over the balance of 2001, the CBT will focus on the control of monetary aggregates. More specifically:

  • The CBT will keep the growth level of base money broadly in line with the indicative ceiling set forth in Attachment E. This path represents our main nominal anchor for the program. Base money is projected to grow in 2001 by 25¾  percent, or by 47 percent after adjusting for the end-2000 Bayram and the cut in the reserve requirement coefficient in early 2001. This is expected to be consistent with the inflation and growth projections set forth in the above sections.

  • Given the current environment of unsettled expectations, and the usual problems with estimating money demand in Turkey, the projections of money demand used to derive the base money path are subject to some uncertainty. It will be necessary, therefore, to keep the development of the monetary aggregates under close review. In particular, the CBT stands ready to raise money market interest rates promptly regardless of the position of base money with respect to its indicative targets to counter unexpected inflationary pressures. While the monthly reviews will provide an opportunity to revisit these projections if need be, the CBT will remain in close contact with Fund staff between program reviews to assess developments in the money and foreign exchange markets.

  • The attainment of the above indicative targets for base money is expected to be consistent with the decline in nominal and real interest rates from their exceptionally high levels. This decline is expected to reflect primarily the recovery of confidence as the program's policies are implemented and the use of the external resources ease pressures in financial markets. However, the bulk of the sizable external financing available to the CBT under the program will be used to facilitate this decline and restore markets' confidence. The program's performance criteria for net domestic assets of the CBT (NDA) and for net international reserves (NIR), which are presented in Annexes F and G, have been set at a level that would allow the use of the available external financing for this purpose. However, should our program succeed in bringing interest rates down as rapidly as expected, we will keep the change in NIR above the program floor (and NDA below the program's ceiling). Developments in this area, including the behavior of interest rates, NIR, and NDA, will be subject to close scrutiny, in close consultation with the Fund staff, between and during the forthcoming program reviews, to ensure that the program objectives are achieved.

  • In case the available external financing is used as explained in the preceding paragraph, the sales of foreign exchange by the CBT on the market will not be aimed at stabilizing the exchange rate at any particular level, but to restore stability in the securities' market and facilitate a rapid reduction in interest rates. While we expect a relative strengthening of the Turkish lira due to the strength of our program and the level of external support, the exchange rate will continue to be determined by the market, in line with the demand and supply of foreign exchange. To this end, most of the market transactions in foreign exchange by the CBT will occur through auctions.

D.  Social Dialogue, Incomes Policy, and Protection of the most Vulnerable

44.  Avoiding a damaging wage-price spiral will require more structured incomes policies, including a closer cooperation with the social partners. The benefits from low inflation will accrue to all sectors of the economy and all segments of the population have to work in harmony to achieve this goal. Moreover, an efficient incomes policy, including a safety net for the most vulnerable, will minimize the adverse effect of the recent crisis on employment and growth. The government policies in this area include three components: (i) wage policies in the public sector; (ii) an active dialogue with the social partners that is conducive to wage and price decisions in line with the inflation target; and (iii) a program of social protection for the most vulnerable.

45.  Wage increases in the public sector will be supportive of our disinflation effort and fully consistent with the fiscal targets. It is also important and desirable to reduce the disparity between civil servants and government workers which has resulted from the very large increases accorded to public sector workers two years ago. In the medium term, we want to introduce a much stronger link between wage contracts and the performance of individual state enterprises. As detailed above, we will maintain the purchasing power of civil servants wages, first through increases in line with targeted inflation and second through ex-post compensation if inflation exceeds the target (a policy that is different from indexation and is not inconsistent with our disinflation effort). For public sector workers, we will negotiate new two-year wage contracts with the unions representing these workers that are supportive of the stabilization and reform program. We believe the nominal wage increase during the contract period should have an important signaling effect, and thus constitute one of the anchors of the disinflation program. We will aim at reducing the ratio of average net salaries of public sector workers and civil servants from 2.6 in 2000 to 2.0 during the contract period, with a decline in the ratio of about one fifth in the first contract year. The wage contracts for public sector workers will be adjusted for inflation exceeding the targets, but not before the end of each six-month period. The adjustment will not, however, exceed 80 percent of the difference between actual and projected inflation, and there will be no such adjustment for the first six-month period.

