Turkey and the IMF
"I am pleased to announce that we completed negotiations for the latest review of Turkey's economic program. On Friday, August 3, the Executive Board of the IMF can meet to discuss approval of the tranche of about US$1.5 billion related to the completion of this review.
"The goals of Turkey's economic program are to bring about sustainable economic growth and increased living standards for the Turkish people. To achieve these goals the program seeks: a lasting reduction in inflation; to ensure the sustainability of the government's fiscal position; and to undertake an ambitious set of structural reforms. More generally, the program seeks to modernize the economy, reduce political influence over it, and prepare it to meet the challenges for entry into Europe. Attainment of these goals is critical to the future of Turkey.
"Turkey has already made impressive progress in implementing this very ambitious program: it has undertaken important banking sector and other structural reforms, continued strong fiscal adjustment despite difficult economic circumstances, carried out an extensive legislative agenda, and undertaken a successful voluntary domestic debt swap.
"All of Turkey shares the credit for what has been achieved – the government for implementing the program, parliament for completing an exceptionally heavy legislative agenda in its spring session, and especially the Turkish people for supporting the economic program despite the currently difficult economic situation.
"These achievements explain why the international community – in large measure through the Fund and World Bank – has provided an extraordinary amount of financial support to Turkey over the past year and a half.
"My visit to Turkey this week has given me fresh assurance that this level of international support will continue to be justified. I say this for two reasons – the strong political support this program enjoys, and the strength of the program itself.
"I was privileged to meet yesterday in Ankara with Prime Minister Ecevit and Deputy Prime Ministers Bahçeli and Yilmaz. What struck me in talking separately to these political leaders was their unanimous support for what they describe as Turkey's economic program. Their views were aptly summarized by one of the leaders, when he told me that the program would be necessary, even if the IMF were not there to support it. Although a great deal has been said by critics about a lack of political cohesion in Turkey, the fact is that the Turkish government and parliament have essentially delivered on their commitments under the program – and they have not been given sufficient credit for this.
"Having mentioned the strength of the program, let me say a few words about what has been achieved during this—the ninth—review.
"We have agreed on some adjustments in the overall macroeconomic targets to take account of economic developments so far this year. --Real GNP is now projected to fall by 5-1/2 percent this year, although we believe growth will resume before the end of the year and we continue to expect 5 percent growth next year. --Higher-than-expected inflation so far this year means that the full-year increase in the price level will be on the order of 58 percent. However, the authorities continue to aim to have the monthly rate down to 2 percent by the end of the year, and the recent decline in inflation is encouraging. "Both these changes – the lower growth rate and the higher inflation rate – essentially reflect what has already happened, and we are not adjusting either the growth assumption or the inflation targets for the remainder of the year. --The external current account is expected to show a surplus of some US$5 billion this year, helped by strong exports, which are themselves influenced by the depreciation of the lira, and the decline in domestic demand.
"Let me turn now to the challenges ahead. Turkey has a viable economic strategy, but its success depends on restoring confidence and reducing interest rates. And these in turn call for perseverance in policy implementation, with full and united political support. The program is designed, through its major budget adjustment and exceptionally large financial support from the Fund and other lenders, to ensure that the government debt situation remains manageable. We discussed with the Treasury yesterday the outlook on its debt rollovers, and it is clear that the measures announced earlier this week by the government will significantly reduce the required rollovers and help ensure a sustainable debt situation. "In addition, the Treasury plans to continue adapting its financing instruments to market conditions.
"Further, there are definite signs of success in reducing inflation. If, as many expect, inflation in July is low, then interest rates could begin to come down – as would be appropriate given the central bank's inflation targeting approach. Already the central bank is operating on an informal inflation targeting basis in making its interest rate decisions, and it plans to move as rapidly as possible to put in place the institutional arrangements that would enable it to undertake a formal inflation targeting approach.
"A flexible exchange rate is also essential in the current conditions of the economy. Fortunately or unfortunately, there is no feasible alternative to the current float of the lira – and this is well understood and accepted by the authorities. Turkey is still in a period of transition following the abandonment of the peg in February, and uncertainties about the operation of the market are naturally larger than they will be when the market settles down and develops its own hedging and other instruments that allow economic agents to deal with inevitable exchange rate fluctuations. In these circumstances, intervention can be used, sparingly, from time to time, to deal with major market instabilities, but not to target a particular rate.
"The adoption of formal direct inflation targeting, which will give monetary policy a well-defined nominal anchor, should also help promote financial market and exchange rate stability.
"I would like to make one more point about exchange rate management. There may be some confusion about the difference between the regular foreign exchange auctions, and smoothing interventions by the central bank. Under its economic program, the Turkish Treasury is in effect borrowing foreign exchange from the central bank to finance part of the budget. For the Treasury to obtain the Turkish lira that it needs, this foreign exchange needs to be sold in the market. It is these sales that are being conducted by regular pre-announced auctions. In addition, but separately, the central bank may from time to time intervene in the foreign exchange market to stabilize major fluctuations. But the auctions are in effect part of the Treasury's financing program, and are not intended as foreign exchange market interventions.
"The period ahead is to be devoted largely to the implementation of measures already agreed and for which legislation has either already been passed or which is in the pipeline. Looking forward, a number of further steps are planned which will help buttress the success of the program. The new banking supervision agency has emerged as a driving force behind the long-awaited restructuring of Turkey's banking system, and will continue its efforts. In regard to other structural reforms, the authorities' attention will now turn to the implementation of reforms, following the major legislative progress since the adoption of the new program. It will be especially important to achieve tangible progress toward privatizing large state enterprises, including Türk Telekom, and to define concrete actions to further improve the business climate and enhance transparency in public sector resource management. On the macroeconomic side, the government's budget policy will remain geared toward achieving debt sustainability, and monetary policy will move as rapidly as possible towards inflation targeting.
"I want to make one final point – a point which is appropriate to make at a press conference.
"Turkey's economic strategy needs to be communicated more effectively to investors and other observers. Continued efforts to improve the social dialogue and protect the most vulnerable segments of society will also help bolster support for the program. In all these areas, my discussions with the political leadership in Ankara yesterday and with private sector representatives in Istanbul today have been very encouraging.
"Finally, let me thank the Turkish authorities for their steadfast and successful implementation of the program. I want also to praise the professionalism and hard work of both the Turkish economic team and the IMF staff team who work on the Turkey program.
"As many of you know, I am leaving the Fund in a few weeks. This is therefore my last visit to Turkey as First Deputy Managing Director of the IMF. It has been a pleasure, a challenge, and a privilege to work with Turkey. I look forward to returning to catch up with my friends here and to see more of your wonderful country," Mr. Fischer said.
IMF EXTERNAL RELATIONS DEPARTMENT