Turkey and the IMF
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The Executive Board of the International Monetary Fund (IMF) today approved an augmentation of Turkey's three-year Stand-By Arrangement by SDR 6.4 billion (about US$8 billion), bringing the total to SDR 15 billion (about US$19 billion). The Board's decision was made in conjunction with the completion of the sixth and seventh reviews of Turkey's economic program. Today's decision will enable Turkey to draw up to SDR 3 billion (US$3.8 billion) immediately. Further drawings of SDR 1.2 billion (about US$1.5 billion) each will be made available not earlier than June 25 and July 25 and of SDR 2.4 billion (about US$3 billion) each not earlier than September 20 and November 15 following the completion of further reviews of the program.
The stand-by credit was approved in December 1999 for SDR 2.9 billion (about US$3.7 billion--see Press Release 99/66). In December 2000, SDR 5.8 billion (about US$7.3 billion) in additional financial resources were made available under the Supplemental Reserve Facility (SRF--see Press Release 00/80). So far, Turkey has drawn a total of SDR 3.9 billion (about US$4.9 billion) from the IMF.
Following the Executive Board discussion on Turkey, Stanley Fischer, First Deputy Managing Director and Acting Chairman, said:
"The Fund welcomes the strengthened program prepared by the new economic team in Turkey. Full implementation of this program should restore macroeconomic stability and address the structural root causes of the country's problems, thereby laying the foundations for the resumption of growth.
"The Turkish program aims at strengthening confidence, addressing the costs arising from the crisis by increasing the primary fiscal surplus, speeding up the reform of the banking sector, and undertaking wide-ranging structural reforms. Decisive implementation of the program's policies, together with the availability of significant additional external support, should initiate a virtuous cycle characterized by lower interest rates, stronger public finances, and a recovery of economic activity.
"The Fund commends the depth and breadth of the new economic program. The emphasis on banking reform is appropriate, especially given the structural weaknesses in this area that were seen during the recent crises. The elimination of public sector banks' large overnight exposure, their full recapitalization, and the overhaul of their governance structure will go a long way to strengthen the financial sector. In addition, measures to privatize key companies and reform major domestic markets, including the telecommunications, electricity, natural gas, tobacco, and sugar markets, and to enhance governance and improve transparency, are essential elements of the program.
"The program's macroeconomic policies are strong, in particular the major fiscal effort that the Turkish authorities are undertaking to re-establish fiscal solvency. On monetary policy, the adoption of the new central bank law will give the central bank operational independence in the pursuit of price stability. In the short term and before a full-fledged inflation targeting framework is put in place, monetary policy will focus on the control of monetary aggregates in the context of a floating exchange rate framework.
"The IMF is demonstrating its backing for this ambitious program by providing exceptional financing in its support. Its success will take both determined implementation by the authorities and sustained support by the private sector," Mr. Fischer said.
Following the second financial crisis in a short time in February 2001, the Turkish government has put together a strengthened program to address the root causes of the country's economic problems. The revised program aims at cushioning the short-term macroeconomic impact of the recent turmoil, while laying the foundation for the resumption of disinflation and growth. To achieve these goals, the authorities have adopted a three-pronged strategy: 1) structural policies to correct the distortions underlying the crises, enhance transparency in economic management, and improve governance in both the public and private sectors; 2) fiscal and monetary policies to restore financial stability and facilitate disinflation; and 3) a strengthened social dialogue to promote wage moderation and social protection.
The program's structural policies are geared toward a fundamental change in the way business is done in Turkey. A major bank restructuring will be implemented, aimed at removing the structural weaknesses highlighted during the recent crisis. It includes recapitalization of banks under government control, accompanied by measures to enhance governance in public and private banks to prevent past problems from recurring. Fiscal transparency will be increased and the role of the private sector in the economy will be strengthened through the removal of obstacles to privatization and the promotion of foreign direct investment. In addition to taking steps to facilitate the privatization of Turk Telekom, the government is implementing measures to reform the sugar, tobacco, and natural gas markets, and sell the state enterprises operating in these sectors.
The program includes a major fiscal adjustment effort, needed to help finance the additional interest costs arising from the increase in debt. The fiscal measures aim to strengthen the primary fiscal position of the public sector, reduce the government's immediate borrowing requirement, and ensure the long-term sustainability of public debt. The new target for the primary surplus of the public sector is now 5½ percentage points of GNP in 2001, requiring additional measures amounting to 3 percentage points of GNP. The government will also continue efforts to involve the social partners in supporting the program, in part through incomes policies aimed at supporting disinflation and removing some of the existing distortions in the public sector wage structure.
Monetary policy will pursue disinflation under a floating exchange rate framework. In the short run, it will center on the pursuit of monetary aggregates, but over time the authorities intend to shift to a full-fledged inflation-targeting regime.
These very strong domestic measures are complemented by additional external financing and private sector involvement. The additional financing from the international financial institutions in support of the authorities' program not only fulfills financial requirements, but also helps reassure markets. To boost confidence further, the program includes voluntary private sector involvement, in line with the authorities' strong preference for market solutions.
As a result of the revised policies and the availability of foreign financing, the program envisages a gradual but steady improvement in economic conditions. Real interest rates are expected to decline from their presently very high levels. GNP growth is projected at negative 3 percent in 2001, mainly as a result of negative growth in the first two quarters. However, the program expects a turnaround for the third quarter, reflecting the recovery of exports and in tourism, and the expected decline in interest rates. As the recovery continues, GNP is expected to grow annually by 5-6 percent in 2002 and 2003. While the inflation outlook over the next few months is uncertain, the authorities intend to bring inflation to 2 percent a month by the last quarter of this year. The program projects CPI inflation to reach 52½ percent in 2001 (December/December) and 20 percent in 2002. The external current account balance is projected to improve markedly as a result of the recession, increased competitiveness and an acceleration in exports.
1/ Average of monthly nominal T-bill interest rate divided by 12-month past CPI inflation.
IMF EXTERNAL RELATIONS DEPARTMENT