46.  Rational wage and price setting behavior in the private sector is also essential for the success of the program. The government will play an active role in the discussions between the social partners to encourage moderate wage and price increases. An intensive dialogue with the employers and trade unions will be established. To this end, following the adoption of the Law on the Economic and Social Council in April, the Council will now be in a position to hold frequent and regular meetings. Moreover, as part of its communication strategy (see paragraph 5), the government will enhance its communication with the public also in this area, so that it will be clear to the social partners that it is in their best interest to set prices and wages so as to support the disinflation program.

47.  Protecting the social welfare of all of Turkey's citizens is a fundamental component of our program. We intend to strengthen our social protection programs, with the support of the World Bank, to help reduce the impact of the economic downturn on the most vulnerable sections of the population. Regarding social insurance, we have already implemented important reforms including: (i) a reform of the public pension system to safeguard its financial viability; (ii) adoption of legislation to establish a framework for voluntary private pensions; and (iii) introduction of national unemployment insurance. In addition, we will continue to provide severance payments to public sector workers displaced as a result of privatization. With regard to social assistance, we intend to move quickly to provide targeted assistance to vulnerable groups most affected by the crisis. A social assessment has been initiated and we expect support from the World Bank in implementing this urgent assistance program.

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Table 1. Turkey: Quantitative Performance Criteria and Indicative Targets

                December 31, 2000
  January 31, 2001
  February 28, 2001
  March 31, 2001




Outcome   Ceiling/


Performance criteria

1. Floor on the cumulative primary balance of the consolidated government sector (in trillions of Turkish lira)


                1,850 N.A.

Adjustment for earthquake-related expenditures


  Adjusted floor           3,157 4,651                  

Ceiling on the stock of net domestic assets of the CBT (in trillions of Turkish lira)













Floor on net international reserves (in millions of US$)









Adjustment for disbursements of foreign loans in excess of baseline Adjusted floor (in millions of US$)













Ceiling on contracting or guaranteeing of new external public debt (in millions of US$)







Ceiling on the stock of public short-term external debt outstanding (in millions of US$)







Ceiling on the cumulative primary expenditure of the central government (in trillions of Turkish lira)        





Indicative targets        


Floor on the cumulative primary balance of the consolidated government sector (in trillions of Turkish lira)      








Floor for the cumulative overall balance of the consolidated government sector (in trillions of Turkish lira)      






Adjustment for earthquake-related expenditures  



Adjusted floor          





Floor on the cumulative primary balance of the consolidated government sector including privatization proceeds (in trillions of Turkish lira)






Adjustment for earthquake-related expenditures  



Adjusted floor          




Source: Data provided by the Turkish authorities.                        

Table 2. Turkey: Performance Criteria on the Cumulative Primary Balance
of the Consolidated Government Sector

(In trillions of Turkish lira)

Cumulative primary balance from January 1, 2001, to:


   May 31, 2001 (performance criterion)


   July 31, 2001 (performance criterion)


   September 30, 2001 (performance criterion)


   December 31, 2001 (performance criterion)


1.  The primary balance of the consolidated government sector (CGS), Table 2, comprises the primary balances (primary revenue minus noninterest expenditures) of the consolidated central government (consolidated budget), the extrabudgetary funds (EBFs) identified below, the eight state economic enterprises (SEEs) identified below, the social security institutions (SSIs), the unemployment insurance fund, and any new government funds and institutions established after March 31, 2001. The floors on the primary balance of the CGS will be monitored:

  • For the central government from above the line on a modified cash basis (the so-called consolidated budget-adjusted balance)

  • For the EBFs, SSIs, and the unemployment insurance fund from above the line on a cash basis;

  • For the SEEs, from below the line as described in paragraph 7.

2.  For the purposes of the program, the primary revenues will exclude interest receipts of the consolidated central government and the unemployment insurance fund, profit transfers of the Central Bank of Turkey (CBT) and proceeds from the sale of assets of the CGS (privatization proceeds or transfers thereof). Interest receipts of EBFs, SEEs, and SSIs will not be excluded. As well, the floor on the primary balance will be adjusted upwards for any increase in revenues arising from changes in the revenue sharing agreement between any components of the CGS and other elements of the public sector, including local authorities. The floor on the primary surplus will be adjusted upwards (downwards) in line with the projected surplus (deficit) of the primary balance of any fund or entity that is incorporated in the CGS after March 31, 2001.

