IMF Completes Third Review of Turkey's Stand-By Arrangement
August 7, 2002
The Executive Board of the International Monetary Fund (IMF) today completed the third review of Turkey's economic performance under the three-year Stand-By Arrangement. The decision will enable Turkey to draw up to SDR 867.6 million (about US$1.1 billion) immediately.
The stand-by arrangement was approved on February 4, 2002 (see Press Release No. 02/7) in a total amount of SDR 12.8 billion (about US$17 billion). So far, Turkey has drawn SDR 9 billion (about US$12 billion).
"The Turkish authorities are to be commended on their continued strong implementation of the economic program. This has yielded quite promising outturns in the first part of the year, including a solid recovery in economic activity, a sharp drop in inflation, and a strong balance of payments performance. This was helped by the rapid decline, through April, in interest rates on domestic and foreign borrowing, which eased the government's debt situation.
"However, recent political uncertainty unsettled domestic financial markets and prompted a substantial rise in interest rates. While Parliament's decision to hold elections on November 3 points to a resolution of the uncertainty and has already resulted in some easing of financial market conditions, it will be essential that the authorities implement the program to the fullest extent possible. Against this background, the coalition partners' renewed commitment to fully implement the program is most welcome, as is the evident support of the thrust of the program among political parties and in the private sector. These developments testify to the strong ownership of the program, and give further scope for its fundamentals to reassert themselves and for interest rates to decline rapidly once the political uncertainty is resolved.
"The authorities' impressive record of fiscal restraint has strengthened long-term debt sustainability and the credibility of economic policy, and unwavering continuation of this effort will be instrumental in keeping the government debt position manageable and improving its resilience against adverse shocks. Strong fiscal discipline and strict adherence to the fiscal targets, both during the present election period and over the medium term, will remain key for securing strong and sustained economic growth.
"Looking ahead, it will be important that the planned fiscal reforms further enhance the durability of the adjustment. In this regard, it will be important that as much of the direct tax reform as possible is implemented in 2003. At the same time, the authorities should continue their efforts to cut unproductive spending, restructure state enterprises, and strengthen tax administration, and press ahead with the reforms of public financial management.
"The central bank has made commendable progress in reducing inflation and inflation expectations, while managing a successful transition to a floating exchange rate regime. It should remain focused on achieving its inflation target and continuing its preparations for the introduction of formal inflation targeting.
"Financial sector reform has also been impressive, with the private bank recapitalization exercise nearing completion, and the operational restructuring of state banks well advanced. The remaining priorities are for the Savings Deposit and Insurance Fund (SDIF) to quickly resolve the intervened banks under its control, and to develop a sales strategy for its remaining assets. With operational restructuring now bearing fruit, it will be important to prepare the state banks for sale. Reforms to the bankruptcy law will improve the effectiveness of the Istanbul Approach for corporate debt restructuring.
"The authorities are encouraged to intensify their efforts to privatize state enterprises, by bringing key assets to the point of sale, while ensuring transparency in the sales process. They should also use the time available from the postponement of the Investor Council meeting to finalize the reforms needed to improve the investment climate.
"Overall, the program has been implemented as agreed and has shown its potential to deliver strong economic performance. At the same time, the remaining vulnerabilities highlighted by the recent market developments have underscored that strict adherence to the program will remain key to ensuring its lasting success," Mr. Köhler said.