3.  For the purposes of the program, revenues of the CGS will exclude payments-in-kind and other nonmonetary forms of payments. As well, net lending of any component of the CGS will be considered as a noninterest expenditure item. Payment of guaranteed debt by treasury on behalf of other components of the public sector will not be regarded as net lending up to the quarterly baseline reported in Annex J.

4.  For the purposes of the program, primary expenditure of the CGS will exclude any payments related to bank recapitalization and to the restructuring of state banks.

Extra budgetary funds

5.  The three EBFs included in the definition of the performance criterion for 2001 are: the defense fund, the privatization fund, and the mass housing fund.

6.  The balances of the following budgetary funds and EBFs--which do not have the legal authority to borrow, and will not be given such authority during the duration of the stand-by arrangement--are excluded from the definition of the performance criterion: petroleum consumption fund; revenue improvement administration fund; support stabilization fund; resource utilization fund; fuel price stabilization fund; budget education health tax fund; and social aid and solidarity fund.

State economic enterprises

7.  The eight SEEs whose primary balances will be included in the definition of the performance criterion are: TTK (coal company), TSFAS (sugar company), TMO (soil products office),TEKEL (tobacco and alcoholic beverages company), TCDD (state railways), TEAS (electricity), TEDAS (electricity distribution), and BOTAS (natural gas). The primary balance of these SEEs will be monitored as the sum of net financing minus accrued interest made by the SEEs. Net financing will be monitored as: net financing from the banking system (excluding pre-export financing from the Eximbank) plus net external borrowing (excluding normal trade financing), plus the change in net arrears to and net advances from the private sector and to/from the non-CGS public sector (including subsidiaries and joint ventures), plus net interest payments undertaken by the Treasury. The net change in arrears on tax liabilities will be excluded.

8.  Net financing from the banking system (excluding pre-export financing from the Eximbank) is defined as the change in all claims of these institutions on the SEEs listed above, including loans and capitalized interest arrears, less the change in deposits and repos of SEEs in these institutions, as reported by these SEEs. Changes in claims and deposits denominated in foreign currency will be valued at the average of the exchange rates between the Turkish lira and each corresponding currency prevailing during the quarter in question. As of December 31, 2000 the stock of net banking claims on SEEs as defined above stood at TL 291 trillion, valued at the exchange rates on that day.

9.  Net external borrowing is defined as the receipt of external loans (including guaranteed debt and on-lending, and excluding normal trade financing) less amortization (excluding repayments of guaranteed debt and on-lending undertaken by the Treasury), valued at the exchange rate at the time of transaction. As of December 31, 2000 the stock of external loans stood at TL 2,694 trillion, valued at the exchange rates on that day.

Social security institutions

10.  The deficits of the social security institutions (SSIs) are covered by transfers from the central government budget, and their primary balance is projected to be in balance in 2001. The floor on the primary surplus of the CGS will be adjusted upwards for any increase in the expenditure arrears of the SSIs. Arrears of the SSIs are defined as those payments overdue by more than one month, and in the case of Bag Kur exclude arrears to the common retirement fund. The stock of arrears of Bag Kur stood at TL 120 trillion on December 31, 2000, while ES and SSK had no expenditure arrears.


11.  The floors for the primary surplus will be adjusted upward for any issue of noncash debt other than for bank recapitalization and securitization of duty losses and for the restructuring of the Agricultural Sale Cooperative Units. They will also be adjusted upward for any off-balance sheet expenditure of any component of the CGS.


Table 3. Turkey: Performance Criteria on the Cumulative Primary Expenditure
of the Central Government

(In trillions of TL)

Cumulative primary expenditure from January 1, 2001 through:


   May 31, 2001 (performance criterion)


   July 31, 2001 (performance criterion)


   September 30, 2001 (performance criterion)


   December 31, 2001 (performance criterion)


1.  The primary expenditure of the consolidated central government (Table 3) comprises the cumulative noninterest expenditure of the consolidated central government (consolidated budget). The quarterly ceilings will be monitored from above the line on a modified cash basis (the so-called consolidated budget adjusted non-interest expenditure).

2.  For purposes of the program, primary expenditure (Table 3) will exclude tax rebates, transfers to Eximbank, treasury payments of guaranteed debt up to the quarterly baseline reported in Annex J, and any payment related to bank recapitalization and to the restructuring of state banks.

3.  The deficits of the social security institutions (SSIs) are covered by transfers from the central government budget. The ceiling on the primary expenditure of the central government (Table 3) will be adjusted downward for any increase in the expenditure arrears of the SSIs. Arrears of the SSIs are defined as those payments overdue by more than one month, and in the case of Bag Kur exclude arrears to the common retirement fund. As of December 31, 2000, the stock of arrears of Bag Kur stood at TL 120 trillion, while the two other institutions had no expenditure arrears.

4.  The ceiling on the primary expenditure of the central government (Table 3) will be adjusted downward for any off-budget expenditure of the central government.


Table 4. Turkey: Indicative Floors on the Cumulative Overall Balance of the Consolidated Government Sector1
(In trillions of TL)

Cumulative overall balance from January 1, 2001 to:  
   May 31, 2001 (indicative floor)   -4,750
   July 31, 2001 (indicative floor) -11,750

   September 30, 2001 (indicative floor)

   December 31, 2001 (indicative floor) -26,450

1See (Annex B for the definition of the consolidated government sector.

1.  The overall balance of the consolidated government sector (CGS), Table 4, comprises the primary balance of the CGS as defined in Annex B, the net interest payments of the consolidated central government and the unemployment insurance fund and gross interest payments of the EBFs, SEEs, and SSIs, and the overall balance of any new government funds and institutions established after March 31, 2001. The monitoring of the different components of the overall balance will be as indicated in paragraph 1 of Annex B. Revenues of the CGS will be defined as in paragraph 2 of Annex B; i.e., excluding privatization proceeds.

2.  All definitions and adjusters specified in Annex B to apply to the primary balance of the CGS will also apply to the overall balance of the CGS.


Table 5. Turkey: Performance Criteria on the Net Domestic Assets of
the Central Bank of Turkey

(In trillions of lira)

Outstanding NDA as of April 30, 2001 (projected):     7,780
   May 31, 2001 (performance criterion)1     9,750

   June 30, 2001 (performance criterion)1



   August 31, 2001 (performance criterion)1   15,850
   October 31, 2001 (performance criterion)1   19,500
   December 31, 2001 (indicative ceiling)1   21,000

1The compliance with the performance criterion (indicative target) shall be based on the average of the stocks prevailing during the five working days including and 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. Indicative ceilings for base money are shown in Table 5.a. below.

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), medium-term and long-term foreign exchange credits (net), and other net foreign assets (including deposits under the Dresdner scheme of original maturity of two years or longer and the holdings in accounts of the Turkish Defense Fund, but excluding CBT's net lending to domestic banks in foreign exchange. As of March 31, 2001, net foreign assets of the CBT amounted to TL 9,012 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 means-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:

Equation 1

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. The averaging period will not be changed during 2001.

6.  NDA ceilings will be adjusted for any change in the reserve requirement coefficient according to the following formula:

Equation 2

where B is the level of the base to which the reserve requirement applies on the test date and ΔR is the change in the reserve requirement coefficient and the liquidity requirement coefficient.

7.  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 5a. Turkey: Indicative Ceilings for Base Money

(In trillions of Turkish lira)

Outstanding base money as of April 30, 2001


   May 31, 2001 (indicative ceiling)1


   June 30, 2001 (indicative ceiling)1


   August 31, 2001 (indicative ceiling)1


   October 31, 2001 (indicative ceiling)1


   December 31, 2001 (indicative ceiling)1


1These ceilings shall be based on the average of the stocks prevailing during the five working days including and immediately preceding each of these dates.


Table 6. Turkey: Performance Criteria on Changes in Net International Reserves
Floors on change in NIR
during the specified periods1
(In millions of U.S. dollars)

Outstanding stock as of April 30, 2001:   3,860
    May, 2001 (performance criterio n) -1,500
    June, 2001 (performance criterion) -2,900
    July-August, 2001 (performance criterion) -2,000
    September-October, 2001 (performance criterion) -2,600
    November-December, 2001 (indicative floor)    -600

1The change is computed as the difference in NIR stocks between the beginning and the end of each period.

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 (or TL-denominated liabilities indexed to any exchange rate) with an original maturity of up to and including one year (including 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. 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.

6. The limits on the changes in net international reserves for June and subsequent periods specified in the above table will be increased by either the unused portion of the limit on the change in net international reserves from the previous period or by 25 percent of the limit during the current period, whichever is less.  

7. The change in net international reserves will be evenly distributed within each period.


Table 7. Turkey: Performance Criteria on the Stockof Short-Term
External Debt Outstanding

(In millions of US$)

Outstanding stock as of December 31, 2000:

   June 30, 2001 (performance criterion) 2,100
   September 30, 2001 (performance criterion) 2,100
   December 31, 2001 (performance criterion) 2,100

The limits specified in Table 7 apply to the stock of debt of maturity of one year or less, owed or guaranteed by the consolidated government sector (as defined in Annex B). The term "debt" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (adopted by the Executive Board of the IMF on August 24, 2000). Excluded from this performance criterion are external program financing, sales of treasury bills denominated in Turkish lira or foreign exchange to nonresidents in either the domestic primary market or the secondary market, normal import-related credits, reserve liabilities of the Central Bank of Turkey, and forward contracts, swaps, and other future market contracts. Debt falling within the limit shall be valued in U.S. dollars at the program cross exchange rates specified in Annex I.


Table 8. Turkey: Performance Criteria on Contracting and Guaranteeing of
New External Debt

(In millions of US$)

Cumulative flows from end-December 1999 to end-December 2000



Cumulative flows from end-December 2000


   June 30, 2001 (performance criterion)


   September 30, 2001 (performance criterion)


   December 31, 2001 (performance criterion)


The limits specified in Table 8 apply to the contracting or guaranteeing by the consolidated government sector (as defined in Annex B) of new, nonconcessional external debt with an original maturity of more than one year. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (adopted by the Executive Board of the International Monetary Fund on August 24, 2000) but also to commitments contracted or guaranteed for which value has not been received. The term "nonconcessional" means containing a grant element of less than 35 percent on the basis of the currency-specific discount rates based on the OECD commercial interest reference rates in place at the time at which the contract is entered into, or guarantee issued. Excluded from this performance criterion are credits extended by the IMF, adjustment lending from the World Bank, and other external program financing, long-term liabilities of the Central Bank of Turkey and sales of treasury bills and bonds denominated in TL or FX to nonresidents in either the domestic primary market or the secondary market. Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract is entered into, or guarantee is issued.


Table 9. Cross-Exchange Rates for Program Purposes1

Value per U.S. Dollar

Value per Euro

Program exchange rate

Euro 1.15500  

Austrian schilling



Belgian franc



Finnish markka



French franc



Deutsche mark



Irish pound



Italian lira   1,936.27
Japanese yen   109.87  
Luxembourg franc   40.3399

Netherlands guilder



Portuguese escudo



Spanish peseta   166.386
Swiss franc     1.750  
United Kingdom pound     0.702  

1These program exchange rates shall apply to the performance criteria/indicative ceiling or floors for the period December 31, 2000-end December, 31 2001; currencies not specified here shall be converted at the representative exchange rates reported to the IMF as of November 29, 2000.
2Constituent currencies of the euro shall be converted into euro at the official European Union conversion rates and then converted into the U.S. dollar value.


Table 10. Turkey: Program Baseline for Selected Variables
Mar. 31 June 30 Sept. 30 Dec. 31

Payment of debt guaranteed by the consolidated government sector
   (in trillions of TL)1

200 800 1,200 1,700
   (in millions of US$) 257 750 1,100 1,600

1For the purpose of the program monitoring, these flows in U.S. dollar will be converted at the average TL/US$ exchange rate of the quarter.